“Please would you tell me,” said Alice a little timidly, “why your cat grins like that?” “It's a Cheshire cat,” said the Duchess, “and that's why.” (Alice's Adventures in Wonderland, 1865).
If you are among the one in five UK IFAs who sells offshore products to your clients, you will be smiling like Lewis Carroll's Cheshire cat.
You will not have received frantic last-minute calls from your clients looking desperately for duplicates of their paperwork. You will not be panicking about deadlines or fines. You will not be concerned about the horror stories that have appeared in the Sunday papers. You will probably have even laughed out loud when reading reports of qualified tax accountants who are struggling with their own self-assessment forms.
With one week to go to the Inland Revenue's January 31 deadline for submitting self-assessment tax forms, some four million returns were still outstanding. You can bet that at least one million people failed to get in their forms on time. The fine for late payment is £100 – that is £100m straight into the Revenue's coffers and let us not forget that Hector charges interest at 8.5 per cent thereafter for late payment.
Even the most organised taxpayers who think they have followed the letter of the law may still face fines and interest charges for late payment. These are those taxpayers who filed a return by the end of September 2000 and met the deadline for having their tax bill calculated for them by the Revenue. They too have to make their payments by January 31, yet the Revenue has a huge processing backlog and many people will not have been advised of their tax bill by the end of January.
Guess what? These people are still expected to make payment by the deadline and, if they do not, they are liable for the same fines. It is true to say that the Revenue is now sending out blank payment forms to hundreds of taxpayers encouraging them to fill them out and make a payment – and many advisers are recommending that their clients overpay rather than be fined, In 2000, tax inspectors launched 750,000 investigations into self-assessment returns and plan to do much the same again this year. Most of these investigations are painstakingly thorough although some just concentrate on one or two areas of the return. So do not let your clients throw any paperwork away.
That is another thing – the self-assessment rules require that taxpayers keep all relevant paperwork for two years or six years in case of the self-employed or business partners. Failure to do so may result in a fine of up to £3,000 per item. For example, capital gains made on unit trusts, details of dividend distributions and any income generated from other sources such as property throughout the tax year will have to be included on the self-assessment form.
All records will need to be filed safely should the Revenue wish to investigate your clients' financial affairs at a later date.
If you want your clients to smile through future Januaries, happy to be missing out on all the form-filling, there is an alternative which will save both you and your clients time and money – offshore bonds.
In the past, many UK advisers have had the notion that offshore investment is only appropriate for expatriates or the jet-setting lifestyles of the rich and famous – largely unrelated to your average client base.
However, increasing numbers of IFAs have discovered that investing offshore can provide a modern, tax-efficient investment solution for all types of investor, especially as the minimum investment can often be as little as between £10,000 and £15,000.
The previously accepted tax-free investments, Peps and Tessas, which closed for business at the end of 1998/99, have been replaced by Isas. As the last consignment of Tessas mature, many investors will roll over their money into Isa accounts, happy to still be investing tax-free.
But once the maturing Tessa has been invested and the £7,000 annual Isa limit has been reached, they will be looking to you, their adviser, for alternative tax breaks.
The key benefit of offshore investment for UK investors is that investments grow free of tax. This is termed gross roll-up. This means that your client retains absolute control over when they pay tax and can choose to cash in the bond when their tax liability is lower, for example, on retirement.
An offshore bond can be an excellent means of planning for retirement. Alternatively, the bond may be held in trust, gifted to a soon to be student and used to plan for school or university fees.
An offshore bond can also reduce your client's self-assessment administration requirements. There is no need to include details of an offshore bond on a tax return unless it is cashed in or an income in excess of 5 per cent is taken each year.
Clients with more complex financial affairs who hold a diverse portfolio of unit trusts may find self-assessment less time-consuming if they place these investments within the tax-efficient wrapper of an offshore portfolio bond.
Another myth about offshore investment relates to charges. Although it is true that offshore bonds tend to contain slightly higher charges than onshore bonds – simply because UK companies enjoy tax relief on corporate expenses while offshore companies do not – if the bond is held for six years or more, the benefit of tax-free growth cancels out this difference.
There are a plethora of offshore jurisdictions, the most popular for UK investors being the Isle of Man, Luxemburg, Dublin and the Channel Islands. There is no difference in terms of the tax advantages these centres provide, the only real variation being the level of investor protection offered. There are a variety of products available to suit most pockets.
If, like Alice, your clients ask you: “Which way should I go from here?”, perhaps you should reply, as the Cheshire cat might say: “I don't much care where as long as it is offshore.”