Offshore Furbs are a flexible vehicle for providing retirement benefits with few restrictions, but their very flexibility can sometimes lead to abuse
An offshore Furbs is a funded, unauthorised, retirement benefit scheme in the form of an offshore trust. It is funded because the benefits provided are limited to the extent of its funding and any future growth within it; it is unauthorised because it does not fall within any of the categories of approved pension schemes for UK tax purposes; it is a retirement benefit scheme because it is designed to provide retirement benefits to a specific class of employee and their family; it is in the form of a trust because the funds must be held independently; and it is offshore to avoid UK tax on its income and gains.
An offshore Furbs is an extremely flexible vehicle for providing retirement benefits. It can be used by UK-resident and non-UK-resident employers for UK resident and non-UK resident employees, whether they will be retiring in the UK or overseas. The benefits can be made to substantially exceed those available under approved schemes. There are no restrictions on the type of investments made by the trustees, no requirement for a specific type of trustee, no requirement to purchase an annuity at any time and no specific form of scheme is required.
No matter what form the scheme takes, it is a retirement benefits scheme only if it provides relevant benefits. These include a pension, lump sum, gratuity or other similar benefit which is, or will be, given (1) when a person retires or dies; (2) in anticipation of retirement; (3) after a person has retired or died (if the reason for the payment is in recognition of past service); or (4) as compensation for any change in the conditions of continuing employment. The trust document establishing the Furbs must therefore define these benefits and the trustees must only confer the defined benefits.
Furbs are set up by an employer transferring funds to offshore trustees, the operation of the Furbs being set out in a trust deed defining the relevant benefits. The employer should fully document the set up of the Furbs and advise the relevant employees of the benefits that will be provided. Appropriate disclosures should be made to the Inland Revenue which will define the tax treatment of the Furbs, the employee and the employer.
The flexibility of a Furbs can lead to abuse. There is the temptation to channel the employee's own funds masquerading as business profits through the employer into the Furbs.
The employer can be either a UK or an overseas corporate business. If the employer is resident in the UK, then the business will obtain a corporation tax deduction in respect of the amounts transferred to the Furbs. Regular payments should have no problem being treated as deductible, whereas large one-off payments are in danger of being treated as capital and disallowed. If the employee is resident in the UK then payments by the employer to the Furbs will be assessed on the employee and subject to NIC.
An offshore Furbs is an offshore trust, so is in danger of falling within the UK's offshore trust anti-avoidance regime. Escaping this regime depends on the employer being clearly identified as the settlor of the Furbs.
If the Revenue seeks to apply the offshore trusts anti-avoidance regime, the result could be that income and gains arising within the Furbs are assessed on the employee or the subsequent payment of any gains arising within the Furbs not assessed on the employee (because he was not resident in the UK) subject to assessment and a penalty charge.
Pension payments or lump sums payable to the employee or their family are taxed as income, without any deferral penalties; however lump sums can be exempt under certain circumstances. If the employee has worked overseas and retires to the UK, there is a concession available to eliminate tax on benefits attributable to the period worked overseas.
So long as the Furbs fails to be classified as an employee benefit trust for IHT purposes, there is no IHT on transfers into the Furbs and none on payments out of it, under the 10-year charge or on the death of the employee or members of his family. There is no requirement for the individual to purchase an annuity at any time and so the benefit of the capital value of the Furbs can pass to the members of the employee's family after their death and down to later generations tax free.
For expatriates who are owner-managers of their business, a Furbs represents a unique tax and estate planning solution. For those who work for a third-party employer, the key is to persuade the employer to make contributions directly rather than to the employee.
In an owner-manager situation, contributions made to the Furbs can be loaned back to the owner-manager's business to assist with the business' cash flow. This can also provide an efficient exit route for the owner-manager from the business, especially if they intend to sell out on retirement, since the Furbs can be repaid its loan over time after the owner-manager has retired to the UK without any adverse tax consequences.
Remember that a Furbs is a trust and so the selection of trustees is important. It is important the trustee understands the nature of the solution and can make the required tax filings and that the individual feels comfortable with the relationship.
The regime for Furbs will change significantly in respect of UK employers from 6 April 2006, so advice should be taken now on how to take advantage of the regime while the opportunity remains. Under the new regime, a Furbs will fall within the employee's estate for IHT purposes but contributions will not be subject to NIC. Existing Furbs will remain in the old regime.
Jonathon Crowther is a freelance consultant and can be contacted at [email protected]
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