Tax issues fuel investor interest in offshore bonds
STRONG INTEREST in both offshore and onshore bonds from British investors is likely to continue in the foreseeable future, as rising house prices, the EU Savings Tax Directive and increasing numbers moving overseas, fuel a greater need for more sophisticated tax planning, especially if the individual is relocating abroad.
According to a review of the UK market by Defaqto, a leading financial research company, in 2005 alone there was an 18.5 per cent increase in sales of bonds compared to the previous year.
The bond industry is at the forefront of providing trust solutions for estate planning, and is now more important than ever, following the Treasury’s proposal to extend the inheritance tax net to cover certain types of trusts, the company says. This, combined with the rapid acceleration of house prices over the last 10 years, means more people are in need of financial advice in the area of estate and inheritance planning.
Defaqto believes that a main driver of the offshore bond market is the increase in overseas migration of UK citizens over the past 10 years, and the expectation of continued growth in the future. The international portability of offshore bonds makes them an investment vehicle of choice for a rapidly growing band of soon-to-be expatriates, says Defaqto. This is also the case for those who have already left the UK.
“Bonds offer so many advantages in financial planning that I am not surprised that the market is powering ahead. The ability to switch investments, within a bond with no capital gains tax issues, is one of the key reasons why bonds are a useful investment vehicle for tax planning,” noted Fraser Donaldson, Head of Investment at Defaqto.
“While onshore bonds are the bulk of the market, offshore bonds sales are growing faster. They are a particularly useful vehicle to help mitigate tax for those planning to spend some, or all, of their time living outside the UK,” Donaldson explained.
Another important factor driving interest in offshore bonds is the European Savings Tax Directive, under which signatory countries (EU Member States and a number of offshore dependant territories) share information on the savings income in their country earned by investors living elsewhere.
Instead of sharing this information, some territories have opted to apply a withholding tax on this income. However, there are many types of investment vehicles that are not included in the legislation, one of them being insurance bonds.
Tax Freedom Day
The day that UK taxpayers start to work for themselves rather than the Treasury – Tax Freedom Day – was three days later in 2006 than it was in 2005; seven days later than in 2004 and nine days later than in 1997. In fact, it’s the latest date it has been since the early 1980s and reflects the increasing tax burden in the UK.
UK taxes climb steadily
Accountancy Age, quoting figures from Eurostat, the European statistical agency, has also reported that UK taxes continue to rise. The UK total tax reached 36 per cent of GDP in 2004, up from 35.5 per cent in 2003 and from 35.4 per cent in 1995. In spite of this, British taxation is still below the EU average.
Britain’s toughest taxes are on capital, with an average rate of 34.9, one of the highest Eurostat has recorded in Europe.
A report in the Daily Telegraph states that “the number of tax rises under Labour has steadily ticked up to 80, taking the tax burden close to record proportions”.
There have been calls from business leaders to simplify and control the tax system “after the revelation that the UK tax burden has overtaken that of Germany for the first time in living memory, and is set to reach 42.4 per cent of Britain’s economic output this year”.
Tax plans
Leader of the Liberal Democrat Party, Sir Menzies Campbell, has announced a radical new tax approach from his party to include a two-pence cut in basic rate of income tax, funded by ‘green’ taxes on items such as flights and ‘gas guzzling’ cars. If elected to government, his party could tax the wealthy to the tune of 13 billion pounds sterling more, by hitting second home owners and clamping down on tax breaks for the affluent.
Meanwhile, Shadow Chancellor for the Conservative Party, George Osborne, has promised a major overhaul of Britain’s tax system, heralding a new tax policy, which, he said, would be more suited to the challenges of the 21st century. He has played down the prospect of pledging tax cuts ahead of the next general election, pointing out that the promise of upfront tax cuts failed to attract voters in the three previous elections.
And finally …
Sports superstars such as England Football Captain, David Beckham, and fellow icons, Wayne Rooney and Michael Owen, who supplement their stratospheric salaries with equally lucrative endorsements, can exploit a tax loophole according to the Daily Mail.
“Any purchases which contribute to a footballer’s public image can potentially be written off as a legitimate business expense,” the article says. “Tax experts believe the loophole, which is perfectly legal, could even extend to players’ sports cars .…”
It means that tax deductible items that are necessary to portray their mega public images could include, in Beckham’s Case, his designer wardrobe, hairdressing bills and his diamond ear studs!
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