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Dublin&#39s fair kitty

I am looking to retire in the near future. In addition to my pension, I

have a substantial lump sum from which I want to achieve the highest

possible income. I understand that by using an overseas savings account, I

can get an additional 10 per cent return on my income. Is this true?

For investors who are resident or ordinarily resident in the UK for

taxation purposes, some accounts do offer favourable tax treatment.

However, this does not by any means apply to the majority of accounts.

Most investors pay tax on both onshore and offshore accounts at their

highest rate of tax. If they choose to invest offshore accounts which pay a

good return, then they are still liable to taxation at their highest rate

when they complete their annual tax returns.

For example, a basic-rate taxpayer who invests £10,000 in Bristol &

West International&#39s Sterling 30 account will receive a gross return of

6.25 per cent.

Once tax has been deducted, this erodes the return to 5 per cent a year. A

higher-rate taxpayer will find the net return is 3.75 per cent – barely 1.5

per cent above the current rate of inflation.

However, this is not the case in another type of account to which you may

be referring. Certain types of stock-market-linked plans, typically issued

by companies domiciled in Dublin, invest in products such as derivatives

lin-ked to the Eurostoxx 50 or FTSE 100 index.

By doing so, they are able to take advantage of favourable tax treatment.

Usually, investors in a company receive a 10 per cent tax credit for

dividends paid by the company. Investors in companies domiciled outside the

UK, however, do not qualify for the credit and dividends are consequently

taxed at 10 per cent.

Furthermore, being domiciled in Dublin, they are able to access further

tax advantages, thereby reducing overall costs.

Good exponents of this working in practice are AIB Govett and NDF

Administration. The NDF plan pays an annualised income of 10.1 per cent.

Basic-rate taxpayers who are resident in the UK for taxation purposes and

who are liable to income tax at the Schedule F ordinary rate would

currently pay in tax only 10 per cent of the gross dividend paid, compared

with 20 per cent on the interest from a bank or building society account.

Because the fund is domiciled in Dublin, investors are not eligible for

the tax credit applied to dividends paid by UK companies and consequently

pay tax at the Schedule F ordinary rate, currently 10 per cent of the gross

dividend paid for basic-rate taxpayers and 32.5 per cent for higher-rate

taxpayers.

For example, if the dividend were 10.1 per cent, with a Schedule F

ordinary rate of 10 per cent, the tax payable would be 1.01 per cent, so

the net dividend for investors who are liable to basic-rate income tax

would be 9.09 per cent.

The same principle applies for investors who would be subject to income

tax at Schedule F upper rate, currently 32.5 per cent of the gross dividend

paid.

For example if the dividend were 10.1 per cent, with a Schedule F upper

rate of tax of 32.5 per cent, the tax payable would be 3.28 per cent and so

the net dividend for investors who are liable to income tax at the higher

rate would be 6.82 per cent.

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