Recent press reports on the proposed reform of the Isle of Man's taxation regime highlighted the pos...
Recent press reports on the proposed reform of the Isle of Man's taxation regime highlighted the possibility that, in future, offshore life companies based there will be able to sell their products to Isle of Man residents. What are the current savings options open to Isle of Man residents, and how do they compare with the options open to UK residents?
Those of us who are fortunate to reside in the Isle of Man will know that it is a low tax jurisdiction. The basic rate of tax is currently 14%, and the top rate is 20%. These rates are due to come down to 10% and 15% over the next 5 years. There are also generous personal allowances - £7,535 for a single person and £15,070 for a married couple. Unlike the UK, personal allowances are fully transferable between married couples.
In addition, interest payable on a mortgage or other loan with an Isle of Man resident institution is 100% tax deductible. There is also no capital gains tax or inheritance tax.
All of this makes for a favourable environment - but what are the savings options open to Isle of Man residents?
Firstly, UK tax - free savings options, such as the Individual Savings Account are not available to Isle of Man residents. Former UK residents who take up residence in the island may have ISAs (or their forerunners - PEPs and TESSAs). Under UK rules they are allowed to keep these in force, but are barred from making further contributions. Once resident in the Isle of Man, they are subject to income tax on their worldwide income. Therefore, the ISA wrapper is looked through, and any income arising is subject to Isle of Man income tax.
Pensions, as in the UK, are the most tax efficient investments for Isle of Man residents. The pensions regime, both personal and occupational, including the contribution levels and tax breaks are similar to the UK. Although pension reform is due this year, so far there have been no plans to introduce the equivalent of the UK's Stakeholder regime.
Because there is no capital gains tax in the Isle of Man, direct investments in shares, and unit and investment trusts can also appear attractive if the goal of the investor is to hold these for the long term. One pitfall with direct investments, however, is that dividends arising from UK companies or unit/investment trusts are paid net of UK corporation tax. Until April 1999, this could be reclaimed by Isle of Man residents providing they did not have other substantial income arising in the UK. After the reform of UK dividend taxation, however, Isle of Man residents have not been able to reclaim the tax deducted at source. This can lead to double taxation.
Finally, insurance (unit linked or with profits) contracts are another popular choice for Isle of Man residents. Income can be rolled up within the funds, and the proceeds are free of tax at the end of the term. Furthermore, if the premiums payable (on an endowment for example) do not exceed one sixth of the policyholder's total income, and 15% of the sum assured, tax relief on 50% of the premiums is available. The 5% withdrawal allowance familiar to UK residents is not available - withdrawals are taxed as income. Therefore, insurance contracts are suitable investments for long term capital growth rather than for income.
If an Isle of Man resident is investing in an insurance contract, it should be issued by an offshore company (such as one based in Dublin), or by a UK company who can appropriate the policyholder's funds to its OLAB fund. This is because the tax payable within a UK company's ordinary fund cannot be recovered.
At present, the number of life companies who market to Isle of Man residents is fairly limited. But with over 15 international life offices on the doorstep, it will be interesting to see what effect the opening up of these companies' products will have on the long term savings market in the Isle of Man.
Technical Services Consultant
Royal & Sun Alliance International Financial Services Limited
This article contains general information only and is not intended to be taken as specific investment or tax advice and is based on the assumption that further information would be required and provides only a guide to some of the relevant routes that an intermediary could cover in advising the client.
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