Give your cash a break

Neil Baker on the tax-free havens
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The Independent Online
James Bond would definitely have had his money invested in an offshore tax haven. There is something illicit, mysterious and a little bit sexy about the idea - making money from sophisticated investments which are too clever for your friends to understand and putting one over on the taxman at the same time.

In the real world, the Inland Revenue gets everyone in the end. Offshore investment will not allow you to avoid tax altogether, but it will give you more control over when and how you have to pay it. Offshore centres such as Jersey, Guernsey and the Isle of Man typically offer investments such as unit trusts, investment trusts, bank and building society accounts and life assurance. Most big UK financial institutions have offshore operations.

These accounts pay gross returns - which means that the tax is not deducted at source. So depending on when interest is credited to your account, you can delay paying any tax for up to 18 months. That can be useful as far as cash-flow is concerned. But one of the biggest attractions of offshore unit trusts is that gains can be accumulated or rolled-up in the fund tax-free. Gains are only taxable when they are brought back into the UK, when they are charged as income, not as a capital gain.

Offshore roll-up funds are useful if you are a higher-rate taxpayer approaching retirement. Because gains can be deferred for years, you can put off taking profits until you have stopped work and moved back to a lower tax rate.

They can also be useful when there is a possibility that tax rates will be increased. As we approach the election people are naturally concerned how investment income will be treated by a new government, says Richard Eliott Lockhart of Murray Johnstone.

While the value of the fund accumulates, investors can also take a form of regular income by selling fund shares. This can also be tax efficient. According to Murray Johnstone, a higher rate taxpayer who invested pounds 10,000 in its Murray Financials Bond Fund at an assumed rolled-up yield of 5 per cent would have a net pounds 3,490.48 if they sold shares worth pounds 3,500 at the end of the first year. If the same person had put pounds 10,000 in an onshore building society account paying 5per cent gross, they would receive a net pounds 3,300 after the same period.

The company says its fund should be seen as a lower risk alternative to a corporate bond Pep and a potential home for maturing Tessa funds. It aims to provide a better long-term return than one would normally expect from UK bank and building society deposit accounts

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