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Offshore tax planning has become increasingly popular over the years as taxes rise and the wealthy seek to escape the tax regimes in their home countries. However, it is not only the rich that can benefit from Tax Havens and their use will significantly increase your wealth and the speed at which you can accumulate it. Before looking at offshore taxation planning you need to consider two key components. You need to understand the taxation regulations in your home country and you need to understand the taxation legislation in the tax haven you would like to utilise. Without both sets of information you may end up spending a lot of money and not achieving your aims. It is therefore very important that you get expert tax planning advice prior to contemplating using a tax haven to reduce or eliminate your taxes.

Low Tax and No Tax Havens

A tax Haven is a country where tax laws and levels of taxation are very favourable. Some are "no tax" jurisdictions and some are "low tax" jurisdictions. Others, which are "foreign source exempt" tax havens, which means that residents do not pay any taxation on income sourced from work or businesses abroad.

Tax Havens for Anonymity - An Additional Benefit

It is perfectly legal to use tax havens to save on tax but you must remember that your home country's own taxation laws have to be taken into account otherwise you may find yourself paying more taxation than you expected. It is also pertinent to point out that the use of tax havens is also for anonymity and privacy reasons. Individuals who want to keep their financial lives out of view also find tax havens attractive. There are also those that use the privacy laws of tax havens to hide their taxable incomes, which is tax evasion and a crime in most countries punishable by fines or even prison sentences. However, it can all be achieved legally with the right taxation planning.

Tax Treaties

It is important to mention here what double taxation treaties are and how they can work for you. Many low tax havens have numerous tax treaties with high taxation countries around the world. The tax treaty determines how a tax resident of its own who has profits arising in another country with whom it has a double taxation treaty with, will be taxed. For example if you have properties in the UK and decide to immigrate to New Zealand and then sold them you would normally be taxed in the UK on those sales but instead you are taxed in New Zealand. However, New Zealand has no Capital Gains tax so you would pay no tax provided you stayed non-resident from the UK for more than 5 years.

Choosing a Tax Haven

When choosing a tax haven to live in there are many factors, which need to be taken into account apart from the taxation benefits. Privacy is an important aspect to many people so the level of disclosure must be looked at. Then one must consider the criteria for gaining residency. Some tax havens are only for the rich, while others can accommodate a wider spectrum of immigrants. Political stability needs to be taken into account as civil disruption can cause huge problems as you don't want your cash ending up in the Government treasury after a radical change of legislation. If you intend to run a business from a tax haven the communications need to be good in terms of internet, telephone and air travel. One also needs to consider lifestyle factors like the cost of living, recreational facilities, medical facilities, schooling and everything else, which impacts on the quality of your life. There is no sense in being taxation-free but miserable.

Methods of Using Tax Havens for Tax Planning

There are numerous methods for using tax havens to reduce tax; they are only limited by the imagination. They can be used to save on virtually every type of taxation in the UK with the right tax planning expert. We will now look very briefly at ways of reducing each form of taxation in the UK through the use of a tax haven. For income tax avoidance a contractor may use a method that employs the now superceded Employee Benefit Trust. To avoid capital gains tax and income tax a British Resident may have used the Trading Partnership. For corporate tax avoidance the company could use "re-invoicing" with an offshore company. A Non Domiciled British Resident may choose to use an offshore company structure to avoid inheritance taxation. The purchaser of an expensive property avoids stamp duty by the use of an offshore company structure. The following examples are just a taste of what is available through Tax Havens.

Contactor tax Avoidance

Up until recently when the HMRC legislated against the Employee Benefit Trust, it was used extensively by contractors to avoid income taxation. New structures have already been devised that have circumvented this change in legislation and work in a similar fashion. A contractor will sign a contract to start working for an onshore Ltd UK company, which will invoice his employer. The contractor is paid a much smaller salary than his actual salary and pays PAYE on this sum. This company uses the new form of the employee benefit trust to avoid income taxation for the contractor. The contractor will then loan back the remainder of his income from the trust structure tax-free because loans are not income and therefore not taxable.

How to Avoid Capital Gains Tax and Income Tax

A property developer believes that if he purchases a particular piece of land, he can gain planning consent on the land to build a housing complex. The Developer will then sell the land for ten times the purchase price. To avoid capital gains taxation and income taxation, he sells an option on the land to a Trading Partnership in the Isle of Man to "hedge his bets" against the possible failure of the venture for perhaps 50% to 100% more than what he paid for it. The developer is also a beneficiary of this trust structure. He therefore gains an immediate bit of income from the Sale of the option. Once the planning consent has been approved, the developer locates a buyer who is now prepared to pay ten times the original purchase price for the land. Upon the sale of the land, the Trading Partnership exercise its option on the land and the 850% uplift in value of the land goes taxation-free into the Trading Partnership. The developer now loans back his profits from the Trading Partnership taxation-free because loans are not income. The Developer pays tax on the difference between the purchase price and the option price, which is significantly smaller than the 850% profit made by the Trading Partnership.

"Re-invoicing" for Corporate Tax Avoidance

There are many strategies for using tax havens for corporate tax avoidance. One popular method is to divert profits from a country of high taxes to a country of low or no taxes. Often the high tax country will have laws to prevent this but it is still possible to legally achieve this aim. For example a person who owns a company exporting a product from the UK to other countries may choose to become non-resident and set himself up in a tax haven where there are no corporation taxes or income taxes. This would work by the individual's new company in the tax haven buying from the UK Company at a reduced rate and then selling the products onto the foreign End-user at a significant profit. Anti avoidance laws in the UK will mean that the tax haven based company will need to buy the products at a commercial rate so some tax will be paid in the UK but the rest of the profits will remain offshore in the tax haven.

Inheritance Tax Avoidance

A British Resident who was not born in the UK is classified as Non Domiciled for taxation purposes and this unique classification helps this person avoid inheritance tax on his estate. This particular citizen has simply purchased all his property and assets through an offshore company, whose shares are owned by an offshore trust. This means that this person's estate ceases to become subject to UK inheritance taxation upon death.

Avoiding Stamp Duty

It is common practise for very expensive properties to be bought by an offshore company with the owner of the shares being an offshore trust. This is done to avoid inheritance taxation, anonymity, and to make the eventual sale of the property a bit more attractive because the buyer will not pay stamp duty. The buyer will not pay stamp duty as the property itself is not sold, just the company. This means that no stamp duty and land tax is payable on the purchase, but in some jurisdictions there is stamp duty of 0.5% payable on share transactions, which is significantly less than the 5% that would normally be paid in the UK for properties over 1 million pounds.

Tax Planning

Everyone's situation and aims are slightly different but there are methods and structures employing tax havens that will avoid most taxes. It is therefore imperative to find a taxation expert that is familiar with people in your own particular situation and with your own particular type of business. Locating the right professional taxation advisor will massively accelerate your wealth creation objectives through the use of tax havens.

Jason Russell is a consultant with The Tax Experts, a UK based firm that specialises in UK Tax Avoidance Schemes and Tax Planning. The firm demonstrates to clients on a daily basis that tax in the UK is totally optional and is legal to avoid. The firm offers income tax planning, capital gains tax advice, corporate tax planning, inheritance tax planning and avoiding stamp duty and land taxes on house purchases and commercial properties. To learn more about The Tax Experts please visit http://www.thetaxexperts.co.uk.

By Jason A Russell