Many financial intermediaries who would like to help landlords minimise their exposure to taxation largely overlook the offshore option, but for a significant proportion of clients it could bring significant tax saving advantages.
The list of those who have benefited from offshore channelling of income is extensive, but it is not only those with great wealth and influence who can take advantage of offshore structures. And most, if not all, intermediaries operating in metropolitan areas will have clients with either overseas or dual nationality who could benefit.
Using a conservative estimate, there are several million people with overseas or dual nationality living at any one time in the UK. For these individuals, and for expatriates, an offshore option would allow them to minimise their tax liabilities. At a stroke they could reduce or eliminate Stamp Duty, Inheritance Tax (IHT), Capital Gains Tax (CGT) and higher rate Income Tax on net rental income. And, although some intermediaries might think otherwise, it is relatively easy for individuals to gain access to such tax advantages.
Safe and secure
The process starts with the setting up of an offshore company and/or trust within the jurisdiction of a tax-friendly country. Admittedly, in the past this has had its risks. There are a large number of established and emerging tax jurisdictions that do not have sufficiently rigorous or sophisticated regulatory bodies to guarantee the safety of such structures. However, this is not the case with areas such as the Isle of Man. The island has extensive legal safeguards for individuals setting up offshore structures and there are companies who have built up considerable expertise in this field.
A large number of highly qualified professionals in the Isle of Man are dedicated to serving this specific market and can be easily accessed by IFAs. They are underpinned by the Isle of Man’s demanding regulatory and legal framework and compulsory professional indemnity insurance.
The cost is also very affordable. A ballpark figure for setting up an offshore structure based on the Isle of Man is around £1,500 for the setting up of a trust and the same amount for the setting up of an offshore company ‘ a relatively small amount when set against the likely tax advantages.
Once the structure has been established individuals can then use it to channel their UK property dealings and raise further mortgage funds. For overseas nationals, resident for tax purposes in the UK, or those with dual nationality this means that incurring CGT when properties are sold becomes much less of an issue, as does IHT and Stamp Duty. With CGT, because the assets are owned offshore, they can be sold and remittances brought back into the UK tax-free.
There are experts in this field who argue that some of their clients can avoid taxes completely if their affairs are structured in the best possible way. Such individuals can be living all-year-round in the UK and even hold down PAYE jobs but still benefit from such savings. Of course, in the case of individuals employed in the UK, they are still liable to Income Tax.
However, raising mortgages via an offshore company or trust has been something of a problem in the past. Most UK high street lenders avoid this sector because the structure, by its very nature, is outside their jurisdiction. This is not the case with all lenders and there are now a limited number of mortgage providers who do lend to offshore companies and trusts. And crucially these products are every bit as competitive as that which can be found from mainstream UK lenders.
So what are advisers waiting for? On the face of it, there is no significant reason why advisers should not be recommending offshore companies and trusts to a much greater extent than is the case at the present time. The main factor that stops intermediaries is the widespread and false assumption that offshore structures are problematic and expensive.
There is a wealth of expertise to be tapped into to ensure the process is trouble free. However a note of caution should be sounded. British nationals resident in the UK cannot benefit from offshore structures. The benefits only arise for those with an overseas passport or those with dual nationality.
The definition used by the Inland Revenue and UK Government agencies in this area is ‘domiciled’ ‘ referring to an individual’s primary country relationship. Someone born in Ireland and with dual UK and Eire nationality would usually be able to use an offshore structure because of their Irish birth. Yet someone born in the UK with dual UK and Eire nationality would be less likely to benefit.
Nevertheless, while it may not apply to all, there is still a sizeable proportion of landlords operating in the UK who could benefit from the tax breaks available to holders of a foreign passport.
Stamp Duty, IHT, CGT and higher rate Income Tax can be reduced by channelling income overseas.
A number of lenders will arrange finance for offshore companies and trusts.
Setting up an offshore company or trust can cost as little as £1,500.