Brendan Harper concludes his review of the tax regime for Isle of Man residents with an analysis of the taxation of non-pension savings and investments
In last month's article, I looked at the rules and tax position of pensions for residents of the Isle of Man. In this final article, I will look at the taxation of non-pension savings and investments.
In addition to pension products, an individual could save for their retirement using a combination of other investment media, including bank deposits, shares and securities, collective investment funds, insurance bonds and savings plans.
The general principle is that investment income is taxable regardless of its source and there are no special savings incentives like the UK Isa regime.
In fact, Isle of Man residents who have retained Isas from periods of residence in the UK still need to pay Isle of Man tax on the income within the wrapper.
So, pension income, bank interest, income from securities, dividends from shares and income from collective investments are all taxable on an annual basis, whether they are distributed or not.
Interest from Isle of Man bank accounts is paid gross and it is the responsibility of the investor to declare the interest on his tax return each year.
If an Isle of Man resident receives interest from foreign investments, he will receive a credit for any tax deducted at source. However, as the Isle of Man's highest tax rate is lower than that applicable in most other countries, investors should try where possible to receive such interest gross.
Dividends from shares and collective investments are taxable on the net amount.
So, for example, if an Isle of Man resident receives a dividend from a UK company, he will not be able to claim the 10% tax credit, leading to double taxation.
As there is no capital gains tax in the Isle of Man, the sale proceeds of shares, collective investments and insurance contracts are all tax-free. Insurance policies, as non-income-producing assets, also allow savings to roll up free of tax, making them particularly attractive to Isle of Man residents.
However, the Tax Assessor has a general anti-avoidance provision at his disposal, which can be used where it is suspected that an individual has entered into a transaction purely to secure a tax advantage.
An obvious example of such a transaction is where an individual attempts to turn income into capital gains (through zero-coupon bonds, for example).
In the context of collective investments and insurance policies, it is more difficult to say with any certainty under what circumstances investment gains would be subject to tax.
Most decisions are made on a case-by-case basis and, although there is a right of appeal to the Income Tax Commissioners, their decisions are not generally made public.
One practice note issued by the Assessor has singled out offshore roll-up funds, confirming that the income element of any investment growth is taxable.
As it would be very difficult to get a split of the income and capital growth elements on such funds, it would generally be unwise for an Isle of Man resident to invest in roll-up funds, and they should choose distributing funds where possible.
In relation to insurance policies, it is generally accepted that the proceeds are tax-free, provided the underlying investment links are collective investments or internal linked funds.
If the insurance policy is a personal portfolio bond, or holds a substantial amount of cash, the anti-avoidance provision could be invoked.
Another danger area is where an individual makes regular withdrawals - say from an insurance bond, or under a unit drawdown scheme on a collective investment.
If the regular withdrawals are being used for an 'income purpose', such as to meet day-to-day living expenses, then it is likely that the growth element will be taxable, particularly if the individual has no other assessable income.
However, those who save for the long term into insurance policies and collective investments and then take the proceeds in the form of a total surrender should not usually be subject to tax.
In relation to trusts, there is published guidance on when trust income is taxable. The general position is that, if an Isle of Man resident individual has an immediate right to the trust income (for example, in an interest in possession trust), he will be subject to tax on the trust income regardless of whether it is distributed or not.
If the trust is a discretionary trust, then any Isle of Man resident beneficiary will be taxable if they receive an income distribution.
If the trustees accumulate the income, then they will be taxable if there are Isle of Man resident beneficiaries.
So, to conclude this series on the Isle of Man, the tax system is simple and generally favourable in comparison to other tax regimes.
The combination of low tax rates, simple rules and a clearance system has led to a general culture of compliance, and makes the Isle of Man a very attractive place for those considering moving there.
- Brendan Harper is technical services manager at Friends Provident International.
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