Are Offshore Tax Havens Benefitting from British Higher Rate Tax Payers’ Wealth?

In their April 2009 Budget the British government not only made it very clear that they want to tax higher earners far more, but that they want to put a cap on any tax relief that such individuals currently enjoy on any of their savings and investments too.

This shocked many as a lot of the proposals represented a u-turn in policy and really made it very clear that the UK government is wholly unsupportive of those who work exceptionally hard and earn more as a result.  Needless to say, those who will be affected by the far reaching and damaging changes from as early as April 2010 have been looking into ways to get around the tax increases.

So, the question on many people’s lips is – ‘are offshore tax havens benefitting from British higher rate tax payers’ wealth’ – and the answer is a resounding and almost universal yes!  In this report we’ll examine how the British government is pushing some of its most important citizens – in terms of their influence on British business and the British economy - away from the UK.

Accepting that the tax rate on income is set to rise to 50% for higher earners from next April, what else has the British Government done to alienate its highest achievers?  Well, the government currently offers tax relief of 20% at source for eligible pension contributions, and gives higher rate tax payers the ability to benefit from an additional 20% via self-assessment or an alteration of their tax code.  However, going forward there has been an absolute U-Turn in respect of this because those earning £150,000 or more per annum will have their higher-rate tax relief restricted from April 2011. 

Apparently there will be a sliding scale of tax relief eligibility up to an annual earnings level of £180,000, over which the individual will be restricted to tax relief of just 20%.  Naturally this restricts the attraction of saving into an onshore British pension for any higher rate earners who decide to remain in the UK.  But that’s not where the government is stopping – tax on income from dividends on equities is to rise to 42.5% for all higher rate tax payers too.  Furthermore, for those earning above £100,000 per annum, the income tax personal allowance (i.e. the amount on which no tax is payable), will be reduced on a gradual scale as income increases, until it is completely eliminated apparently!

Naturally enough the top earners in Britain are doing absolutely everything in their power to protect their wealth through the utilisation of every potential scheme available to them.  At Shelter Offshore we’re already well aware that there has been an increase of interest in international corporate structures amongst higher earners seeking a way to protect their businesses offshore.  What’s more, we’re keenly aware that there are those who are turning their back on the UK altogether.  Some are vacating the country lock, stock and barrel whilst others, who have to retain some ties with the UK, are looking into how they can get around the rules of tax residency by spending the minimum numbers of days out of Britain – however this is a very dangerous game to play as HMRC will not be pleased.  This is certainly not something we would ever recommend.

Everyone who can will protect not only their income but their wealth from taxation erosion – naturally enough, this is where the offshore financial marketplace begins to really grow in appeal and interest.

All nations affected by the global financial storm are seeking ways to protect their economies so potentially it’s not only Britons who are looking overseas for ways to protect their wealth.  However, not all countries had such damaging exposure to failing banks.  Britain has compounded its financial problems by bailing out banks, writing off or underwriting toxic loans and printing money to try and hold up a banking industry that could have done with a few more big names going out of business to clean up the entire industry!  This means that Britain is in the position where it will need to tax more, spend less and wallow in recession for a long time to come anywhere close to building a healthy economy again.  Other nations aren’t in such an horrendous position as Great Britain, but that’s not to say that tax hikes won’t affect other nations.  Mexico, Canada and America are all discussing or implementing hikes apparently, and of course, taxing the rich is always a popular vote winner…

So, will a global increase in income tax be a good thing for offshore financial institutions?

The short answer here is yes – but in truth, this is not an easy question to answer!  The entire offshore world as we know it is under threat from the likes of the OECD, the G20 and the European Union who are forcing damaging disclosure policies on all international financial centres.  Of course, we fully support those who wage war on tax evasion, but we are wholly opposed to a restriction on tax competitiveness. 

There are certainly nations that will come out winning in this global financial battle as other countries decide to tax their citizens to the hilt – they are likely to be the countries that offer a lower income tax rate to residents who fulfil certain criteria – such as those who do not earn an income from the local economy, but who reside in that nation.  Such individuals will then perhaps be taxed less on their worldwide income and gains.  Look to the models currently in operation in countries like Malaysia and Belize if you want to escape today, but keep your mind open and take professional advice about your own personalised best way to protect your income, your assets and your wealth because not all solutions are suitable for all people.

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