Investment havens are not a tax paradise

while Anthony Bailey examines the new system and warns would-be tax avoiders to take advice before going offshore

WITH Labour hotly tipped to win the next election, more and more people are likely to consider putting money offshore in places like Jersey and the Isle of Man to avoid tax.

However, for people of relatively modest means there is likely to be at most only a marginal benefit in doing so. "Any offshore investment will have to justify itself on investment criteria alone," says Jane Seymour of accountants Clark Whitehill.

Many funds are legally based offshore. But they are often run from the City of London by well-known firms that also sell unit trusts and investment trusts based in the UK.

One reason for UK residents to go offshore is for greater investment flexibility than that which the regulatory authorities give to unit trusts.

For example, you may want to invest in something with a higher-than-average risk for greater returns, such as a hedge fund run by the likes of George Soros. But if you count as a UK resident for tax purposes and you are "domiciled" in the UK, you have to pay UK tax on your income and gains wherever in the world they arise.

However, that is not to say there are no tax advantages in going offshore.

Offshore roll-up funds do not pay out a dividend but reinvest interest and other income in the fund. These funds can provide compound growth tax-free until you cash them in. But any return from the investment would then be liable to UK income tax. If you are currently a higher-rate taxpayer but expect to become a basic-rate taxpayer on retirement, the eventual tax bill will be lower.

If you are planning to move abroad and will become non-resident, postponing cashing in the investment until you have left the UK will mean you escape UK tax. However, there may well be tax due in the country in which you end up living.

Anyone tempted by offshore investments needs to consider that there may be an extra risk from slacker regulation. Investor compensation schemes may be less generous than in the UK.

There are two categories of people who might get significant tax advantages from offshore investing, Ms Seymour says. "First, someone who is resident in the UK but domiciled abroad. This person is only liable to pay tax on income and gains arising abroad when they are brought into the UK." An example here would be foreign nationals working in the UK. If they invest offshore and do not bring the money into the UK they will not be taxed.

The second category is UK expatriates. If expatriates become non-resident, investment income and gains arising outside the UK will not be taxed in the UK. But there are strict rules on what counts as non-residency and how it is achieved. You have to be outside the country for a full tax year if you are working abroad. If you are not working, non-residency may be only provisionally granted. There are also strict rules on the length of visits back to the UK if non-resident status is to be maintained. Advice is crucial, as it is for anyone about to return to the UK.

"Some people can benefit from investing outside the UK. But tax should be only part of the consideration. You should not make any decisions until you have consulted a professional adviser and your domicile and residence status have been checked to ensure you avoid unexpected tax charges," Ms Seymour says.

Start your day with The Independent, sign up for daily news emails
News
i100
News
Bobbi Kristina Brown, daughter of the late singer Whitney Houston, poses at the premiere of
people
News
people
News
The frequency with which we lie and our ability to get away with it both increase to young adulthood then decline with age, possibly because of changes that occur in the brain
scienceRoger Dobson knows the true story, from Pinocchio to Pollard
Voices
The male menopause: those affected can suffer hot flushes, night sweats, joint pain, low libido, depression and an increase in body fat, among other symptoms
voicesSo the male menopause is real, they say, but what would the Victorians, 'old' at 30, think of that, asks DJ Taylor
Life and Style
health
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: DBA Developer - SQL Server

£30000 - £35000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Customer Service Administrator

£13000 - £15000 per annum: Recruitment Genius: Are you passionate about custom...

Recruitment Genius: Dialler Administrator

£22000 - £25000 per annum: Recruitment Genius: Main purpose: Under the directi...

Ashdown Group: Contracts Manager - City of London

£35000 - £37000 per annum + benefits : Ashdown Group: Contracts Manager - City...

Day In a Page

Turkey-Kurdish conflict: Obama's deal with Ankara is a betrayal of Syrian Kurds and may not even weaken Isis

US betrayal of old ally brings limited reward

Since the accord, the Turks have only waged war on Kurds while no US bomber has used Incirlik airbase, says Patrick Cockburn
VIPs gather for opening of second Suez Canal - but doubts linger over security

'A gift from Egypt to the rest of the world'

VIPs gather for opening of second Suez Canal - but is it really needed?
Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Fashion editor, Alexander Fury, applauds a man who clearly has more important things on his mind
The male menopause and intimations of mortality

Aches, pains and an inkling of mortality

So the male menopause is real, they say, but what would the Victorians, 'old' at 30, think of that, asks DJ Taylor
Man Booker Prize 2015: Anna Smaill - How can I possibly be on the list with these writers I have idolised?

'How can I possibly be on the list with these writers I have idolised?'

Man Booker Prize nominee Anna Smaill on the rise of Kiwi lit
Bettany Hughes interview: The historian on how Socrates would have solved Greece's problems

Bettany Hughes interview

The historian on how Socrates would have solved Greece's problems
Art of the state: Pyongyang propaganda posters to be exhibited in China

Art of the state

Pyongyang propaganda posters to be exhibited in China
Mildreds and Vanilla Black have given vegetarian food a makeover in new cookbooks

Vegetarian food gets a makeover

Long-time vegetarian Holly Williams tries to recreate some of the inventive recipes in Mildreds and Vanilla Black's new cookbooks
The haunting of Shirley Jackson: Was the gothic author's life really as bleak as her fiction?

The haunting of Shirley Jackson

Was the gothic author's life really as bleak as her fiction?
Bill Granger recipes: Heading off on holiday? Try out our chef's seaside-inspired dishes...

Bill Granger's seaside-inspired recipes

These dishes are so easy to make, our chef is almost embarrassed to call them recipes
Ashes 2015: Tourists are limp, leaderless and distinctly UnAustralian

Tourists are limp, leaderless and distinctly UnAustralian

A woefully out-of-form Michael Clarke embodies his team's fragile Ashes campaign, says Michael Calvin
Blairites be warned, this could be the moment Labour turns into Syriza

Andrew Grice: Inside Westminster

Blairites be warned, this could be the moment Labour turns into Syriza
HMS Victory: The mystery of Britain's worst naval disaster is finally solved - 271 years later

The mystery of Britain's worst naval disaster is finally solved - 271 years later

Exclusive: David Keys reveals the research that finally explains why HMS Victory went down with the loss of 1,100 lives
Survivors of the Nagasaki atomic bomb attack: Japan must not abandon its post-war pacifism

'I saw people so injured you couldn't tell if they were dead or alive'

Nagasaki survivors on why Japan must not abandon its post-war pacifism
Jon Stewart: The voice of Democrats who felt Obama had failed to deliver on his 'Yes We Can' slogan, and the voter he tried hardest to keep onside

The voter Obama tried hardest to keep onside

Outgoing The Daily Show host, Jon Stewart, became the voice of Democrats who felt the President had failed to deliver on his ‘Yes We Can’ slogan. Tim Walker charts the ups and downs of their 10-year relationship on screen