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
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Digital Optimisation Executive - Marketing

£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

Recruitment Genius: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Day In a Page

Sepp Blatter resignation: The beginning of Fifa's long road to reform?

Does Blatter's departure mean Fifa will automatically clean up its act?

Don't bet on it, says Tom Peck
Charles Kennedy: The baby of the House who grew into a Lib Dem giant

The baby of the House who grew into a Lib Dem giant

Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

The harrowing testament of a five-year-old victim of Syria's endless civil war

Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
The future of songwriting: How streaming is changing everything we know about making music

The future of songwriting

How streaming is changing everything we know about making music
William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

Recognition at long last

Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
Beating obesity: The new pacemaker which helps over-eaters

Beating obesity

The new pacemaker which helps over-eaters
9 best women's festival waterproofs

Ready for rain: 9 best women's festival waterproofs

These are the macs to keep your denim dry and your hair frizz-free(ish)
Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

Wiggins worried

Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific