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Jailhouse shock

Offshore investment has been a growth area in the last few years and IFAs

writing offshore bond business will be familiar with many of the advantages

that exist with this type of business.

Nevertheless, like any other sector of investment, there are a number of

areas where advisers often experience difficulties. I want to highlight

some of the areas where offshore business can give rise to difficult

issuesfor advisers.

The area giving rise to the most personally challenging difficulties is

disclosure. The issues here are not in themselves complicated.

Although the funds underlying an offshore bond will grow virtually

tax-free and gains will not necessarily be notified to the UK Inland

Revenue despite the introduction of fiscal representatives for offshore

insurers, a UK-resident taxpayer, whether domiciled in the UK or not, will

be taxable on all gainson offshore bonds.

This is the case even if the proceeds of the policy are never remitted to

the UK. Despite the simplicity of the issue and the best endeavours of the

Inland Revenue tocombat tax evasion, which include a dramatically increased

rate of criminal prosecution in recent years, it appears there is still a

pool of individuals determined not to meet their obligations to the

Revenue, whether through naivety or opportunism.

All offshore life companies will have amusing apocryphal tales of

potential investorstrying to turn up with suitcases of cash but genuine

difficulties can arise for the adviser when a client shares information

which makes it clear that one of two situations is happening:

Either the capital to be invested has arisen from a source of income or

gain which should have been taxed but has not – “black” money is being

hidden offshore;

Or the source of the capital has been taxed but future gains will not be

declared – “white” money is turning “black”.

In each case, the adviser is in a very difficult position.

Looking at the first situation, the adviser&#39s immediate thought, once the

shock has subsided, should relate to money laundering. Even if the

potential client is shown promptly to the door, the adviser may have

whistleblowing obligations and immediate consultation with the firm&#39s

compliance officer is advisable.

If the adviser decides this aspect of the case can bedealt with

satisfactorily and decides to continue the relationship and in cases where

the source is legitimate but the client intends not to pay tax in the

future, the next issue comes down to the advice given.

Clearly, the adviser will be giving advice regarding future tax

liabilities to the effect that these will indeed be an issue and that full

reporting should take place.

However, it is also worthgiving thought to the information recorded on the

client&#39s file. In the event of a tax investigation of his or her affairs,

the adviser&#39s records will be open to scrutiny by the Inland Revenue and it

is essential the file demonstrates the advice given was beyond reproach.

This is necessary to protect the adviser&#39s own position since assisting an

individual to commit a criminal offence is an offence in itself and

prosecution leading to imprisonment is just as likely to bethe fate of the

adviser as it is of the client.

If these comments appear to be extreme, a quick look at the prosecution

press releases on the Inland Revenue website may be of interest. A total of

18 releases were available on the site on June 7. Of these, six related to

the prosecution of professional advisers, albeit some related to their own

affairs. Custodial sentences are the norm.

As well as compliance issues relating to money laundering, offshore

business may also raise issues relating to regulation. A UK-based adviser

will be comfortable with the idea of selling UK and offshore products to

individuals who are resident in the UK.

A logical leap might be to sell offshore business to clients or contacts

based abroad. However, this is an area fraught with difficulty. Generally,

the adviser should check with their own regulator whether they are

regulated to carry on the business and, if they find this is not the case,

should take the necessary steps to allow themselves to conductbusiness in

the country in question.

Two examples of the steps required are as follows:

In Jersey, the adviser will have to seek a licence from the Jersey

Financial Services Authority. This is likely to require the establishment

of a physical presence on the island.

In Spain, the adviser will need to obtain authorisation from the Spanish

Insurance Directorate. To obtain this, academic requirements must be

demonstrated to have been met, a bank guarantee or PI insurance cover at

the required level must be produced and a business plan will also be

required.

The final issue which can cause difficulty is that of tax liabilities

arising in other tax jurisdictions. One benefit of offshore bonds is that

periods of non-residence in the UK by the policyholder can red-uce the

eventual UK incometax due where the bond is encashed following a returnto

the UK.

This is only half the story, however, and the tax position in the country

of temporary residence should also be con- sidered. It may be that the

policyholder will suffer tax liabilities in the new country irrespective of

whether benefits are taken. Australia and the US are examples of this type

of regime, imposing an ann-ual charge to income tax oninternal growth.

Even if there is no tax on annual growth, where benefits are taken from a

bond it is unlikely that an allowance analogous to the UK&#39s 5 per cent tax

deferred allowance will be available, and the basis of taxation and rate of

tax suffered will need to be considered if any withdrawals are likely while

abroad.

Obtaining information on foreign tax issues can be difficult. Offshore

providers may have general information available, particularly for

jurisdictions where they are themselves active, but even in cases where

limited information is available, advice from a specialist in the

jurisdiction will be required.

When advising on offshore investments, advisers should be aware of areas

where helping with investments is inadvisable and where this might give

rise to potential legal difficulties in the UK or in other jurisdictions.

The adviser will also have to be aware of when the assistance of another

adviser is crucial. Awareness of these issues should allow the adviser to

assist his client to the benefit of the client and the adviser.

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