Offshore bond providers are shifting their new business focus away from jurisdictions such as the Isle of Man and towards European jurisdictions, Epoch Wealth Management has said.
In February, Scottish Widows announced it will close offshore bond provider Clerical Medical International (CMI) to new business.
Markas Gilmartin, partner at Epoch, said the closure of CMI is part of a wider move by providers to utilise the more favourable tax treatment of DFM services in places other than the Isle of Man.
This, he said, is because in order to provide a more transparent service, more advisers than ever are using outsourced DFM services for their clients.
VAT is due on DFM fees where DFMs are used to invest in Isle of Man offshore bonds.
However, VAT does not apply if the bonds used are domiciled in the EU, Gilmartin said.
Paul Fidell, senior business development manager of investments at Legal and General, said: "It is due to the Irish government interpretation of the exemption for management of collective schemes.
"For providers based in the Isle of Man, DFM fees need to be subject to UK VAT, whereas the same DFM fees would be exempt from Irish VAT. This means that the DFM charges no VAT, and none is accounted for by the Irish life company."
Gilmartin said providers such as the Prudential, Aegon and Axa have all focused their offshore bond activity in Dublin, which falls under EU law.
Scottish Widows' closure of CMI has signalled a similar move, Gilmartin said, although Lloyds TSB, the owner of Scottish Widows, has announced no plans yet to launch a Dublin operation.
He said there are other factors drawing providers away from the Isle of Man.
"Portability is an issue," he said. "In France and Italy there can be very heavy tax charges if a bond is not an EU bond."
He added that EU bonds are subject to Europe-wide rules, and therefore subject to slower and more predictable change than those regulated by the Isle of Man regulator, the Financial Supervision Commission (FCM).
However, there is still a place for Isle of Man domiciled bonds, Gilmartin said.
"There are some incredibly useful Isle of man trust and investment based solutions run by the likes of Isle of Man Assurance and Canada Life International where additional costs for VAT on DFMs are still worth paying given the potential to make significant IHT savings," he said.
Gary Boal, consulting actuary at Boal & Co., said: "Industry and other statistics bear out the fact that the Isle of Man life assurance industry is thriving.
"New business in the Island's life sector grew strongly in 2011, with major growth in the past year in single premium bonds in particular.
"The sector's reputation continues to go before it, not just in the UK but also around the world."
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