by John Westwood features@algarveresident.com
John Westwood is the Managing Director of Blacktower Financial Management Group.
Fiscal attacks on both illegal tax evasion and legitimate tax avoidance mean that there are fundamental changes ahead for offshore and low-tax jurisdictions, but the cross-border life market looks set to be one of the areas that will benefit.
Attention has now turned to deficit reduction and balancing this with economic recovery. Apart from cutting public spending, the core strategy of the governments affected, involves increasing taxation revenues, with a focus on personal and consumption taxes rather than corporate taxation.
What is already clear is that there is a natural tendency for governments to focus on those seen as having the ability to pay – the wealthy – and especially those that seek to avoid paying taxes by both tax evasion and legitimate tax planning.
Changes ahead
The UK has lagged behind some other countries in taking action on taxes mainly due to the General Election. But the new coalition government has wasted no time in publishing its programme ahead of an emergency Budget this week.
This, along with other announcements, highlights a general rise in taxation through measures that effect the mass affluent market, particularly the asset-and income-rich.
Forget the previously published party manifestos; the UK is now heading for a significant rise in capital gains tax (CGT), a continued freeze on the inheritance tax (IHT) nil-rate band and a re-appraisal of taxes for non-domiciles.
Taxing measures
Ireland was the first country to tackle these issues head on. In 2009, it raised income tax, with the country’s wealthiest taxpayers required to pay an extra 300 euros a week.
The government followed this up with the so-called “Bono Tax”, designed to ensure that all wealthy Irish nationals who live abroad make a major contribution to the nation’s economic recovery.
This annual levy is significant, with Irish nationals who have a worldwide income of more than 1.5 million euros and capital located in the republic worth more than 7 million euros looking at a tax bill of some 300,000 euros per year.
France is also taking action, with both the senate and the National Assembly issuing draft bills to abolish the tax shield (bouclier fiscal), which guarantees that a citizen’s direct taxes (income, social welfare, property, wealth and Residence) will not exceed 50% of their income.
It has also introduced anti-tax evasion measures, such as a new law with a number of provisions designed to combat the use of tax havens.
These are just two examples of governments taking such action. There are many more and this trend is likely to continue for the foreseeable future.
Disclosing assets
As well as raising the tax-take from the wealthy, several governments have incentivised the regularisation and repatriation of previously undeclared monies held in offshore and low-tax jurisdictions through various forms of tax amnesties.
These have met with mixed reactions, with the Italian Scudo fiscal, which had resulted in 85 billion euros being declared with two months of the amnesty to run.
Most of this sum, 60 billion, originated from Switzerland.
The UK has had more moderate success with two tax amnesties; the new disclosure opportunity, which focused on undeclared offshore holdings generically, and the more targeted Liechtenstein disclosure facility. The latter is expected to recover one billion Sterling in tax, implying that 10 billion in undeclared assets will be regularised.
The UK has adopted a carrot-and-stick approach, making it clear that it will now take tougher action against tax evaders, with investors with undeclared offshore holdings facing penalties of up to 200% of the tax due if they are discovered.
To tighten the tax net even further, the HMRC has strengthened the investigative capacity of its HNW Unit.
The treasury has also set up an advisory group to examine the “hidden economy”, while unveiling plans to extend the existing tax avoidance scheme disclosure regime by requiring tax planners to register lists of clients taking up certain schemes.
Knock-on effects
These attacks on offshore and low-tax jurisdictions, and the wealthy people, have had a significant impact, as can be seen from the experience of Jersey, Guernsey and the Isle of Man in 2009.
The sustained period of growth that the financial services sectors in the UK offshore islands enjoyed over the last decade came to a halt last year, which all these jurisdictions reporting significant falls in assets under management.
Future manoeuvres
Given the change in market fundamentals, the key question for investors in UK
offshore centres and European low tax jurisdictions is; where to from here?
There is no doubt that offshore banks and private banks heavily dependent on undeclared assets, might find themselves without a viable business model sooner rather than later.
Fiduciary businesses are also threatened by the clampdown on the creation of “artificial” structures using offshore companies and further scrutiny of use of trusts and foundations.
Using offshore life policies
The drive towards increased taxation of high net worth individuals will, in particular, boost the cross-border life market as investors increasingly find life insurance-based tax wrappers to be effective ownership vehicles for their wealth.
The tax control and deferral properties of a life insurance policy offer compliance-based tax planning opportunities for the nationals and residents of many countries, including the UK, France, Spain, and Portugal.
It is expected that investors will increasingly use portfolio bonds, based on the traditional benefits of gross-roll up (so no tax on an arising basis) and with active investors being able to switch between funds without creating tax charges.
Investors in European markets will be taking an increased interest in cross-border life wrappers as they look to add value to the returns on their investments and be tax compliant.
John Westwood can be contacted on +351 289 355 685
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Blacktower Financial Management Group – Telephone 289 355 685.
