The Labour Party has signalled its intentions clearly with regard to the use of offshore jurisdictions. It intends a full overhaul to counter what it perceives as offshore loopholes. The strongest criticism is reserved for offshore trusts and companies where Labour argues there is continuing abuse.
Jersey, like the other UK offshore islands, provides the services which Labour appears to have so firmly in its sights. Labour has proposed an overhaul of the taxation of non-residents, non-domiciled and those with offshore accounts in line with Inland Revenue recommendations made in 1988.
However, the present government has already looked at and rejected the Inland Revenue recommendations.
There is no doubt that the benefits of the present taxation system for those domiciled outside the UK are considerable, nor that their collective voice in making representations to protect those benefits is strong.
The interest that is being protected, however, may well be the proper interest of the Government in protecting and encouraging much needed investment into the UK rather than any self-interest by the Conservative Party.
Under the present system, those domiciled outside the UK who invest in or move to the UK and make use of the offshore trust services available in Jersey and elsewhere need pay no inheritance tax.
For the uninitiated, being domiciled outside the UK is broadly equivalent to retaining close ties with a permanent homeland outside the UK.
The freedom from inheritance tax may extend across generations. In the meantime much-needed funds are invested into the UK to boost a still fragile housing market and an economy in need of growth.
Offshore trusts also offer capital gains tax benefits. A non-domiciled individual can, for example, fund his offshore trustees to enable them to acquire a company in the UK.
If he and his employees work hard the value of the company may increase and his offshore trustees may later be able to sell the company for a profit.
Under the present rules the offshore trustees will not be liable to capital gains tax. In all likelihood the offshore trustees will also be able to pay the proceeds of the sale to their beneficiaries who will receive it free of tax.
In the meantime the non-domiciled individual will have injected funds into a needy economy and the company will have created jobs and paid tax, as will the non-domiciled individual and the employees on their UK earnings.
Similar capital gains tax benefits are not available to those domiciled in the UK. However, until 1991, such people could defer liability to capital gains tax on disposals by using offshore trusts. The Government closed this possibility with the 1991 Finance Act and followed it up with proposals to amend section 13 Taxation of the Chargeable Gains Act 1994 in the most recent Finance Bill.
As drafted, the new section 13 is potentially damaging to taxpayers who are not seeking to minimise their liability to tax and is also excellent evidence of the danger of reacting without considering potential loopholes or abuse. Labour has criticised the Government's “piecemeal and partial approach” in this matter.
In the area of income tax, too, the non-domiciled have significant advantages. They can, for example, convert certain types of income into capital and take it into the UK, where they may spend it free of tax.
But is it preferable for such money to be spent in the UK or taken elsewhere?
Equally it should not be forgotten that many settlors of trusts in Jersey and the other islands have no personal connection with the UK. Here there is no question of tax avoidance.
It is often the offshore trustees themselves who create a connection by engaging UK brokers or fund managers to manage the funds held offshore. The number of investment managers travelling to Jersey to sell their wares shows the value of Jersey business in the UK. Other forms of investment from offshore structures benefit the financial markets, lawyers, accountants, surveyors and other professions.
What is clear is that the use of offshore trusts will continue to be controversial and party politics will continue to play its role. And regardless of whether the use of offshore trusts and companies is seen as a skill or an abuse, a legitimate incentive for investment or a loophole, the policy makers will be aware of the vast sums of money that are invested into the UK through Jersey and the other offshore islands. It is difficult to determine whether such funds would continue to flow if inward investment was not as tax efficient. But if there is a perceived abuse, then it should be identified clearly and corrected.