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
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
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's 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's
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's file. In the event of a tax investigation of his or her affairs,
the adviser's 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's 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
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
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's 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
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.