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Ship to offshore

For many advisers, the end of the tax year heralds the opportunity to advise clients on maximising pension payments and Isa investments.

More astute advisers will consider the use of inheritance tax exemptions, CGT planning and the potential for investments into venture capital trusts.

This is also a time when a prudent adviser should consider the merits of offshore investments for particular clients. The use of offshore investment structures can often significantly reduce a client&#39s exposure to income tax and CGT each year and, in some cases, with careful planning, create substantial tax-free gains in the future.

Before taking a look at the specific types of structure, it is worth considering what types of clients should consider the use of offshore investments. Without doubt, UK tax resident high-earners represent a good target market.

After these individuals have maximised their pension and Isa allowances, there is a strong argument to consider building up a unit trust portfolio offshore.

Using an appropriate structure, it is possible to buy and sell unit trusts without fear of capital gains tax.

Furthermore, the majority of these investments can be bought at a substantial discount often at creation or creation plus 0.5 per cent.

In our own practice, we have found that in big financial institutions, where share price information can be very sensitive, members of staff are precluded from investing directly into large numbers of equities.

For these individuals, building up an investment portfolio involves carefully selecting a collective investment portfolio using unit trusts and openended investment companies.

One of the more obvious advantages of investing in this way for a higher-rate taxpayer is that he or she will benefit from gross roll-up on the offshore investment funds as tax is not deducted at source.

One of the key principles of investing in this way for higher-rate taxpayers is that should they become lower-rate taxpayers in the future, any gains realised from their investments could be taxed at a significantly lower rate.

This brings us on to our next category of investor – those clients who are planning to sell their business in future and retire abroad.

Many of these will also be higher-rate taxpayers now and there is a strong argument to consider investing in offshore products, where gains can be rolled up until they retire abroad.

Certainly, if they are planning to retire in a lower-taxed environment or possibly even a tax haven, then gains could accumulate and be realised while the clients are living in the tax haven.

It is important that an adviser establishes precisely where the client is likely to retire and to establish whether or not the taxation implications are higher or lower, as it is important not to jump from the frying pan into the fire.

It is also important to ensure that any encashments or realisation of investments are made in the following tax year after the client has left the UK.

Taking the reverse situation, if you have clients who have been expatriates working abroad and are planning to return to the UK, then end of tax year planning is vitally important to ensure they realise any gains in the tax year prior to returning to the UK.

If investments are realised in the new tax year when they become resident, there is every chance that the profits will be taxed at the individual&#39s highest rate.

It is worth contacting clients who are expatriates whom you believe are likely to return to the UK in the next tax year and advise them to review their investment strategy prior to the end of the current tax year.

Finally, we should be identifying clients who have substantial inheritance tax liabilities and could benefit from establishing a suitable trust arrangement, where either capital is transferred into the trust immediately, funds permitt ing, or where sums of money can be either willed or routed via another trust to create an investment fund for a client&#39s chosen beneficiaries.

Offshore investment structures are ideally suited to trust money for two specific reasons. The first is that through the use of offshore investment bonds or perhaps non-distributor funds, profits or growth can accumulate on a gross basis and, as the funds are normally for the benefit of younger beneficiaries, the money is likely to stay invested for some considerable time.

This is particularly so where trust funds are to be used across a number of generations. It is worth establishing these trust funds at an early stage so that death benefits from pension schemes and perhaps share purchase agreements can be routed into the trust rather than swell the survivor&#39s estate, giving rise to an even larger IHT problem.

Still on the subject of inheritance tax planning, it is worth considering whether any gifts can be made utilising the various allowances and such sums invested via a trust into a suitable offshore investment.

For those of your clients who are of foreign domicile and who have been UK resident typically for less than six years or so, it is worth exploring the use of an excluded property trust, whereby cash and assets can be transferred into the trust avoiding liability to UK inheritance tax on this property.

We can now look at the types of offshore investment that an adviser should consider for his or her client.

The precise choice of investment will, of course, depend upon the client&#39s attitude to risk, need for access and the intended term for the investment. A bank or building society account paying a good rate of interest may be a good home for those of your clients who are non-UK domiciled and want to accumulate interest without remitting money onshore.

For these types of investors, interest is only taxed on a “remittance” basis and therefore if your client is a non-taxpayer, it is worth remitting sufficient funds to utilise the personal allowance before the end of the tax year.

For those clients who are UK-domiciled and tax resident and who want to have reasonably quick access to their money in a low-risk environment, a gross roll-up or non-distributor fund may be the right answer.

Many of these will permit savings to be made in a host of different currencies which may suit a client wanting to travel abroad and remit money to a foreign bank account.

Perhaps the most popular type of investment is an offshore investment bond. These are typically offered by insurance companies from secure locations such as the Isle of Man, Luxemburg and Dublin.

Traditionally, high establishment charges, poor performance and from time to time the added scare of an offshore scandal has had sufficient impact to outweigh the tax advantages gained by offshore bonds.

According to our research, an investor will not see any benefit from gross roll-up on an offshore bond until either six or eight years, depending on whether they are a basicrate or higher-rate taxpayers respectively.

In general terms, therefore, the tax advantages of offshore bonds tend to point towards a longer-term investment solution, typically 10 years and more, which often suits the types of investor outlined earlier.

An astute financial planner will have the ability to generate significant extra savings for his client and a rewarding living for himself from the opportunities highlighted.

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