It should not be surprising that the sort of clients attracted to these options are the asset-rich with high levels of liquid disposable income and have, in all probability, exhausted all domestic ‘onshore’ tax breaks. In the UK, we are talking about possibly no more than 0.5 per cent of the population. This group is generally looking to control and manage its tax affairs rather than to avoid or evade tax, as well as meeting any specialist investment needs they may have. It is still a highly relevant – if niche – sector of the financial services market in most countries.
So, who and why would one of these investors wish to invest legitimately in an ‘offshore’ or foreign investment?
There are three basic scenarios:
1. UK tax residents looking to manage an income tax liability
In the same way that PAYE for most of us ensures we pay broadly the right amount of tax ‘painlessly’ out of our salary each month, most UK onshore investments perform the same function. For the wealthy, their tax position can be less homogenous. They can be higher-rate payers now, but confidently expect to be standard rate payers in, say, retirement. Offshore investments can give some investors the non-PAYE tax option which involves them paying the tax at a time of exit rather than having it deducted regardless. Get the calculations wrong and individuals can end up paying more tax by going the offshore route, but that is their choice and the taxman generally gets his money one way or another.
2. Persons looking to achieve tax-efficient and compliant intergenerational wealth transfer
Offshore investments are routinely used in relation to fiduciary structures such as trusts in Common Law jurisdictions and Foundations in Civil Law markets to ensure that post-death assets are directed to the chosen recipients. The use of fiduciary structures in wealth transfer planning for individuals and companies is not unique to the offshore world, but much of the historic expertise in this specialist area still resides there, and in the context of the UK market, the combination of such structures with the tax control in scenario one, above, is also a powerful tool. Provided there is no fraudulent intention to disguise the identity of beneficiaries, wealth transfer planning is a perfectly legitimate activity in which offshore solutions can play a key part.
3. Persons who are currently resident outside their home country