The alternative investment

From a fiscal point of view, there is no reason why non-resident or non-UK domiciled individuals should have investments placed in the UK. But time and again we meet clients whose investments are onshore and subject to the UK tax authorities. “No one advised me otherwise,” they will say.

Many lawyers will have strong relationships with bankers and investment managers in the City of London. However, they would not have the opportunity to liaise with similar organisations in offshore jurisdictions, even the nearby British centres of Jersey, Guernsey and the Isle of Man.

Offshore professionals must accept some of the responsibility. In some instances, offshore professionals are guilty of assuming that the UK adviser will be aware of the offshore opportunities. It is part of the role of offshore providers to inform professional advisers in the UK of both the legitimate financial advantages available to their clients and the quality of the jurisdiction.

Before seeking the appropriate offshore provider, the first priority is to establish the residential status of the client concerned. Anyone who enjoys non-resident or non-domicile status in the UK should be advised to consider the offshore options. Each case would have to be considered on its own merits, but in most cases individuals in this category can legitimately avoid paying UK taxes if their financial affairs are structured correctly.

Professional publications often carry stories on the growth of institutional type business offshore. These institutional investment vehicles are a strong growth area and the complexity of them may deter some lawyers from considering the simpler, legitimate options that remain. These options are available to wealthy, private individuals who are not required to pay UK taxes because of their residential status.

There are two specific situations where individuals can benefit. The first occurs when income from a UK source is liable to income tax in the UK. So if the clients have funds located in the UK and they are earning more than their personal tax threshold, they will pay tax on that income. By placing those funds offshore, clients avoid paying that tax quite legitimately.

The second situation arises in relation to inheritance tax. Any assets held physically in the UK are liable to this tax. For example, the beneficiaries of an overseas client with property in London will have to pay inheritance tax of 40 per cent above a threshold of £231,000. Even though the property itself is not located offshore, through an offshore company it can effectively be transferred offshore for tax purposes. By arranging to hold such an asset offshore, inheritance tax is avoided because centres such as Jersey and Guernsey have no estate duty.

There are, of course, many advisers who are well aware of the benefits afforded to their clients through a correctly structured offshore company or investment vehicle. This is reflected in the consistent growth in this type of business in centres such as Jersey and Guernsey. But the message has not reached all.

It is commonplace to come across clients who, although they live part of the time in the UK, are classified as non-resident or non-UK domiciled. Yet they have their investment portfolio of properties located with a financial institution in the UK. These investments should have been placed offshore but no one onshore has advised them accordingly.

For non-UK resident/domiciled clients, there are three areas of financial planning where the offshore advantages have to be considered. They are real estate investment, holding portfolios of stocks and shares in the UK and bank accounts where interest is paid gross. In all three cases it should prove more tax efficient for clients to place these investments in offshore structures.

The choice of offshore location is almost as bewildering as the range of services now offered. But the recent Home Office Review of the British offshore dependencies of Jersey, Guernsey and the Isle of Man, has given these centres extra credibility and reinforced their reputations for stability and probity.

In the independent report, written by UK Treasury official Andrew Edwards, the islands were described as being “in the first division” of offshore centres. The review acknowledged the quality of the existing regulation and praised the commitment to enhancing that legislation.

Offshore trust and company structures are powerful weapons in the armoury of any informed financial planner when advising non-resident or non-domiciled clients in the UK. The quality of certain British centres is such that clients deserve to be steered in the offshore direction. Professionals in the UK should have the confidence to talk to the many specialist financial services groups, operating in centres such as Jersey and Guernsey.

Trevor Falle is group business development director of Jersey General Group and Ashburton