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Haven sent

Advisers should point clients in the direction of offshore bonds, which have legitimate tax-deferment qualities

Last week, I promised to look at how VCTs could represent interesting pension alternatives and I will address this topic in the very near future. This week, I would like to look at the fact that the financial press has recently carried stories on rumoured Treasury negotiations with three jurisdictions with a view to establishing either withholding tax or information-sharing arrangements with them.

These will be the latest in a longish line of actions aimed at increasing information-sharing and stemming the tide of offshore investments (particularly in deposits) that are perceived to be contributing to what is officially believed to be a significant tax gap.

These rumoured arran-gements, if implemented, would build on the success of agreements made with Liechtenstein and Switzerland. For example, the deal with the latter preserved the anonymity of UK investors in Swiss assets/accounts but a withholding tax was agreed.

There is currently no indication as to the identity of the three jurisdictions. Jersey, Guernsey and the Isle of Man all deny involvement. The Treasury is keen to keep this information under wraps to prevent a pre-announce-ment movement of funds.

The ongoing pressure being applied by some G20 nations, including the latest action being taken by the US in connection with the Foreign Account Tax Compliance Act, is clear evidence of the strong and continuing intent to apply pressure to tax havens.

Global action is clearly more effective than that from the EU. The risk with action that is not applied globally is that the targeted funds just move to homes in countries that are not signed up to the particular initiative.

The wider the net – and especially if the more respected havens sign up to avoid harsh economic and fiscal retribution being applied by the applying nations – the harder it is for those looking to evade to move funds without accepting what is likely to be, or at least be perceived to be, significantly increased risk associated with some of the less well established havens. It is one thing avoiding (or evading) tax, it is another having access to or a return of your money at risk.

Over the past few years, UK advisers cannot have failed to notice the strong action being taken to minimise what is thought to be significant tax leakage through the use of offshore deposits to hold undeclared income.

This is thought to be a strong contributor to the estimated £42bn tax gap. Such action includes the disclosure initiative (in regard to offshore accounts invested in by UK residents), the EU savings directive and the specific arrangements referred to above.

Against this background, apart from strongly encouraging disclosure where appropriate and informing all clients that express an interest in offshore investment about the initiatives referred to, advisers might like to make their clients aware of the current legitimate tax-deferment qualities of offshore bonds.

Even if the client wants to remain invested in cash, the offshore bond offers a legitimate tax shelter and with no disclosure or withholding requirements under the current provisions in the UK. Of course, there is relatively well developed legislation that specifically deals with chargeable-event gains made under offshore bonds. This should be seen as reassuring by advisers.

Interest, dividends and gains can legitimately roll up tax-free inside the offshore bond. It is assumed that the personal portfolio bond provisions (giving rise to an annual tax charge) are avoided. This should not be hard to do, though.

As well as avoiding disclosure or withholding requirements, the holding of deposits or investments in the bond provides legitimate and effective tax deferment and tax-attractive roll-up of income and gains. And, of course, all of the well known withdrawal and extraction strategies are still available to minimise or avoid tax when funds are required.

If inheritance tax planning is on the agenda, most offshore bonds would be capable of being combined with a wide range of trusts to deliver the type of planning that can best meet the investor’s objectives.

This could be evidenced in the delivery of some continuing investor say in the control over and/or access to the funds made subject to trust. For non-UK domiciliaries, there is also the possibility to effectively combine the offshore bond and trust to create excluded property for IHT purposes and resulting permanent IHT freedom – but with continuing investor access via the trustees.

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