As more people leave the UK to seek out sunnier and more tax-efficient climes, Cyprus is expected to be one of the major centres to benefit from the exodus. This will push demand for both financial services and advice
By 2020, many of the 'sunshine states" in the Mediterranean could be the new home to an increasing number of UK expatriates - whether employed or retired. According to a recent report, over the next 10 years more than two million over the age of 50 will leave the UK to retire abroad, and more again will take up employment posts overseas. It is estimated up to one in five UK retirees will live overseas by 2020.
Spain, a perennially favourite destination for UK retirees, is likely to be one of the host countries most affected. Along with a wide use of English, the sun"s perceived health benefits are, of course, an important factor in Spain"s dominance as Britain"s foremost European destination for UK retirees. The Mediterranean climate is also helping other European destinations attract an increasing proportion of affluent UK retirees, including Portugal and the south of France.
a sound economy
As a popular 'sunshine state", the island of Cyprus has been sharply increasing in popularity as a destination for both tourism and expatriate retirement. With an estimated expatriate population of around 10,000-15,000 - already representing around 10% of the total population - together with a robust and efficient infrastructure and widely-spoken English, Cyprus looks set to be a main beneficiary of the massive demand for goods and services that a continued exodus from the UK could create.
Indeed, the island has an enviable record of economic performance and has established a potentially fertile environment for future economic success. With a highly effective legal system and a well-established body of commercial law, together with a developed financial and taxation system, Cyprus has a strong and modern professional services infrastructure. The expected increase in migration to Mediterranean islands like Cyprus can only increase the potential demand for professional services, such as financial and tax planning.
With an increasing existing market of cash-rich, affluent UK retirees, the financial services sector is a thriving industry, supported by modern international trust legislation, relatively low taxation environment, double taxation agreements (with the UK) and the abolition of local inheritance tax.
The island also boasts a good number of professional financial advisers who advise expatriates on the island and beyond into the Middle East and Africa. However, increasing business and compliance costs are making a number of smaller adviser firms re-examine their reasons for being located in Cyprus. In a recent report, many advisers admitted that the costs to do business are likely to increase.
Increasing regulation and compliance is not, of course, peculiarly Cypriot - it is part of a global development of regulation for financial advisers. Like the UK, increasing regulation can bring consolidation as more business capital has to be directed towards compliance costs.
Many financial advisers on the island continue to focus on professional, working expatriate investors, mainly investing regularly from earned income into long-term savings plans. This type of investor has mainly invested into offshore savings plans while non-UK resident in order to fund for a specific goal, normally education and university fees. However, in an environment of increasing compliance costs, professional advisers are turning to the potentially more lucrative high net worth wealth management and tax planning opportunities for UK retirees - and advisers to this market are optimistic about the future.
While the tax tail should not wag the investment dog, the demand for UK IHT planning products from professional advisers in Cyprus has increased exponentially over recent years - but many advisers have not yet tapped into this important and rewarding market.
You may be missing an important financial planning opportunity. As far back as 1789, Benjamin Franklin wrote "in this world nothing is certain but death and taxes", and little has changed over the last two centuries. For your UK-domiciled, Cypriot-resident investors with sizeable estates, financial planning should also include the mitigation of UK IHT. While local inheritance tax may be abolished, you should bear in mind that UK IHT is currently a tax on domicile and not on residence - it is also potentially payable on worldwide assets. Therefore, while each investor"s circumstances may differ, UK expatriate retirees will probably need to consider UK IHT and estate planning - an excellent opportunity for you as an adviser of expatriates.
international single premium bonds
The use of an international single premium bond with a suitable trust arrangement can help ease many of the tax planning pitfalls. The key difficulty faced by your UK retiree clients is that if they keep their assets then they suffer tax, but if they give them away to mitigate tax then they lose access to them. Therefore, IHT planning is all about finding ways of giving assets away but keeping access to them.
There are several different arrangements available from an increasingly small list of credible players in this market. These arrangements include gift and loan trusts, retained interest trusts and discounted gift trusts. As an example, in the list of popular IHT mitigation arrangements is the discounted gift trust (DGT). DGTs are arrangements that enable investors to transfer assets to their heirs but keep a right to an 'income" from them.
These arrangements might best be classified as 'carve out trusts" to distinguish them from other constructions available in the marketplace. This classification flows from the fact that the investor carves out a predetermined property right and gives away all other property, subject to having kept this right. In DGTs, the right carved out is the right to regular capital payments. In some arrangements, it may also be possible to lessen and vary these payments from time to time.
How might this work? For example, a 75-year-old UK domiciled man could decide to put £100,000 into such a trust for his children. He decides at outset that he would like to receive yearly payments of £5,000 from the trustees to supplement his pension. The trustees decide that they can most easily provide for this by effecting an offshore capital redemption bond.
If the settlor is in average, or better, health for a man of his age, an actuary might value his right to receive £5,000 a year for the rest of his life at say, £41,480. Therefore, the value of the gift would be the balance of £58,520. To the extent that this exceeds available exemptions, it would be a potentially exempt transfer.
The effectiveness of carve out trusts has been confirmed by a long history of estate duty court cases. These include Munro v Commissioner of Stamp Duties of New South Wales  AC 61, Privy Council and Nichols v IRC  2 All ER 120, Court of Appeal. This means carve out trusts do not themselves result in a gift with reservation, as described in S102 Finance Act 1986. However, some may ask whether they fall into the specific anti-avoidance legislation aimed at insurance based arrangements and contained in Para 7 Sch20 Finance Act 1986.
DGTs are beyond the reach of this legislation. This is because they are a carve-out trust based generally on a capital redemption policy and not on a policy of insurance on the life of the donor or his spouse or on their joint lives. If Para 7 is to apply then it needs there to be such a life policy. As capital redemption bonds do not have any lives assured, they are not policies of life assurance.
Capital redemption contracts are usually offered with a term of 99 years. Usually, the maturity value is a guaranteed amount or the value of units, if greater. Trustees or other investors who do not want to have to specify an individual life assured typically use these contracts. In addition, some investors do not have a favourable outlook on life assurance or indeed are forbidden from effecting insurance contracts on religious grounds.
Capital redemption bonds are a helpful tool for advisers wishing to promote a tax-efficient investment to these classes of investors, whether living overseas or in the UK. Clearly, such contracts are not life assurance contracts, as they do not depend on human life. Equally, it is difficult to view these contracts as insurance in the ordinary sense. This is because the happening of the specified event, on which the insurer will pay, does not involve doubt about whether it will occur at all, or as with life insurance, about its timing.
These are just a few of the many, largely untapped, opportunities for professional advisers of UK-domiciled retirees. With a potential and increasing market of 10,000-15,000 investors, advisers of UK retirees who are UK domiciled but resident overseas will now more often consider recommending suitable UK IHT planning arrangements as part of the financial planning process. There are many opportunities for advisers wherever in the world you are to create value for your investors and yourselves.
Cyprus looks set to be a main beneficiary of the massive demand for goods and services that a continued exodus from the UK could create.
The offshore centre has an enviable record of economic performance and has established a potentially fertile environment for future economic success.
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