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Perk &#39n&#39 mix

The Manx Insurance Association announced recently that a record £12bn is now under administration with Isle of Man-based life companies. Given that the offshore life industry only really began to take off in the late 1980s and early 1990s, amassing such large funds is no mean feat.

It reinforces the fact that, every year, thousands of UK residents and companies legitimately utilise a wide range of offshore investment structures based in quality offshore centres such as the Isle of Man, Jersey and Dublin.

As these offshore centres become increasingly capable of providing efficient, well regulated and flexible environments for investment, offshore corporate tax planning is steadily moving into the mainstream. Financial advisers who are not aware of the benefits are missing out on substantial fee income.

In short, UK companies, whether they trade in the UK or farther afield, need to seriously consider what offshore centres are capable of delivering in terms of tax-mitigation schemes.

Offshore bonds

These are still one of the most popular ways of deferring tax for UK-resident companies. Surplus long-term funds can be legitimately applied to offshore insurance wrapper products to offer a UK company unrestricted access to the best investment funds in the marketplace together with a corporation tax shelter over the longer term.

Within this tax wrapper, offshore or UK funds can be bought and sold without any capital gains tax complications and UK corporation tax is only due when a chargeable event occurs. This event can be deferred until many years in the future, conferring long-term CGT mitigation and tax deferral.

In most cases, the company will elect to initiate a chargeable event at a time when perhaps other trading losses have been incurred on the balance sheet, thus reducing the potential tax liability on the growth achieved.

These simple structures provide the mainstay of basic corporate planning. But while offshore bonds are great stand-alone tax deferment vehicles, more often than not they are used in conjunction with other trust and planning arrangements to improve tax efficiency.

Employee benefit trusts

These may be UKor offshore-domiciled trusts and may ultimately be linked to an offshore bond as a tax-deferment wrapper. Here, a company sets up an employee benefit trust for unspecified employees – effectively, a discretionary trust – thus achieving relief against corporation tax on the contributions made.

No PAYE liabilities arise and, because beneficiaries are elected on a purely discretionary basis, there can be no question of an employee having received a benefit in kind.

The fund is then invested for the long-term benefit of the employees and benefits may be paid to them in the future by the trustees. If UK resident at the time these disbursements are made, the employees will pay tax on receipt. However, in practice, it is widely accepted that certain employees, particularly directors, may have the intention of retiring overseas before such payments are issued, thus obtaining them tax-free.

By utilising an offshore bond within the structure, the company achieves tax-free growth on the investments placed within the trust and can buy and sell funds within the wrapper without any CGT complications. In certain circumstances, the company or its employees can draw down loans from the trust. As disbursements are discretionary, employees&#39 estates have no inheritance tax liability in the event of death.

Offshore pension schemes for non-UK workers or contractors

Increasingly, UK companies are fulfilling contracts overseas or sending employees or contract staff offshore for fixed periods of time. Many of these staff may be fulfilling roles in a succession of countries as contracts progress.

While these employees often simply stay in the UK pension scheme, there are very attractive alternatives on offer. By constituting a bespoke pension scheme in a quality offshore centre, the company or an offshore subsidiary or payroll company can create one central benefit structure for a wide variety of employees operating in different companies around the world.

These unapproved schemes tend to be more flexible than their UK counterparts and, where benefits accrue to such schemes in respect of overseas employment, a returning UK expatriate employee can often receive a tax-free lump sum under an Inland Revenue concession. The tax-efficient lump-sum benefits that can be accrued and the wider investment choice make these schemes an excellent reward and motivation mechanism for valued employees.

In recent years, many subsidiary or payroll companies have moved to quality offshore locations specifically to create these structures and the Isle of Man is introducing legislation to make the island an attractive base for this type of scheme.

Funded unapproved retirement benefit schemes

Following April 6, 1999, when National Insurance became payable on contributions into these structures, Furbs became less attractive for UK companies but can still be appropriate in certain instances.

Furbs are simply trusts where the scheme members act as trustees and are used to take contributions for employees whose earnings exceed the earnings cap. A contribution is paid into a Furbs on behalf of a director or employee on which the company receives relief from corporation tax. However, this payment is treated as a benefit in kind for taxation purposes.

Once inside the Furbs, all investment income is subject to either 23 or 20 per cent tax, depending on the source of income, while capital gains are taxed at 34 per cent but subject to taper relief. However, there is scope where such schemes are big enough to utilise bespoke offshore-based Oeics to achieve tax savings.

On retirement, members can take their entire fund as a lump sum free of any further taxation and there can be IHT savings if you die before taking the fund, providing the company has paid the set-up costs on behalf of the employee.

These are just some of the ways UK companies can avail themselves of tax savings by taking thorough financial advice from their UK IFA.

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