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What is Offshore- The term offshore is often referred to by investment advisers and financial institutions but has no legal definition. Investing offshore does not necessarily mean placing your capital with a bank or investment company based on an island although many islands are referred to as offshore centres. The reference to ‘offshore’ infers that private investors are making financial transactions in a jurisdiction (Legal Foreign Location) removed from his/her normal residence and/or domicile for tax purposes. The modern terminology for an offshore location is commonly referred to as an International Offshore Financial Centre ( IOFC). It is thought that in excess of half of the world’s capital is invested within IOFC’s (also known as tax heavens). There are more than 50 well established tax heavens, of which the best known are – Isle of Man, Jersey, Guernsey, Gibraltar, Ireland, Luxembourg, Switzerland, Bermuda, Bahamas & British Virgin Islands.
Why invest Offshore- There are a number of reasons why you should consider making your investments offshore. One benefit offshore investment companies offer is far more flexibility when it comes to investing in alternative currencies or indices. In addition, they can make use of diverse markets and can benefit from various ‘hedging’ mechanisms. Offshore returns can also usually be accumulated tax free, or close to tax free, allowing compound growth to equate to better returns for you. This means that the potential returns are often significantly higher compared to a similar onshore UK fund that will have tax deducted from the dividends received.
Tax saving- Many countries (known as tax havens) offer tax incentives to foreign investors. The favorable tax rates in an offshore country are designed to promote a healthy investment environment that attracts outside wealth. For a tiny country with very few resources and a small population, attracting investors can dramatically increase economic activity. Simply put, offshore investment occurs when offshore investors form a corporation in a foreign country. The corporation acts as a shell for the investors' accounts, shielding them from the higher tax burden that would be incurred in their home country. Because the corporation does not engage in local operations, little or no tax is imposed on the offshore corporation. Many foreign companies also enjoy tax-exempt status when they invest in U.S. markets. As such, making investments through foreign corporations can hold a distinct advantage over making investments as an individual.
Asset Protection - Offshore centers are popular locations for restructuring ownership of assets. Through trusts, foundations or through an existing corporation individual wealth ownership can be transferred from people to other legal entities. Many individuals who are concerned about lawsuits, or lenders foreclosing on outstanding debts elect to transfer a portion of their assets from their personal estates to an entity that holds it outside of their home country. By making these on-paper ownership transfers, individuals are no longer susceptible to seizure or other domestic troubles. If the trustor is a U.S. resident, their trustor status allows them to make contributions to their offshore trust free of income tax. However, the trustor of an offshore asset-protection fund will still be taxed on the trust's income (the revenue made from investments under the trust entity), even if that income has not been distributed.
Confidentiality - Many offshore jurisdictions offer the complimentary benefit of secrecy legislation. These countries have enacted laws establishing strict corporate and banking confidentiality. If this confidentiality is breached, there are serious consequences for the offending party. An example of a breach of banking confidentiality is divulging customer identities; disclosing shareholders is a breach of corporate confidentiality in some jurisdictions. However, this secrecy doesn't mean that offshore investors are criminals with something to hide. It's also important to note that offshore laws will allow identity disclosure in clear instances of drug trafficking, money laundering or other illegal activities. From the point of view of a high-profile investor, however, keeping information, such as the investor's identity, secret while accumulating shares of a public company can offer that investor a significant financial (and legal) advantage. High-profile investors don't like the public at large knowing what stocks they're investing in. Multi-millionaire investors don't want a bunch of little fish buying the same stocks that they have targeted for large volume share purchases - the little guys run up the prices.
Diversification of Investment - In some countries, regulations restrict the international investment opportunities of citizens. Many investors feel that such restriction hinders the establishment of a truly diversified investment portfolio. Offshore accounts are much more flexible, giving investors unlimited access to international markets and to all major exchanges. On top of that, there are many opportunities in developing nations, especially in those that are beginning to privatize sectors that were formerly under government control. China's willingness to privatize some industries has investors drooling over the world's largest consumer market. How safe is my money? If you are making an investment, opening a savings account, or buying shares - no money should ever be paid directly to a financial adviser or broker. Any transfers you make should always go directly to the financial institution with which you are investing. In most cases the financial institution will be paying a management fee or bonus to your adviser. Large international financial advisory companies are generally able to obtain better rates and special offers for you, due to their volumes of business.
Note 1: When dealing with a reputable financial adviser or brokerage company, any investment or savings transfer will always go directly from you to the financial institution – never via the adviser or brokerage company.
Note 2: The major offshore locations and jurisdictions favoured by reputable investment advisers have the highest levels of investor protection anywhere in the world. Investments made in the Isle of Man, for example, are covered by a worldwide investor protection scheme. The scheme offers protection of up to 90% of the value of the investment at that time, in the unlikely event that the provider is unable to meet their financial liabilities. Suitable investment products- Finding the right investment solutions based on your requirements and situation is something your financial adviser will be able to help you with. They will consider security for your money, tax efficiency of your investment and ease of administration of the policy. One of the flexible products on offer in the market place, which can offer tax efficiency, cost effectiveness, asset protection, personal confidentiality, insurance coverage and income options, is the Portfolio Bond.
Portfolio Bond- The Portfolio Bond is a simple holding structure for a wide range of investment vehicles – stocks, shares, bonds, funds, etc. It Provides the convenience of holding all your assets in one portfolio Offers significant initial discounts from fund management groups Provides opportunity for greater tax efficiency Includes ability to transfer in existing quoted share holdings Involves almost total investment freedom Offers flexibility to change your investment portfolio at any time Supplies easy access to capital Includes regular income facility.
Hybrid Company- A Hybrid Company is limited by both shares and guarantee and so has two classes of members - Shareholders and Guarantee Members. A Guarantee Member holds a contingent liability, undertaking to contribute to the debts of the company up to a specified amount. This contrasts with the Shareholder who holds an asset – the shares. It can be structured in a way that may potentially avoid or reduce inheritance tax or probate yet still provide all the advantages and benefits accorded to an offshore company.
Online trading platforms- In the past investors would contact traders by phone, who in turn would buy shares on behalf of their clients. However with modern technology it is now possible to trade online using an online trading platform. For those who want to take a more active role in their investments, a trading platform can provide easy access to a variety of investment funds and provides up to date market data and analysis and also instant portfolio access 24/7, 365 days a year.
Offshore bank accounts- Most UK banks have offshore divisions so you may opt for an account with one of these. The benefit is that you will have the comfort of dealing with English speaking professionals who understand the needs of expatriates.
SIPPS (Self Invested Personal Pension Scheme) is a type of personal pension plan, which is suited to the more sophisticated pension investor. There are very few restrictions on what can be invested in, meaning that each individual can take more control of his pension funds. SIPPS can buy property funds in the UK and abroad and assets within the SIPPS benefit from IHT mitigation. SIPPS allow pension funds to be passed onto children on death and the individual can choose whether or not to buy an annuity. There are well over 50 SIPPS providers, but they are not necessarily the best solution for everyone. SIPPS can have high fees because of the width of the investment choice and are therefore more suited to higher net worth individuals. In addition, there are greater savings the more that is invested.
QROPS (Qualifying Recognized Overseas Pension Scheme) is a pension scheme set up outside the UK that is regulated within the country where it is has been established. QROPS enables you to take a tax free lump sum of up to 30% and have access to onshore and offshore funds with high fixed deposit rates. Income and benefits may be withdrawn in a currency of choice and with confidentiality. The disadvantage of QROPS is that if you ever decide to go back to the UK you could experience difficulty with the HMRC and possibly face a tax bill for any income you may have drawn that is above that allowed by a UK based scheme. This tax would be payable at a rate of 15% above your highest tax bracket at that time. Therefore QROPS are not suitable for individuals that have a view to return to the UK. Advantages of Offshore Investments- The most common reason for private investors to place capital offshore is to reduce tax burden. Banks and financial institutions such as insurance companies invariably pay less tax in respect of subsidiaries based in offshore locations. This is because insurance companies effectively deduct tax at source on income and make allowances for capital gains on unrealized gains. Whereas the same fund located offshore would suffer little or no tax and is able to compound at a much faster rate similar to an untaxed UK Pension fund but without the restrictions. As an expatriate, you are legally entitled to take advantage of any tax savings offered in your country of residence. Many popular expat locations offer an incredibly high standard of living, economic stability and striking scenery – and no or low corporate and personal taxes. Make sure you research the taxation benefits, whatever your location may be. Income or gains may only be taxable if they are remitted to (or brought into) the country in which you are now living. It may, therefore, be possible to remit only the basic minimum for living costs and save on income and capital gains in your new country of residence.
Offshore policyholder protection- In the present climate, most offshore investors require some protection. One of the ways to evaluate the types of protection available is to make a comparison with onshore products; in particular to ensure that the jurisdictions are well regulated. Ireland, Isle of Man, Guernsey and Luxembourg are all jurisdictions that are extremely well regulated. Consistent reporting enables the regulators to monitor the position of the insurer and inform them if any corrective steps need to be taken in order to protect the policy holders of the insurance company. Regulators also have controls in place to ensure that only ‘fit and proper’ managers are employed by life companies. These jurisdictions impose minimum solvency margin requirements upon the life offices they regulate, which generally require each company to hold a balance of several millions of pounds or Euros more than its liabilities. Ireland and Luxembourg have implemented the same EU solvency directives. The Isle of Man and Guernsey have similar minimum solvency requirements.