Take the adventurous route to a tax haven

Tax savings, higher income, and little risk. An attractive cocktail, says Mike Goodman
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The Independent Online
Most savers seeking a "tax haven" need look no further than Peps or Tessas. But there are two groups of investor who will enjoy tax advantages from being more adventurous and investing offshore.

The first group are wealthy high-rate taxpayers who have used up all their Pep and Tessa allowances for the tax year, and have also exhausted their personal pension investment allowances. They may choose to "wrap up" their fund investment into single-premium offshore insurance bonds, and offshore trusts, to defer or minimise their future income and inheritance tax liabilities.

For them the name of the game is turning high-taxed income into capital gains. So their first choice among offshore funds should be those which "roll up" income into capital.

The second group are non-taxpayers who want to save the bother of reclaiming tax credits on their UK unit trust investments.

For them maximising income without undue risk to capital is the chief objective. So they are best suited to high-yielding funds which invest in cash deposits or bonds and enjoy "distributor' status.

Higher-rate taxpayers can also benefit from offshore investment through single-premium insurance bonds, as the Revenue allows up to 5 per cent of the original investment to be drawn out annually as tax-free income.

Tax is payable eventually, but can be deferred until the holder moves to a lower tax bracket, for example on retirement.

Another tax concession, the so-called "dead settlor" loophole, can defer or mitigate inheritance tax liability - for the moment. And the use of offshore trusts can also play its part in tax planning. An offshore trust can based in a different jurisdiction to the assets. The Channel Islands, Bermuda and the Isle of Man are favourite "trust havens" as their legal system is similar to that of the UK.

Sadly the so-called "5 per cent" concession and the "dead settlor" loophole are unlikely to survive the next Finance Bill, and will certainly disappear under a Labour government. That said, avoiding tax is not the be-all and end-all of investing offshore, as Julia Whittle, consultant at Chase de Vere Investment, explains.

"Don't just look at tax when deciding to buy offshore funds. Look at performance. Some offshore funds have not performed as well as the UK but it may be worth investing in offshore funds that do not have UK equivalents - multi-currency or emerging market funds, for example.

"Choose funds on their merits, not just because they are offshore. Often poor performance and higher charges cancel out the advantages of an offshore fund's tax-free status," she adds.

Investors already bewildered by the proliferation of UK unit trusts may be even more bewildered at the choice offshore. There are literally thousands sold out to a score of jurisdictions.

For safety's sake, however, it is wise to confine choice to funds managed by established UK names and based in six offshore centres - Jersey, Guernsey, the Isle of Man, Bermuda, Luxembourg and Dublin.

The first four enjoy so-called "designated territory" status with the UK authorities, who recognise that the local regulation is on a par with the UK's.

The last two fall within the European Union collective investment directives, which allow funds to be sold throughout the EU.

Statistics on offshore funds show they are big business in these territories. The "market leader" is Luxembourg which offers 2,000 different funds with assets totalling pounds 70bn. And from a standing start nine years ago, Dublin's International Financial Centre now hosts 500 funds with assets of pounds 30bn. More than 300 operate in Jersey, with assets of pounds 23bn, while Guernsey boasts about 200 funds with assets topping pounds 8bn. Bermuda, a tax-free haven for top US mutual fund groups, boasts more than 500 funds with more than pounds 9bn of assets.

Only 100 funds are offered out of the Isle of Man and their assets are a modest pounds 4bn. But funds offered by the island's life insurance companies through investment bonds more than double this total.

Investors in funds based in Luxembourg and Dublin benefit from their "open-ended company" structure, based on EU law. Unlike UK-style unit trusts, they are stock market-quoted companies.

These combine the best attributes of investment trusts with those of unit trusts. The first is single-pricing, the second is they can be set up as umbrella funds. With conventional unit trusts there is a bid/offer spread. With single pricing, there is one price and any sales or purchase costs are added on. This allows some brokers and fund managers to charge a flat fee-which cuts the overall cost of large deals. With an "umbrella fund" structure, it is cheaper and easier to switch among funds in the same management stable.

For example, Mercury Asset Management's $1.2bn Luxembourg-based Selected Trust offers 31 sub-funds. These range from low-risk bond funds to high- risk emerging market funds.

Some of these "company-style" trusts have already appeared in the Channel Islands, and they are set to appear in the UK later this year when the necessary legislation is in place.

New-style investment trusts may also be on their way from Dublin, where the authorities plan to allow so-called closed-ended investment companies. These will be similar to UK investment trusts, but may be allowed to redeem shares at net asset value for a limited period each year.

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