Tax planning: Are you up to an offshore haven?

You don't need to be a millionaire to invest outside the jurisdiction of the UK, writes Matthew Craig

The words offshore tax haven conjure up visions of white sands and fiscal laxity. The UK's offshore havens are the rather more prosaic Channel Islands, Isle of Man, Dublin or Luxembourg.

You may not realise that offshore investments in these places can be useful. You don't need to be a millionaire. Offshore investment is simply investment outside the jurisdiction of the UK. Some of these locations have investor protection regimes deemed equal to the UK.

Many of the best-known institutions have set up offshore operations to take advantage of the more favourable tax regimes.

Andrew Meeson, international financial planning adviser at Clerical Medical, says there are two classes of people in the UK who can benefit in different ways from offshore investment.

"The first is someone who is not domiciled but resident in the UK, which basically means they live here now but their permanent residence and their roots are abroad."

Examples of a non-domiciled UK resident could be an American lawyer seconded to a London office, or one of the growing number of foreign sports professionals living in this country.

These individuals can benefit greatly from offshore bank accounts, as Mr Meeson explains. "If they have a bank account paying annual interest of pounds 10,000 a year in the UK a non-domiciled person would pay pounds 4,000 a year in tax, assuming they are a higher-rate taxpayer.

"But if the bank account is in Jersey they will pay no tax on it unless and until they bring the interest into the UK, so their investment rolls up free of tax. The interest may then be turned into capital over time and they can bring the money onshore without paying tax on it at all."

For those of us domiciled in the UK this approach is no use as every penny of offshore bank interest, wherever in the world it is earned, is taxable as part of our annual income by the Inland Revenue. However, there are other ways to make use of offshore accounts.

There are simple offshore savings accounts, which operate in the same way as a normal bank or building society account. The interest rolls up gross (before tax). Almost all the well-known UK based institutions have offshore branches. Current rates start at about 4.5 per cent gross on pounds 5,000. First Active Bank is paying 6.25 per cent on pounds 10,000 or more in its instant access offshore account. You pay tax when you bring the money back to the UK, so you can time your investments in order to minimise a tax bill.

Offshore insurance bonds have been popular with investors over the years. These are classified as a non-income producing investment although withdrawals of up to 5 per cent a year are permitted, free of income tax.

The 5 per cent withdrawals operate on a cumulative basis so if no income is taken in the first year, investors can take 10 per cent in year two. Income received in the bonds rolls up gross, compared with the equivalent onshore bonds, where income is received net of tax.

However, onshore bonds obtain tax relief on their expenses, and you don't get that offshore so the costs to investors are higher.

Scottish Life International marketing manager, David Ferguson, says: "The benefits of offshore gross roll-up more than outweigh onshore tax relief if the investment is held for more than six or seven years."

The minimum investment in an offshore bond is normally pounds 15,000 so investors need to be able to lock away large sums of money for a considerable period of time. The drawback to this type of investment is that tax will need to be paid when the money is brought back onshore.

Even so, figures show the offshore bond can still produce better returns than its onshore rival after tax is paid when the bond is cashed in. Clerical Medical International calculations show a higher rate taxpayer investing pounds 50,000 offshore for 20 years would gain pounds 14,785 after tax, assuming annual growth of 6 per cent and no withdrawals.

Mr Meeson points out that UK taxpayers can control when they bring the money onshore. If they save offshore while working, they could bring in the money when they have retired and perhaps moved from a higher to a lower tax bracket.

You may also read about personal portfolio bonds and offshore trusts. Personal portfolio bonds allow investors to hold a basket of unit trusts and investment trusts within the bond structure, but the minimum investment is usually about pounds 50,000. It is possible to transfer an existing investment portfolio into a personal portfolio bond held offshore but you will be liable to capital gains tax (CGT) on any gains when you make the transfer. As you can choose when to bring the money back to the UK, this is a very popular investment.

Offshore trusts had a moment in the spotlight recently when Geoffrey Robinson, the former Paymaster-General, was found to be the beneficiary of an offshore trust after he had announced Tessas and PEPs were to be scrapped for UK savers.

Offshore trusts are geared towards wealthy individuals who want to pass on their money to beneficiaries. It is better to make the most of tax breaks from PEPs, Tessas, ISAs and other onshore savings products before you start to move your investments offshore.

n First Active Bank, 01481 710400. For guidance on offshore investments consult an independent financial adviser. IFA Promotions, on 0117 971 1177, can give you the names of local IFAs.

n Matthew Craig is deputy editor of `Pensions Week'.

Start your day with The Independent, sign up for daily news emails
Life and Style
love + sex A new study has revealed the average size - but does that leave men outside the 'normal' range being thought of as 'abnormal'?
Arts and Entertainment
TV
Voices
The Palace of Westminster is falling down, according to John Bercow
voices..says Matthew Norman
Sport
Steve Bruce and Gus Poyet clash
football
Arts and Entertainment
Jake and Dinos Chapman were motivated by revenge to make 'Bring me the Head of Franco Toselli! '
arts + ents Shapero Modern Gallery to show explicit Chapman Brothers film
Arts and Entertainment
Kurt Cobain performing for 'MTV Unplugged' in New York, shortly before his death
music Brett Morgen's 'Cobain: Montage of Heck' debunks many of the myths surrounding the enigmatic singer
Life and Style
life
ebooks
ebooksA special investigation by Andy McSmith
Sport
Brendan Rodgers
football The Liverpool manager will be the first option after Pep Guardiola
Arts and Entertainment
Myanna Buring, Julian Rhind-Tutt and Russell Tovey in 'Banished'
TV Jimmy McGovern tackles 18th-century crime and punishment
Arts and Entertainment
Paul Whitehouse as Herbert
arts + ents
Sport
Christian Benteke of Aston Villa celebrates scoring the winner for Aston Villa
football
News
Bill O'Reilly attends The Hollywood Reporter 35 Most Powerful People In Media Celebration at The Four Seasons Restaurant on April 16, 2014 in New York City
media It is the second time he and the channel have clarified statements
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: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Austen Lloyd: Law Costs HOD - Southampton

£50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...

SThree: Recruitment Resourcer

£20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Day In a Page

Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn