End of the road?

Legislation had already eroded some of the benefits of investing offshore, but is the credit crunch the final nail in the coffin? Gary Telford and Helen Bucktrout report

End of the road? Recent turmoil in the ­banking sector has led to widespread investor concern over the safety of deposits. With the news of bank failures and Iceland’s collapsed banking economy ­dominating the headlines, never before has the banking and finance industry ­experienced a crisis that has had such an overwhelming global effect.

Events in one country have had an almost instant knock-on effect in territories ­thousands of miles away, and it is the very speed and almost uncontrollable nature of the crisis that has gripped the global ­financial world.

All this has contributed to shaking the confidence of and possibly belief in the use of offshore finance locations for non-UK domiciled individual taxpayers.

In this environment investors are looking at available bank deposit guarantees. ­Ireland stole a march by offering an unlimited guarantee in respect of deposit accounts, leading to an influx of new customers. Other countries have since followed suit or brought in limits of varying amounts.

However, this is not the case in respect of all the offshore centres, which ;must ;be ;a ­concern. For example, Gibraltar covers deposits up ;to ;e20,000 (£16,000) and the Isle of Man increased its deposit protection to £50,000 per person recently. There is no ­protection scheme in the Channel ;Islands, although it is being ­considered. If it comes in, it is unlikely to offer unlimited protection for non-Jersey or Guernsey residents.

Tax and estate planning was a major ­benefit of using offshore locations to hold funds, but the changes to the tax treatment of non-UK domiciled taxpayers introduced in April 2008 were designed to further reduce these advantages.

Many of the loopholes were closed, such as source ceasing in one year and remitting in the next. However, major benefits remain even if they come at a £30,000 annual ­payment. In addition there are some simple planning techniques available to mitigate the effect of this charge – for example, ensuring that one spouse holds all the ­offshore funds can save one annual ­payment per couple.

Offshore trusts are more tax advantageous than holding assets outright or ­directly through a company. Non-UK ­domiciled ­settlers are not taxed on trust gains on an arising basis, even in respect of UK assets, regardless of whether the remittance basis has been elected for. The election and possible payment of £30,000 only needs to be made when ­offshore capital ­payments are made. No charge to UK tax ­arises, ­provided the funds remain offshore.

Another benefit of using offshore financial centres is confidentiality of financial information, but there has been increased pressure on these offshore centres to provide transparency and exchange of information with a taxpayer’s home jurisdiction.

The Organisation for Economic Cooperation and Development listed cooperative states and highlighted a number that were uncooperative, including Andorra, ­Liechtenstein and Monaco. Many of the cooperative states have entered into bilateral information-sharing agreements. Home jurisdictions have adopted other measures to open up the bank accounts of some of these uncooperative states. For example, the payment by Germany to a bank employee for a list of the accounts of a Liechtenstein bank was ­widely reported. Additionally the US authorities have acted against a Swiss bank to open up more than 19,000 accounts held by US nationals.

The European Union Savings Directive came into effect on 1 July 2005 and aims to prevent cross-border tax evasion using information exchange regarding foreign resident individuals receiving savings income outside their resident state.

It applies to all EU member states, together with dependent or associated territories of EU member states. These include the British Virgin Islands, ­Cayman Islands, Gibraltar, Guernsey, Jersey and the Isle of Man. Some other ­jurisdictions have also agreed to participate, including Andorra, Liechtenstein, ­Monaco and Switzerland.

A further reason for using offshore ­locations is asset protection planning. For example, structures are sometimes used to shield wealth from creditors or a spouse in divorce actions. Clearly the effectiveness of this strategy depends on timing the transfer of assets into the structure and how robust the local jurisdiction is against the UK courts seeking information or access to the funds.

The recent case of Mubarak v Mubarak (2008) (see page 43) demonstrates the desire of offshore courts to act independently and not enforce the divorce orders of UK courts. However, as shown in Charman v Charman (2007), when setting up an ­offshore structure care needs to be ­exercised to avoid a UK court being able to show that the spouse has “the fullest possible access to the capital and income”.

Investor security may mean that more funds are brought home, particularly in light of the cost of maintaining the ­remittance basis of taxation, the loss of the ability to maintain confidentiality and ­concerns over the ability of UK courts to reach offshore funds.

As always the answer will be different for each situation but this is one ­further issue that needs to be ­considered.

Gary Telford is a tax partner and Helen Bucktrout a tax manager at Pricewater-house­Coopers