A rich man's world?

Guy Hands, chairman of Terra Firma Capital Partners '“ the owner of EMI, has reportedly moved from the UK to Guernsey in protest against recent UK tax increases. On the face of it, this appears to reinforce the perception that certain offshore jurisdictions are the exclusive preserve of the 'well heeled and well keeled' and, indeed, of tax avoiding corporates. But is such a perception myth or does it simply reflect reality?

Before examining the myth, it is worthwhile briefly considering the seemingly obvious question of what is meant by 'offshore'. From a UK perspective this is pretty obvious; being a geographic reference to tax jurisdictions beyond the seas. Globally, however, the term has become synonymous with 'tax haven' and is often perceived as referring exclusively to island jurisdictions. More broadly, and in this article, 'offshore' refers to a jurisdiction used by persons from other jurisdictions to reduce their overall tax liabilities.

The offshore myth

During 2009 the image of the offshore world has undergone something of a rollercoaster ride. At the beginning of the year certain 'onshore' politicians focused attention on 'offshore tax havens' in what some, perhaps cynically, perceived as a rather transparent attempt to deflect focus from domestic woes. The spectre was raised of tax havens 'stealing' all those now desperately needed taxes that the good citizens of the onshore world would otherwise, presumably, have been overjoyed to pay.

The wind was rather taken out of the sails of these attacks by the publication on 2 April, while the G20 were meeting in London, of the new 'White List' by the Global Forum of the Organisation for Economic Co-operation and Development (OECD). The list, which identifies jurisdictions which are assessed as having 'substantially implemented the internationally agreed tax standard', includes Guernsey, Jersey and the Isle of Man, as well as, in the interests of balance, the United Kingdom.

The 'myth' then is that the offshore world is being used by the wealthy to 'hide' their money and therefore to avoid paying tax on it. In terms of 'hiding' money, while some jurisdictions remain opaque, many others are increasingly transparent (as reflected by the White List) and the openness of their regimes compares favourably against many onshore regimes. In terms of tax matters, many offshore products offer tax planning solutions, rather than opportunities for evasion. Those that offer the latter are being, quite rightly, squeezed by onshoretax authorities.

Until the recent property market crash, many investors were using offshore trusts and pension schemes as vehicles for investment in real property especially residential buy to let. Advantages of investing this way can include the tax-free roll up of any capital gains on such property. Many of these schemes have been established by relatively 'ordinary' investors, often small businesses owners, who simply want to ensure their future financial security.

The benefits of QROPS

A recent example of how 'ordinary' people can take advantage of offshore services is the relatively new Qualifying Recognised Overseas Pension Scheme (QROPS) regime. The regime allows individuals with pension assets in UK-registered pension schemes to transfer those assets to overseas schemes approved by HM Revenue and Customs. Typically, such transfers appeal to UK nationals who move or retire overseas.

Benefits vary depending on the jurisdiction(s) in which the pension scheme and the individual are resident but will usually include lower taxes on pension income payments. Once the individual has been out of the UK for five years (and is outside the HMRC 'reporting period') wider investment options will also usually apply. While many QROPS transferees are among the better off, many are simply the hard working who wish to enjoy their well-earned retirement in the sun.

HMRC are working closely with overseas tax authorities to ensure that QROPS transferees do indeed receive a pension in a meaningful sense. In Guernsey, for example, the Guernsey Financial Services Commission (GFSC) has been proactive, being the first jurisdiction to sign a bilateral agreement with the UK in respect of QROPS transfers. This effectively eliminates the possibility of Guernsey schemes being used for 'pension busting', whereby pension scheme members can be paid 100 per cent of their 'pension pot', possibly tax free, before reaching retirement age.

The QROPS regime is a very good example of how the offshore world is not the exclusive preserve of the wealthy '“ it allows ordinary retirees, albeit those who have retired outside the UK, to take their pension and to pay tax on it subject to local, not UK, taxes.