Offshore tax schemes ‘set to remain a niche choice’: survey

This article is part of
Offshore Investing - July 2013

Since the retail distribution review was introduced at the start of this year, it is clear the delivery of a full advisory service by many advisers will only be feasible for clients on higher incomes or with substantial amounts – £100,000-£150,000 plus – to invest.

For these clients, having access to a full range of underlying investments and product wrappers – UK and offshore – to construct financial plans will be essential.

At a time when advisers are gravitating towards the ‘upper end’ of the market with their advisory propositions, the need to know about how offshore products work and who they are suitable for is even more important.

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For most advisers, offshore solutions represents in the region of 1-5 per cent of all investment business with an overwhelming bias to bonds and very little consideration given to a qualifying non-UK pension scheme (Qnups) or a qualifying recognised overseas pension scheme (Qrops).

Most advisers, though, do not expect this to change in the next year, pointing to regulation, and the general anti-abuse rule as the biggest barriers to greater engagement with offshore business.

The regulatory environment and anti-abuse legislation in particular were the key threats identified by advisers at 39 per cent and 21 per cent respectively, although negative public perception was also discussed as a potential obstacle.

Advisers have experienced a marked coagulation of the process involved in offshore product selection and justification, owing to various solutions coming under greater scrutiny. At a time when most are acutely aware of the cost of delivering advice and of the costly repercussions of getting it wrong in the regulator’s eyes, advising on offshore alternatives is seen as an increasingly onerous and risky business. As such, advisers are apprehensive at best.

But while advisers point to outside forces holding back engagement, research strongly indicates that there is a significant lack of understanding around the whole offshore market and Qnups and Qrops in particular.

‘Q Day’ – when UK legislation changed to address perceived abuses in Qrops practices – last year has left a lot of uncertainty and has contributed to a tendency for advisers to err or the side of caution and avoid areas they are not 100 per cent clear on.

But the answer to uncertainty is not avoidance and an independent adviser may be sitting on a mis-selling time bomb by not advising on a Qrops if it would be suitable for a particular client. Obviously a subjective issue.

Since some Qrops may fall under the RDR definition of retail investment products, it makes this issue potentially relevant for those advisers whose offerings have no advice-centred constraints.

Advice requires knowledge not only of the financial-planning issues, but of the tax consequences of the UK and the country of residence, visa implications and social security issues. Not advising on something you don’t fully understand is commendable… unless it happens to be the most appropriate solution, and you hold yourself out as advising on financial planning with no explicit constraints or limitations.