The demand for taxation advice is set to grow as investors continue to look offshore for investment opportunities, so intermediaries will need to do their homework on a range of jurisdictions with very different tax structures
Changes to capital gains tax (CGT) for UK residents may have removed some of the attractions of offshore trusts but demand for tax planning remains undiminished.
For international finance centres such as the Channel Islands and the Isle of Man, the focus is becoming ever more international and advisers are increasingly reliant on knowledge of more than one jurisdiction.
During the 1980s and early 1990s, the offshore trust industry saw a surge in demand from UK residents. This was largely driven by clear opportunities to defer or avoid CGT on rapidly appreciating assets, such as pre-flotation shares.
Successive legislative changes, particularly the 1998 Finance Act, have removed many of the tax benefits. The requirement for such structures still exists but they tend to be far more specialist than in the past. As a source of new business, this area has been largely overtaken.
Demand for offshore structures is coming from slightly different quarters, with cross-border investment a real growth area.
Almost any activity involving an investor in one country and an asset in another will require specific advice as to the financial outcome and how this may be protected or enhanced through structuring. Property is a prime example and, in tax-planning terms, has seen significant growth in recent years.
As with other cross-border activity, avoiding the many pitfalls of international property investment requires specific knowledge of the legal framework in each jurisdiction.
Take Austria, for example. Merely owning an Alpine retreat in your own name can be sufficient for you to be regarded as a resident and therefore liable for Austrian taxation on your worldwide income. For the unwary, the ski chalet could prove a little more expensive than first thought.
This is perhaps extreme but nevertheless provides a good example of how direct ownership can be problematic. As a result, the Channel Islands is increasingly being used for property structures in European jurisdictions.
Such investments still need careful consideration from both a legal and fiscal perspective, which is where specialist advice is required. UK residents, for example, need to be aware of a potential tax trap known as the 'shadow director' before rushing to put their holiday homes into companies run from an international finance centre.
This is not quite as sinister as the name might suggest. It is actually the result of recent judicial interpretation of tax legislation, which means the actions of someone looking after such a property can be interpreted as tantamount to those of a director running the holding company.
Should this apply, it could lead to a liability for UK income tax on the free occupation of the property. The CGT consequences on the sale would also need to be considered carefully. Demand for tax-efficient property structures has also come from further afield. The UK market has attracted a massive amount of inward investment from overseas landlords, most notably in the Far East.
Property investors in Hong Kong and Singapore, in particular, have seen the opportunity for capital growth in their own markets diminish. This followed successive bouts of deflation in the wake of the 1998 Asian currency crisis and slowing demand from US customers.
The combination of high rental yields and low interest rates, together with continuing capital appreciation in the UK property market, more than offsets the fact tax rates are considerably higher than both Hong Kong and Singapore.
These investors are no strangers to offshore companies. They have long used such structures to hold assets in their local markets as a means of avoiding estate duty. It is a natural progression for them to seek a similar arrangement for UK property and avoid UK inheritance tax implications.
The Channel Islands have long been established as centres of expertise in handling UK tax issues. This, together with their reputation as well-regulated jurisdictions, has meant they have been ideally placed to benefit from this new business.
As private clients increasingly look at investments on a more international basis, the demand for tax advice is set to grow.
This expansion has more than offset the decline in demand for tax-efficient structures arising from the Government's CGT changes. Perhaps the most important of these came with the 1998 Finance Act, which introduced a form of taxation for offshore trusts that was arguably both retrospective and discriminatory.
Subsequent changes to the UK's CGT laws have seen the replacement of indexation allowance with taper relief, with generous provisions for certain business assets. The new taper relief provisions for qualifying business assets can result in an effective rate of taxation of just 10% on the sort of business assets that were being placed into offshore trusts in the 1980s.
Paradoxically, the legacy of the 1998 Finance Act is a much harsher regime for offshore trusts, with the introduction of taxation on stockpiled gains. This means those who used legitimate offshore structures in the 1980s and early 1990s and realised their gains in the past are faced with an effective rate of tax of 64% if they wish to remove the funds.
To the casual observer, it may seem inconsistent and unfair on anyone who made their fortunes in the 1980s and early 1990s rather than the 21st century, as well as a barrier to the re-importation of that wealth into the UK.
To quote an old adage: a 98% rate of taxation is effectively a zero rate, since people will simply leave a jurisdiction that taxes them too highly.
Many people that have offshore structures for which the 64% rate of tax applies are looking at legitimate means to avoid the tax. Sophisticated minds initially came up with the 'flip flop', which involved moving assets from one trust to another, but the Inland Revenue introduced legislation to counter this action.
Not surprisingly, with so much at stake, the same experts have developed methods with which the subsequent legislation can be side-stepped. Such planning is, however, not for the faint hearted. The Inland Revenue will scrutinise these arrangements very closely and, without care, there is a risk that, far from being avoided, the 64% tax charge could be crystallised and passed on to the new structure.
It is a good example of how tax planning is an evolving science for the international finance community. It calls for creative thinking and, increasingly, a depth of knowledge of more than one tax jurisdiction.
Nevertheless, the fact remains that anyone looking to use an international finance centre for tax-planning purposes will need to work closely with their advisers. Legislation does change and, with an increasingly international focus, investors will often have more than one jurisdiction to consider.
Keeping abreast of all the legal and fiscal requirements can only be done through ongoing dialogue.
Changes to capital gains tax for UK residents may have removed some of the attractions of offshore trusts but demand for tax planning remains undiminished.
Anyone looking to use an international finance centre for tax planning purposes will need to work closely with their advisers.
The legacy of the 1998 Finance Act is a much harsher regime for offshore trusts.
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