HMRC Profile of Offshore Investors

17 Feb

Royal Arms of England - Offshore InvestorsDiscussions with the 16 banks highlighted that the typical offshore investor is of either High Net Worth (HNW) or Ultra-High Net Worth (UHNW). The definition of these terms varied amongst banks in relation to the manner in which they segmented their customer base. Despite some variation in the boundary between HNW and UHNW there was some consistency in the minimum amount of capital required to invest in an offshore product.

On average, a minimum of around £1 million was required to invest in an offshore vehicle, with the lowest minimum investment mentioned by bank representatives being £500k and the highest being £5 million.

In terms of domicile status, higher proportions of UK non-domiciles invested offshore, with several representatives of banks stating that it was becoming increasingly rare for UK domiciles to pursue offshore investment. However, in the case of two banks with operations only in the UK, representatives emphasised that they predominantly service UK domiciles with very few dealings with non-domiciled clients.

“Yes, most of our clients are UK, resident UK domicile; we get a few who are UK resident non-domiciles.” Bank without retail arm

The knowledge investors had of the offshore investment market and the products within it was highly varied; ranging from novice to an expert level understanding. A number of bank representatives identified investors with the greatest level of knowledge of the offshore investment market to be those that work in financial services, specifically hedge fund managers and investment bankers. Meanwhile, investors that had recently experienced a ‘liquidity event’ e.g. the sale of a business – with little previous experience of financial markets are identified as the offshore investors with the lowest level of knowledge.

“Hedge fund managers and investment bankers who are very sophisticated financially and they would lead the process a lot more in terms of what they want” Bank without retail arm

“And then you get … the very wealthy, unsophisticated that have had a liquidity event in their commodity business or their textile business and they know nothing about the financial markets or banking” Bank with retail arm

Motivations for Investing Offshore

UK domiciles

It was stated by most representatives of banks that UK domiciles have little reason to invest in offshore products because there was no significant tax advantage in doing so. According to these representatives, the same rate of tax is paid on an onshore investment product as it is on an offshore investment product. As a consequence UK domiciles were said to be more likely to invest in onshore products rather than offshore products.

“I think for UK resident domiciled individuals there really aren’t any particular pros. … there really is no difference to them being booked with Guernsey to being booked with the UK. They get the same service; they pay the same fees; they get the same regulatory protections.” Bank without retail arm

Exploration of the Offshore Investment Market

Although the majority of bank representatives claimed that there was little tax advantage for UK domiciles to invest in an offshore product, it was also felt that that equally, there was no significant disadvantage to investing offshore in terms of taxation and there were in fact other advantages/benefits.

In this context, where UK domiciles do invest capital offshore, bank representatives reported that those that choose to do so were principally motivated by commercial factors rather than tax efficiencies. Specifically, UK domiciles that invest offshore were typically driven by the ability to:

  • Diversify investments;
  • Exploit financial flexibility; and
  • Because offshore vehicles are beneficial for internationally mobile individuals.

In terms of diversification, it was explained that investing capital outside of one’s jurisdiction of residence enables UK domiciles to reduce exposure to risk.

“Most clients would think it sensible and reasonable to have offshore investments from a diversification point of view, so even if they are UK, if they’re wealthy individuals who want a diversified portfolio, going wholly UK would not achieve that” Bank with retail arm

With regards to financial flexibility, banks explained investing capital offshore provides UK domiciled investors with a greater level of flexibility than available in onshore investments due to less regulatory restrictions in offshore jurisdictions. Moreover, some vehicles (e.g. offshore bonds) offer UK domiciles flexibility by allowing them to defer the payment of tax on investment gains until a time that is convenient.

“There have been benefits for us moving our clients’ investment structures into an offshore structure versus the UK structure, even for UK res dom individuals… because the taxation is the same for both structures, but there’s greater investment freedom in a Luxembourg one.” Bank without retail arm

Banks also explained how internationally mobile UK domiciles, i.e. people living or working abroad, were motivated to invest offshore by the fact that such investment products enable them to hold multi-currency accounts and because it minimizes their exposure to UK tax whilst not residing in the UK. In light of this, non-resident UK domiciles appear to be the one group of UK domiciles whom offshore investment can be tax advantageous for.

“Once you’ve moved out of the UK, having a UK bank account which effectively is UK income, when you’ve really got no UK interest other than the bank account, it makes sense to move it away from the UK and offshore” Bank with retail arm

Exploration of the Offshore Investment Market

UK Non-Domiciles

A number of banks stated that UK non-domiciled offshore investors were motivated by many of the same reasons as domiciled individuals that invest offshore; offering diversification and financial flexibility because they are often internationally mobile. However, in contrast to UK domiciled investors, UK non-domiciles were said to be often motivated by the need to preserve wealth – i.e. by ensuring they do not pay tax they are not obligated to.

“[Offshore investment] is very relevant for our UK res non-dom client segment, so for non-domicile clients we would by default use an offshore booking centre for tax reasons” Bank without retail arm

“I think if you come then to UK res non-doms, I think there continues to be an attraction for being offshore because of the res non-dom regime and the benefits it entails…for inheritance tax planning purposes.” Bank without retail arm

Several bank representatives referred to a hypothetical example of a UK non-domiciled individual who is resident in the UK, but keeps wealth accumulated prior to moving to the UK and the income of overseas enterprises offshore. This practice is primarily motivated by a desire to reduce exposure to UK tax, but in many cases it is also partly motivated by a historical connection with a particular offshore jurisdiction.

“At the moment, with the UK res non-dom rules as they remain, I think it’s absolutely appropriate that if a client moves from India or anywhere in the world and they maintain business outside of the UK and have a UK business… then the separation of their finances between what they earn in the UK and the wealth…that they have elsewhere is appropriate” Bank with retail arm

Although, at the time of the research (summer 2015) banks acknowledged that there was an advantage for UK non-domiciled investors to keep assets outside of the UK, it was mentioned by one bank representative that this advantage would fade soon. In this case, the changes to the status of UK non-domiciles announced in Summer Budget 2015 were expected to cause many UK non-domiciles to bring their offshore investments onshore as they will become liable to the same tax as UK domiciles.

“We might see an element of onshoring so basically money is offshore for no reason in the new world of transparency … I think we might see an increased use of traditional structuring based on domestic locations so typical structuring and financial planning used by pure UK clients might in future be more relevant to an increasing number of [non-dom] clients” Bank without retail arm

Royal Arms of England Photo-credit: Free Grunge Textures – via VisualHunt / CC BY

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