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Offshore accounts – Is tax avoidance legal?

Offshore pension plans are tailored for the expat community.
Offshore accounts

The media has been buzzing recently with revelations about how HSBC has assisted prominent members of the business community, high society acolytes and politicians with their personal tax affairs. Allegations and counter-allegations dominate Prime Minister’s Question Time in parliament with both sides accusing each other of encouraging evasion.

The question of what is evasion and what is avoidance has long been a matter of contention among tax authorities and financial planners. Up until now, the approach seems to have been that if a particular scheme is deemed as not having evaded tax it is therefore considered to be a vehicle of tax avoidance, and thus ‘legal’. In my opinion, this type of interpretation is just too simple. There is more than a hint of suspicion that such black and white definitions are in reality a very convenient way of justifying intricate arrangements for the offshore banking industry.

Offshore accounts – The challenge

Two questions come to mind. Are there alternatives to the current definitions, and is it really necessary to risk entering into complicated tax planning arrangements which might subsequently be challenged and voided at some point in the future?

Let’s have a quick look at what we understand to be avoidance and evasion. Evasion is quite clear. Attempting to hide assets from the tax authorities by placing funds in offshore locations which guarantee confidentiality and therefore secrecy, is generally considered evasion. Great strides have been taken to minimise this practice with the introduction of the European Savings Directive which obliges EU banks to declare the existence of client accounts to the relevant tax authority in the country the client resides. Similarly, the Liechtenstein disclosure facility has been introduced as a type of tax amnesty. Holders of Liechtenstein accounts have been offered favourable terms to regularise their tax affairs; although they are obliged to declare their holdings and pay tax on them, they can sleep more soundly from that point on.

Avoidance is where in my view things need to change. Lumping legitimate tax planning investments such as ISA’s and pension plans with complicated loan-back arrangements from offshore companies, such as those which caught out Gary Barlow and Jimmy Carr, is crude and only helps further muddy the waters between evasion and avoidance. The spectrum of avoidance is as wide as ‘chalk and cheese’ and needs clarification. Over the last few years, the term ‘aggressive avoidance’ has entered our lexicon. This needs further codification. Indeed the present UK chancellor has made some progress in separating benign and aggressive forms of avoidance by legislating that ‘would be’ participants of aggressive avoidance schemes pay tax first, then challenge later. In some ways, this is akin to being presumed guilty and thereafter having to prove your innocence, but the government clearly think this problem has become so great that drastic action is required.

The solution

My solution, therefore, is to create four categories; legitimate tax planning, benign avoidance, aggressive avoidance and evasion. Investment products, trusts, offshore pension plans, companies and bank accounts can then be slotted into a category and treated accordingly. Similarly, an individual’s tax residence status needs clarification; anyone falling into a potentially ambiguous category (e.g. non-Doms in the UK)  should be treated differently from those whose status is clear, such as a UK national who lives and works in the UK, pays tax via PAYE and experiences the automatic withholding of tax on savings interest.

It’s all well and good discussing the tax affairs of the super-rich, but what can we do to make sure all of our investments fall into the legitimate tax planning and benign avoidance categories? The answers are surprisingly simple. Most countries with developed financial sectors offer simple tax planning opportunities for investors. Pension plans are an obvious way of reducing your tax bill as most in the EU treat contributions as deductible for tax purposes. By the same token, there are often domestic investment products available which attract favourable tax treatment subject to various conditions being met.

Everyone in France for example, whether local national or expat, is allowed to invest in an Assurance Vie contract. In short, tax is calculated according to time held and withdrawals made along the way. Assurance Vie products can also significantly reduce the impact of French inheritance tax in estate planning. Importantly for expats, it is crucial to realise that French and UK tax codes are quite different; it makes sense, therefore, to plan your finances in such a way as to reflect your new tax residence status. ISA’s and UK bank account holdings are potentially taxable in France, whereas Assurance Vie contracts can be totally tax-free or have tax-deferred.

Similarly in the Netherlands, the 30% tax ruling allows perfectly legitimate planning by not taxing investments and accounts held by expats outside the country. Spain and Portugal also have their own versions of allowable tax deferral products, however, it has to be emphasised that the underlying investment must be registered with and authorised by the relevant tax office.

In conclusion, I’d say that the grey areas between avoidance and evasion do need clarity. As long as they exist there will be individuals who try to take advantage and companies who will happily earn fees helping set up esoteric schemes to exploit loopholes. For the majority of us, however, careful financial planning ensures that we won’t pay tax where it isn’t necessary, and most importantly that we can sleep at night in the knowledge that the taxman won’t come knocking on our door!

Phil Loughton – AXIS Strategy Consultants

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About Des Cooney

Des Cooney is a renowned International Pensions expert with over 27 years experience in pension and wealth management. His main specialty is in the transfer of UK pensions to QROPS and International SIPPs.

Categories

  • EU Taxation Matters (20)
  • Expats Life (24)
  • Offshore pension plans (9)
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  • QROPS (66)
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  • Retirement in Spain (19)
  • Retiring in Ireland (3)
  • Retiring in the Netherlands (2)
  • UK Pension Lifetime Allowance (4)

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About AXIS

AXIS Financial Consultants are a team of Overseas Pensions experts helping expats make the best financial decisions about their retirement.

Important notice

The contents of this website are for educational and information purposes only. No part of this website is to be considered as an offer, inducement or recommendation to invest.

AXIS Financial Consultants are a fully authorised “Courtier d’Assurance” in France, ORIAS reg. no. 17 003 701

They are also authorised to act as a “Financial Investment Advisor “, referenced under the number E009199 by the association ANACOFI-CIF and approved by the Financial Markets Authority in France.

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374 Avenue de la Gaule,  Ile de la Dérivation
78955 Carrieres Sous Poissy, France
Tel: 00 33 1 39 70 98 54

Co. reg: R.C.S. Versailles 824 686 968

 

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