TAX PLANNING AND SAVING: Offshore need not mean out of bounds

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The Independent Online
Many savers believe that investing offshore is only for the rich or those working abroad. Not so. Offshore investment is for anyone and can provide a useful means of tax planning.

Over the past decade many well-known life assurance companies, building societies, and unit trust and fund management groups have set up subsidiaries in offshore centres such as the Channel Islands, Isle of Man, Dublin and Luxembourg. While they can be used by the local inhabitants and Britons working abroad, they are mostly for British residents who want to benefit from the advantages on offer.

Some offshore deposit-taking subsidiaries offer a slightly better rate of interest than their mainland branches. Midland Bank's Isle of Man operation, for example, is paying 5 per cent gross for 30-day deposits compared with the 4.25 per cent available in high-street branches.

One advantage of investing in an offshore life fund is that the insurance company does not have to pay capital gains or income tax on its investments. This means that its fund can grow at a faster pace than its UK equivalent.

There also tend to be fewer restrictions on the amount that can be invested in any particular company, sector or country. This could, however, mean that there could be greater risks and that unit prices could be more volatile.

But the main benefit of investing offshore is the ability to defer tax. Legally, any income from earnings or investment and any capital gains have to be declared. Avoiding tax by not declaring them is illegal.

If, however, they are rolled up in the offshore fund, with the money reinvested, then any income or capital gains tax will be deferred. Tax will only become payable when the investment is encashed. Whether run by an insurance company or by a fund management group, investment in an offshore roll-up fund can provide a useful vehicle for retirement planning.

Many people who are higher-rate taxpayers revert to the standard-rate band on retirement. Others, such as married women with a limited pension, may pay little or no tax on retirement. In such cases their tax liability from offshore earnings is minimised.

There is also no maximum amount that can be invested overseas. Nor is there any maximum investment limit in any one year as is the case with personal equity plans.

For an investor intending to move abroad, either before or after retirement, offshore investment has added attractions. If cashed in after moving overseas, there will be no UK tax liability.

Offshore funds can have other roles. Philip Saunders, a director of Guinness Flight, the fund management group, says that many parents are starting to be alarmed at the cost of university education.

He says: "It is likely that children whose parents have a joint income as low as pounds 32,000 a year will not receive any grant and will have to pay the full cost of accommodation, books and living expenses.

"An investment in an offshore fund, in a child's name, will grow tax free until the child is 18 and realises the investment to fund education costs. Since the child is likely to have little or no taxable income, any gains can be set off against unused tax reliefs."

Investing in offshore life assurance bonds can be useful in avoiding inheritance tax but this technique is likely to be short-lived. The Government has issued a consultative paper on changes in the rules and a Labour government is also unlikely to leave them unchanged.

When investing offshore, charges tend to be slightly higher than with the equivalent mainland investment vehicle. Off-shore unit trusts, for example, tend to levy around 0.5 per cent to 1 per cent more on annual charges.

For safety and value it pays to consult an independent financial adviser or stockbroker and make sure that you understand how your money is being invested and the risks involved.

In the long term you would expect a higher return with one of the Asian "tiger" specialists, such as Newport Capital, but these shares are volatile so you need to take the long view and avoid selling at the wrong time.

Savers must also show caution when looking at any offshore investment as it will not have the benefit of the full range of investment protection in more conventional UK mainland investment vehicles.

For added security you may prefer to invest with a well-known name, though make sure that it is a subsidiary of the familiar parent. Some rogue companies have set up overseas with names similar to those of well-known saving institutions, when in fact they are unrelated.

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