The Great Escape – Tax Havens for Fun and Profit
Offshore tax havens are the glamorous side of tax planning, or avoidance if you prefer to use that word. Places like the Cayman Islands, Bermuda, and even the Channel Islands, when mentioned, call to mind images of wealthy tax exiles lounging on palm fringed beaches (well, perhaps not the Channel Islands.)
It’s almost unnecessary to say that a lot of this glamour is unwarranted in practice, however not all of it is.
What is a tax haven? There’s no official definition of the phrase “tax haven”, however a pretty good working definition might be the following. A tax haven is a jurisdiction which is generally free of capital taxes like inheritance tax and capital gains tax, and which has available an incorporated entity which pays no tax in the country itself providing there is no business carried on there, and none of the shares are owned by residents.
The UK as a “Tax Haven”
The one statement that is probably more surprising than referring to the UK as a tax haven is probably that the United States is as well! We’ll explain.
The UK certainly meets at least half of our definition as a tax haven. Although anyone investing in UK based assets is still potentially liable to inheritance tax here, non UK residents can invest all they like in the UK without paying capital gains tax: hence the enormous vogue for holding UK property amongst wealthy non residents.
But, interestingly, the tax exempt vehicle is also available in the UK. This is our old friend the Limited Liability Partnership or LLP, which is a body corporate, and hence treated as if it were a limited company by most or all other tax jurisdictions round the world. It differs from a UK limited company in one very important respect, though. If you imagine a UK LLP which has no UK resident partners or members, and which carries on no business in the UK, a simple application of the rules will show you that there can be UK tax exposure on that LLP. LLP’s themselves don’t pay tax. Instead, it’s the members that pay tax on the LLP profits, but if the members are non UK and the source of the profits is also non UK, those profits are outside the reach of the UK tax authorities.
In fact, US LLC’s have the same effect, and are marketed by US company agents as such.
A Tax Free Paradise?
Turning to the more conventional tax havens, though, how can these give real tax benefits?
The answer “it depends” is not particularly useful, even if it is completely true! If you’re UK resident, to start with, it’s probably best to say straight away that tax havens are unlikely to be any use to you in saving tax, unless you are also non UK domiciled.
One of the main reasons for the boom in tax havens amongst the British offshore jurisdictions, like Bermuda, the Isle of Man, the Channel Islands, and Gibraltar is the fact that UK residents can feel “at home” investing in these countries whilst avoiding all tax arising in them, if they are non domiciled and don’t remit the income to this country.
It’s only fair to say, though, that if you are UK domiciled, as well as being resident here, you may as well forget the idea of using tax havens as a way of saving tax. We suspect that the vast majority of individuals in this position, who have offshore accounts or companies, only succeed in saving tax (where they do) by not disclosing their existence of their offshore wealth to the Revenue. And that’s obviously where evasion takes over from avoidance.
Non UK Residence
Apart from non UK domiciliaries, though, who can save not only income tax but even capital gains tax, and even on UK situated assets, the other major class to benefit from tax havens are those who are not even resident here in the UK.
It’s pretty obvious, of course, that someone who’s non UK resident and who doesn’t have any source of income in the UK won’t be exposed to UK tax. But one or two uses of tax havens, for non residents, are not so obvious.
Rather than turn this short piece into a treatise on international tax planning (which could fill several volumes), let’s pick out one example here.
We mentioned earlier on that you can end up paying inheritance tax, if you have UK sited assets, even if, apart from your UK assets, you have nothing to do with this country. Another example of what a former colleague of ours used to refer to as tax “rape”.
Be that as it may, a non UK domiciliary is able to sidestep this inheritance tax charge so easily (at least as far as the UK is concerned) that it’s almost criminal to allow any inheritance tax to be payable by such a person.
The way it’s done is simply by transferring the ownership of the assets concerned into the ownership of a tax haven resident company. By a form of “alchemy”, the UK situated asset, in the hands of the individual, turns into a non UK situated asset, that is the shares etc in the offshore company. Using a tax haven ensures that this produces no undesirable side effects from the point of view of income tax or capital gains tax in the country in which the offshore company is situated.
So, if the cap fits, that trip out to the Seychelles or Mauritius could just turn out to be very lucrative, as well as a very pleasant excursion.