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Border battles

Review of 2005 Simon Hildrey rounds up the offshore year and finds the FSA taking a keen international interest while cross-border business is stalled

The offshore market has seen a number of regulatory and tax changes this year.

Developments include the implementation of the European Union savings tax directive and the start of the pre-owned assets tax and the insurance mediation directive.

It has been a good year for many offshore insurers operating in the UK market. According to the Association of International Life Offices, single-premium business rose from 2.4bn in 2003 to 3bn in 2004, represent-ing growth of 28 per cent. In the first half of 2005, single-premium sales reached 2.0bn and there are estimates there will be full-year sales of at least 4bn, an increase of 31 per cent.

The widening of the inheritance tax net has benefited the offshore insurance market. A recent survey by Grant Thornton and Lombard Street Research revealed that 3.6 million estates could be liable to IHT by 2009, a 70 per cent rise between 2002 and 2009.

The pre-owned assets tax, which came into operation in April, has restricted the ways in which IHT can be mitigated, notably on the family home, by imposing an annual income tax on assets given away but still enjoyed by individuals.

However, written confirm-ation has been secured from HM Revenue and Customs that some IHT plans offered by offshore insurers are not subject to the annual income tax.

Another potential boost has come from implemen-tation of the EU savings tax directive in July. Under the directive, cross-border bank interest is subject to a 15 per cent withholding tax. Offshore centres, such as the Channel Islands and the Isle of Man, are allowing banks to notify the home tax authority of deposits instead of imposing the withholding tax.

But insurance policies are not subject to the directive because they are classed as corporate structures. Offshore insurers play down the direct impact of the directive on inflows but say there has been increased interest in offshore life policies by private banks.

It is admitted by private banks that there has been a stigma surrounding offshore life insurance policies but this has been disappearing over the past 12 to 18 months.

This is attributed to greater awareness of the tax efficiency of insurance policies. These include the fact that offshore bonds enable investors to roll up gains so they are not taxed until the bond is cashed in. Investors can also take 5 per cent of the original investment each year as income and defer the taxation on this income.

Such is the perceived potential of selling offshore insurance into the UK that Standard Life is to offer its first product early in 2006. This follows the company applying to the Irish regulator in March to establish an offshore business in Dublin. It is expected to launch unit-linked and portfolio bonds as well as an IHT plan.

Legal & General has also been investigating the viability of selling offshore products from Dublin to the UK, the Channel Islands and the Isle of Man.

But it is not all good news for the offshore industry and insurers. One senior member of an offshore insurer says this part of the market is coming under increasing scrutiny from the FSA. He says that when the FSA visits the insurer’s parent group it asks more questions about the offshore operation than the onshore business.

One reason for the greater scrutiny, he says, is the growth in complaints received by the FSA about offshore funds bought through offshore bonds. High-profile casualties in 2005 have included Shepherds funds. In May, the Isle of Man Financial Services Commission applied to court for Shepherds’ four funds domiciled in the jurisdiction – Shepherds Select, Safeguard High Security, Traded Life Policy and Traded Endowment Policies – to be put into liquidation.

The TLP fund has been suspended since May 2004 after the US Securities and Exchange Commission placed Mutual Benefits Corporation into receivership and suspended its licence.

The TLP fund bought between 80 per cent and 85 per cent of its traded life policies through MBC. Earlier this year, the directors of TLP won one of their legal battles in the US that led to the return of $7m (4.07m). This was money that was in the process of being invested when MBC was placed in receivership and brought the fund’s total cash to $8.5m (4.95m).

The directors also argued through the US courts that Aids and non-Aids policies should be separated and therefore premiums for non-Aids should not be used to pay premiums for Aids policies.

One area of possible growth this year for advisers in the offshore market came from the IMD, which set a deadline of January 15 for countries to implement. But at the beginning of November, 10 EU countries had yet to implement the directive.

As well as meaning that IFAs across Europe have to comply with minimum disclosure requirements, such as having to carry out fact-finds to prove they know their clients and send reason-why letters, the IMD is also supposed to enable advisers to operate cross-border.

Spanish regulators, for example, have received a number of enquiries from UK-based IFAs looking to advise expatriate investors. But Spain has yet to implement the directive and few cross-border insurers have received regulatory approval to sell their products in the country.

Other developments this year have included offshore insurers reaching agreement with HMRC over around 100 non-permitted closed-ended funds held by UK investors within some portfolio bonds that turned them into highly personalised bonds.

Insurers said the assets were held within the bonds because of ambiguity over the definitions in the relevant legislation.

The agreement between insurers and HMRC was designed to persuade the regulator to waive the 15 per cent annual tax charge on highly personalised bond in return for investors taking the non-permitted funds out of their portfolio bonds.

The EU is also continuing efforts to create a single market for investment funds across Europe. In July, the European Commission issued a number of proposals in its initiative on Enhancing the EU Framework for Investment Funds to lead to a more consistent regulation of funds across Europe and promote the cross-border distribution of funds. The fund industry had until November 15 to respond.


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