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					Offshore Investing
– Separating the facts from the fiction

By Andrew Pennie, Head of Investment Propositions, Abbey


If somebody mentions 'offshore investing' to you, what images immediately spring to
mind? It might involve a fully paid-up member of the super rich club, sipping a
ridiculously priced cocktail on some faraway sun-kissed island that doubles up as
a rather dubious tax haven. Perhaps they'd be raising a glass in mockery to the tax man
back home whose hefty bills have been cleverly avoided as the ink barely dries on the
very expensive and very complicated investment contracts just signed. In a place where
Regulation is a dirty word and the head office is simply a brass plate manned three days
a year. Sound accurate?


In a nutshell, these are the popular and stereotypical myths surrounding offshore
investment. In reality, however, nothing could be further from the truth.


The reality is less Hollywood
Firstly, who are these 'super rich' and why should they have all the fun? After all,
everybody is subject to the same penal income, capital gains and inheritance
taxes. Although minimum investments offshore tend to be higher than onshore, they are
by no means beyond the reach of millions of UK residents.


Particularly when you consider that UK residents are generally becoming wealthier -
whether because of rising property prices, salaries or inheritances. As such, the benefits
of investing offshore deserve a much wider audience.


As for avoiding large tax bills and moving money around in large suitcases, the reality is
somewhat less Hollywood. Investing offshore is not a vehicle for cutting out the taxman.
In fact, the offshore life offices will co-operate with the Inland Revenue on many tax
matters.
Distinctly appealing benefits
But while we may have dispelled some of the more glamorous myths, it's important to
emphasise that there are still some potential benefits that many of your clients will find
distinctly appealing:


> Virtual tax-free growth - a client's investment will grow free of income tax and capital
gains tax charges, with the exception of small amounts of irrecoverable withholding tax.
This is commonly known as 'gross roll-up' and can have a significant effect for longer-
term investment.


> Unlike a portfolio of collective investments, fund switches do not trigger capital gains
tax or income tax. The offshore structure is therefore very tax efficient for an
investor/advisor that wishes to review and amend fund holdings on a frequent basis.


> UK expatriates and foreign nationals living in the UK can invest offshore to help
mitigate their UK tax bill.


> Offshore bonds are taxed only when remitted to the UK. An investor can therefore
choose when the tax charge will occur and take advantage of their individual tax
position. For example, a higher rate taxpayer that becomes a basic rate taxpayer after
retirement would do well to leave encashment to just after retirement - thereby saving
18% tax.


> 5% of the original investment can be taken each year without incurring an immediate
tax liability - like bonds written by onshore life companies. This is ideal for providing a
regular return of capital that doesn't need to be entered on a self-assessment return.


> Offshore bonds and the use of trusts are a tremendously effective solution to diminish
– or avoid altogether - an Inheritance Tax bill.


Cost, hidden charges and complexity?
Ok, so we've established that there are some interesting tax benefits, but what about the
cost, the hidden charges and the complexity of these offshore contracts?
Well, they are arguably no more complex than onshore solutions. But they can offer a
greater degree of flexibility and choice. They provide access to international funds and
asset classes that are not permitted in onshore investments - such as many hedge
funds. A criticism of many offshore and onshore bonds is the complex charging
structures. This includes annual management charges, establishment charges,
administration fees, exit penalties, valuation fees and so on. It is therefore unsurprising
that these investments are viewed with caution.


With regard to cost, it is important to weigh this up against the potential tax benefits,
although it would be fair to say that there are cheaper contracts available onshore. The
position is clouded slightly as 'special deals' are often available with offshore
investments - which can be particularly frustrating. It's like haggling over a car - you still
never really know if you've been 'done' and why your next-door neighbour is looking
particularly smug!


Finally, lets deal with some of the more mundane issues, regulation and compliance.
Offshore Bonds are provided by leading life companies and are covered by their home
state regulation. The well-established international financial centres are now highly
regulated. For example, Abbey operates Scottish Provident International from the Isle of
Man where the Isle of Man Life Assurance (Compensation of Policyholders) Regulations
1991 allows considerable protection to holders of policies issued by an Isle of Man
company (see www.gov.im for more information). Furthermore, all offshore products sold
into the UK have to meet the Financial Service Authority's product and promotion rules.


The Isle of Man is a UK dependent territory and many other offshore centres are full EU
members, most notably the Republic of Ireland (Dublin) and Luxembourg. These areas
have been thoroughly examined and received numerous plaudits as highly regulated
jurisdictions.


Re-defining offshore investments
I am not saying that an offshore bonds, or offshore investment in general, is right for
everyone. No statement to that effect can be made for any investment. However, what I
can say is that it is one entire class of product that has for many years suffered from
sweeping prejudices. And as a result, many clients who could have otherwise benefited
from some of the very real advantages of this type of investment have missed out.


Simpler and more transparent offshore products
It pains me to say it, but many of these myths have been reinforced by some offshore
providers. In line with IFA and customer needs, offshore products are attempting to
become simpler and more transparent. To this end, Abbey is delighted to have launched
a new contract that delivers what we believe is the most competitive, flexible and
transparent product in the UK offshore bond market. Abbey is now leading the way in re-
defining offshore investments and ensuring they get the airtime they deserve amongst
the mass affluent sector.


This article represents the views of Andrew Pennie, Head of Investment Propositions,
Abbey. The above information is based on our present understanding and interpretation
of current regulations. It is not intended as a substitute for legal or other professional
advice. The information given is for consideration only and full advice should be sought
for individual circumstances. Please remember that the value of tax benefits depend on
individual circumstances and you should bear in mind that the government may alter or
withdraw these benefits in the future. We cannot accept responsibility for any action
taken or refrained from being taken as a result of this information. The article is not
intended as a substitute for legal or other professional advice. To discuss, please e-mail
andrew.pennie@abbey.com

				
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