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“Going Offshore” is a phrase that one commonly hears usually accompanied by a wry smile or a sly wink of the eye.

There is an assumption that somehow “Offshore” is “dodgy” and anyone who has an offshore bank account or business must automatically be up to no good. Phrases like “tax avoidance”, “tax evasion” and, increasingly these days “money laundering” spring to mind. But the fact is that even in highly regulated UK and USA there are many quite legitimate reasons for their residents and nationals to use offshore facilities totally legally.

Unfortunately, organisations such as the US Internal Revenue Services (IRS), the UK HM Customs & Excise (HMRC), the European Union (EU) and the OECD (Organisation for Economic Cooperation and Development) have all  contributed to the view that offshore = illegal.

Recently the purchase of confidential details of wealthy Liechtenstein bank account holders by UK and German tax authorities has raised interest in the use of offshore accounts and the measures authorities are taking to prevent misuse. In addition, HMRC is understood to be launching a new probe into offshore account holders by sending out disclosure requests to 25 foreign banks to provide details of UK account holders.

The UK Treasury has been progressively tightening the net on offshore accounts for some time and it is now getting to a point that those with money held offshore, whether acting rightly or wrongly, are likely to feel some heat from HMRC in the near future which using any means possible – some of it probably illegal –  to get hold of information on offshore accounts.

Whilst HMRC is justified in its pursuit of tax evaders, (note tax evasion is illegal but tax avoidance is not – but HMRC would like to think otherwise) its push into offshore jurisdictions has the potential to strip offshore banking facilities of their ability to operate on a level playing field in respect of legitimate account holders of which there are many. Remember the term “offshore” simply means having a bank account or investment product in a country other than the one in which you live. Therefore a UK resident with an account in Spain could be said to have “gone offshore” even though he may end up paying more tax. It isn’t clear cut at all.

So let me make it clear: it perfectly legitimate for a UK taxpayer to have a bank account outside of the UK. At its most basic a UK domiciled and resident citizen may have an offshore bank account simply to facilitate the paying of expenses of a holiday home abroad. Those individuals should have the same tax liability on interest from money held in a UK account as in a foreign bank account and that then should not influence an individual’s choice in whether to use an offshore account or not. Similarly a UK domiciled – and possibly even tax resident – individual may have earnings from work carried out outside the UK either as an employee or as a business owner. They are perfectly entitled to have a bank account offshore. So why all the hassle from HMRC? Suspicious lot aren’t they? To them anyone with a bank account outside the UK must be dead dodgy and up to no good.

A couple of years ago I got a letter from HMRC asking why I had an account with a bank in Jersey. I rang them up and asked what business it was of theirs as I was a resident of the Isle of Man (which is not part of the UK) and had been for several years. I pointed out that I also had a bank account in the UK and so that was, to me, “an offshore account”. Idiotically they claimed not to have known I was resident in the UK despite having sent the letter to my address which they later admitted they had on file for at least six years.

Anyway, bank accounts aside, there are other offshore investment vehicles that are legitimate for both UK domiciled, non-domiciled individuals and for high net worth investors to use in their global investment plans. These include:

Offshore Investment Funds

Offshore investment funds are for the most part structured in much the same way as their onshore equivalent. The key difference, however, is that the offshore funds are usually tax resident in tax neutral jurisdictions and hence the funds themselves do not pay tax. This sounds like an attractive proposition initially as one might think that returns can be rolled up in an investment offshore without paying UK tax until the investment is sold. However the tax rules can be complex and this need not be the case. It is therefore important that an investor is aware of the tax implications. An investor cannot for example assume that they will get the benefit of capital gains tax (CGT) treatment (e.g. the annual CGT exemption).

Hedge Funds

A hedge fund generally pursues far more active strategies to achieve an absolute return. Most hedge funds do not seek distributor status and therefore an investor will not get capital gains tax treatment on disposal. They will be subject to income tax and not get the benefit of the CGT annual exemption. The reason why hedge funds do not seek distributor status is that the UK tax authorities regard them as trading funds and therefore argue that the capital gains made by the fund itself should be treated as income for UK tax purposes. To be certified as a distributing fund the UK tax authorities would expect the hedge fund to distribute not only 85% of its income every year but also 85% of its gains.

Offshore Life Policies/Bonds

Offshore life assurance bonds are popular for their tax benefits as tax is usually only due when the funds are withdrawn. These funds have the advantage of being exempt from the European Union Savings Tax Directive. The reason being that the assets in the bonds are technically held by the life company running the fund and that the EU directive was targeted at reporting the savings income of individuals rather than corporate.

Offshore Pensions

Anyone with non UK income can now benefit from taking out an Isle of Man pension. There is almost no limit to the amount you can invest and you don’t have to buy an annuity when you retire so the money stays within your estate when you die. At that point a small tax charge of 7.5% shields it from being taxed in the UK for Inheritance Tax (at 40%).

As with any offshore investment, investors should consider taking tax and legal advice, to avoid any complications. Anyone wanting further information may contact me directly.

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