Offshore – it’s not a dirty word
I advise some clients to invest their money offshore. There. I’ve said it. No shame, no embarrassment.
All perfectly legal, sound and prudent financial advice based upon our understanding of our clients’ financial objectives.
Such is the weight of negative media headlines in the last few years, that me and my team of financial advisors at Carrick Financial Management take time to explain to our clients that investing hard-earned cash overseas can be a sensible way of managing their wealth.
In recent years offshore investment has become synonymous with ‘dodgy practice’.
Headlines portraying the rich as hiding their money from the UK taxman, running from their obligations to The Exchequer by squirreling cash in complicated financial schemes based in sun-soaked locations.
It’s important to draw the distinction between these schemes presented in the media and the perfectly legal investment strategies presented by professional financial advisors.
That is people legitimately investing in the market as opposed to artificial structures created for tax avoidance.
I don’t do that. I do real structures. It is not about the avoidance of tax.
It’s not tax free. At some point you’ll have to pay tax. It’s important to make that clear.
There’s a simple mathematical reason why investors should seek advice about going offshore once you’ve used up your ISA allowance .
For example, if I’ve got £100,000 onshore and I make £10,000 on my investments, I pay tax which reduces that down to £8,000, which means moving forward I’ve got about £108,000 plus interest.
When I’m offshore, if I make £10,000 I have now got at the end of the tax year £110,000 plus interest. It’s what we call gross roll up. The money has got a much better chance to roll up much more quickly. With onshore you are taking five steps forward and three steps back.
By going offshore with gross roll up it means you are taking five steps forwards and no steps back.
It might be better for high earners because what we are trying to do is to manage the money, so when we take it out we are trying to manage when you pay tax, not pay no tax.
An offshore bond is a tax efficient wrapper that can hold a variety of assets, like stocks and shares, property funds, corporate bonds, gilts and mutual funds.
Offshore bonds are designed to accumulate income and gains without any immediate tax liability for a UK tax resident.
I discussed offshore investment recently with a client and she said ‘it’s tax free’. I said ‘it’s not, it grows free of tax ,but when you bring the money back in you will pay tax on it.
‘All we are doing is managing the tax. Would you rather bring the money back in when you are a 45% taxpayer or when you are a 20% taxpayer? That’s what it allows us to do.’
Within the offshore bond I have my different investment managers. Client’s money is put in there and they can take an income from it. It’s a bit like a big tap on the side you can turn fully on and take £5,000 a year from it, turn it off, or turn it half on and take £2,500.
It’s very useful as well because like a big salami we can cut this into a thousand slices. So if you are a high rate taxpayer, you’ve used ISAs as your first port of call, looked at pensions which are great, we’ve done all that but what else can we do – we want to make money and we want to manage tax.
So we have all these different salami slices – our client can give a slice worth say £10,000 to a family member with no tax, assigning a segment, so the money is sitting there growing free of tax.
If the client took the money out of the bond, she would pay tax on it. By giving the money to a family member, she won’t.
We predominantly use Dublin or the Isle of Man for offshore investment because of their legal structures and the protection this gives our client.
The rules and regulations of the Cayman Islands aren’t strong enough, the Wild West from a regulatory point of view, as is Panama hence the Panama Papers.
People who give me their money to invest into an offshore bond have worked hard, paid their tax and paid their NI.
They earned that money by going to work, by paying tax at 45%, National Insurance at 11.8% their employer has paid employers’ NI at 15.5%. The client has paid their dues.
As ever, the advice before considering offshore investment is to consult a professional financial advisor.
It’s not for everyone.
But it can prove to be a sensible and valuable way of managing wealth. Perfectly legal and no need to feel uncomfortable about it.