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A shore thing

Over the past few weeks, I have been looking at the impact of the proposed 2009 Budget changes to income tax – notably the introduction of a top rate of 50 per cent and the removal of higher- rate tax relief for pension contributions made by those with incomes of more than 150,000. I have also been reviewing the alternatives to pension investments, focusing on investments whose taxation treatment will be affected by the Budget.

The increase to the Isa allowance will be welcomed, especially by those looking to contribute to investments other than pensions. Also, the retention of an 18% CGT rate, compared with the higher-income tax rates, has made capital growth-oriented investments and investments delivering the return in the form of a capital gain rather than income more tax attractive.

Last week, I looked at the new rules on the receipt of personal dividends from offshore companies. After last year’s proposed changes – to give a 10 per cent tax credit to all dividends from offshore companies and then the removal of the credit for open-ended funds – it was important to secure clarity. However, this clarity clearly could not deliver a tax bonanza to funds invested in interest-bearing investments. So, it seems that a reasonable balance has been struck.

Legislation has been proposed which aligns the categorisation and taxation of dividend-paying offshore funds with that of UK funds in relation to the extent to which the fund is invested in equities and debt (interest-producing) investments.

Currently, all distributions from offshore funds are received and taxed as dividends – the UK concept of an “interest distribution” does not exist for offshore funds.

Since April 6, 2008, as I pointed out last week, individual shareholders with shareholdings of less than 10 per cent in non-UK resident companies have been entitled to a 10 per cent non-payable dividend tax credit. This tax credit resulted in tax freedom for non- and basic-rate taxpayers on “interest-fuelled” dividends and a 22.5 per cent rate for higher-rate taxpayers (32.5-10 per cent).

However, this tax credit was withdrawn for offshore funds as some collective investment schemes were seeking to exploit the extension by placing their cash or bond-fund ranges offshore, with the intention of securing tax advantages by paying dividends funded by non-taxed interest which carried a 10 per cent tax credit. So, before the latest proposals, distributions made as dividends from offshore funds received by individual UK resident investors are currently taxed at rates of 10 per cent for basic-rate taxpayers and 32.5 per cent for higher-rate taxpayers, regardless of the nature of the investments underlying the fund. Where the distributions are from non-corporate offshore funds they may be taxable at different rates depending on the type of fund and, in some cases, the nature of the fund income.

Legislation in Finance Bill 2009 amends section 397A of the Income Tax (Trading and Other Income) Act 2005 to extend further eligibility for the 10 per cent non-payable tax credit to individuals in receipt of dividends from non-UK resident companies, including offshore funds that are companies.

However, where the offshore fund holds more than 60 per cent of its assets in interest-bearing (or economically similar) form, any distribution will be treated in the hands of the UK individual investor as a payment of yearly interest. This will mean that no tax credit will be available and the tax rates applying will be those applying to interest.

This mirrors the current treatment of UK corporate investors with holdings in similar funds (in the UK or offshore), and also means that UK individuals will pay tax on interest-like distributions at the same rate as tax is borne by individual investors on interest distributions received from UK-authorised investment funds. This change takes place from 22 April 2009 but will not affect the tax treatment of UK investors in offshore funds, which are transparent for the purposes of tax on income as in such cases the investor is taxed on their share of the underlying fund income according to the type of income received and not on the distribution made.

Finally, under current legislation, the definition of an investment in an offshore fund is based upon the regulatory definition of “collective invest-ment scheme” as set out in the Financial Services and Markets Act 2000, with modifications for tax purposes.

The new definition of an offshore fund uses a charac-teristics-based approach which has been the subject of detailed consultation with the funds industry, as set out in the relevant consultation documents. There are also exceptions specified in the legislation to ensure that fixed share capital arrangements that do not mimic open-ended arrangements will remain outside the definition. This includes specific provisions for continuation votes and capital only arrangements. The new definition will apply from December 1, 2009.


Weak point

I have only ever had one complaint and it was not upheld. I told him not to dump equities to buy bonds, he thought otherwise Bonds tanked and markets shot up. Oddly enough, he blamed me for his loss. With pension and endowment mis-selling, advisers have become a soft touch for a spot of compo.

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What's going on in the 'offshore' world?

Graeme Robb, Senior Technical Manager at Prudential, explores the current state of the nation for offshore issues and highlights areas which may be particularly relevant to advisers. In the context of insurance companies, ‘offshore’ can be a relatively straightforward matter. Like their onshore equivalent, offshore bonds are ‘non-qualifying’ for tax purposes, meaning that all gains […]


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