Investing through international providers has grown in popularity over recent years as investors seek out the benefits of gross roll-up and the wider range of investment options that can be available.
When considering a recommendation for a lump sum investment, not only does the adviser have to select a suitable tax wrapper and help create a suitable portfolio, but they must also decide whether to invest through a UK provider or through a provider based in another jurisdiction. If the latter is right for the investor then there is another decision; which jurisdiction to use and there is a whole world from which to choose.
Many investors will want to use providers based in countries they are familiar with and not in countries that are located on the far side of the world. In these days of transparency and information sharing agreements, the jurisdiction should also be seen as reputable. Nations that maintain a high degree of confidentiality can often be seen as suspicious and this may deter investors. Think of those companies and individuals who invested through Panama and whose names were leaked to the press. I am not sure the publicity was welcomed.
For these reasons, many UK resident investors and advisers will select providers based on the Isle of Man or in the Republic of Ireland. These countries are geographically close to the UK and have developed into global financial centres over a number of years. Their governments have passed legislation that makes them attractive destinations for investors from other countries, including the UK, and financial services has become a key part of their economies.
From a common-sense perspective, providers based in these countries will have similar working hours to the UK, making working with them easier. They will also speak English, again making them easier to work with. Luxembourg is another international financial centre that can claim to meet these requirements; however, it is not as popular and this is likely to be because many UK insurance companies and investment companies have chosen to use Ireland or the Isle of Man as their non-UK base.
The investor’s objectives have to be taken into account and this could affect the choice of jurisdiction. For example, if they plan to move abroad in the future, the choice of jurisdiction could be linked to their exit strategy. If a UK resident invested through an Irish provider and then moved to Ireland, they could find themselves with an unexpected tax bill.
So if you are looking at an investment with a provider based either on the Isle of Man or in Ireland, what are the common factors that you need to consider?
Government and the European Union
The Isle of Man is a crown dependency and part of the British Commonwealth. It is an independent country and not part of the United Kingdom or the European Union. However, it is an affiliated member of the European Economic Area (EEA), generally following the EEA guidelines. The Financial Services Act 1986 in the UK granted the Isle of Man the status of a ‘designated territory,’ leading to the Isle of Man Insurance Regulations 1986. As financial services companies rely on investment from foreign nationals, the legislation must remain consistent and relevant to global markets but they have the flexibility to vary this as they feel suitable.
The government, the Tynwald, is claimed to be the longest continually running legislature in the world, dating back to AD979, so few can argue with a claim that the Isle of Man has a stable government.
Ireland can also offer a stable environment and, unlike the Isle of Man, Ireland is part of the European Union (EU) and, as such, is currently subject to some of the same legislation as the UK. This can be familiar to advisers in the UK, such as the Markets In Financial Instruments Directive (MiFID) and the Solvency II requirements. Some also believe that there is a degree of passportability should the investor move to a new destination within the EU, although this can be a myth in some circumstances as it will depend on which jurisdiction they move to.
If the investor’s objectives are to move abroad then whichever jurisdiction is used for an investment, the investor and adviser would need to establish the tax treatment of the potential solution in the destination which the investor is moving to.
Both jurisdictions provide regulators for financial services providers; the Isle of Man Government through the Isle of Man Financial Services Authority and the Irish Government through the Central Bank of Ireland.
These regulators impose rules around the segregation of assets so that policyholder assets held in the long term business funds are ring-fenced from shareholder funds. There are also strict solvency rules in both jurisdictions, with Irish providers being subject to the same Solvency II requirements as UK providers.
In addition to this, both jurisdictions have an ombudsman service that policyholders and advisers can contact if they feel it necessary.
This is where we start to see some differences.
Policyholders of Isle of Man providers are protected by the Isle of Man Life Assurance (Compensation of Policyholders) Regulations 1991. This means that, if the company becomes unable to meet its liabilities to policyholders, then the scheme would meet up to 90% of the provider’s liabilities to its policyholders. This is similar to the UK Financial Services Compensation Scheme. However, the UK scheme increased its cover to 100% last year following the pension freedoms.
In Ireland, there is no policyholder protection scheme available.
These factors aside, the UK Financial Services Compensation Scheme can provide a level of protection to those investing offshore. There is an understanding that, where advice has been given to an investor habitually resident in the UK by a regulated UK adviser and the investor was resident when the advice was given and the policy started, the UK scheme will apply. This would offer protection up to 100% of the value of the investment, but it is untested at the time of writing.
Even with the regulators’ requirements and the possibility of a policyholder protection scheme, the importance of a provider’s financial strength should not be underestimated. A provider with good ratings and commitment from a parent company should provide the investor and adviser with more confidence.
Fees for discretionary investment management
Another difference is around the treatment of the fees for discretionary investment managers (DIMs) and this relates to the EU VAT directive.
Where a UK policyholder nominates a DIM to manage the underlying investment and they are appointed by the bond provider, the DIM will charge a fee. The invested assets will be owned by the life company and therefore the contract for services will be between the provider and the UK-based DIM.
Under the EU VAT directive, there is a VAT exemption for managers of special investment funds. However, and this is key, it is up to each individual member country to define what a special investment fund is.
The Irish Revenue Commissioners’ long-standing belief is that this exemption may apply to the services performed by a third party in respect of investment and the administrative management of a fund. This would therefore catch the mandates given to DIMs by Irish-based insurance companies.
HMRC does not agree with this stance and therefore does not believe the exemption should apply and will seek to require VAT be charged on the fees and this cannot be reclaimed.
There is clearly an issue around fiscal neutrality between two EU nations but, with the UK soon leaving the EU, this difference may never be challenged.
The choice of jurisdiction will very much depend on the investor’s objectives and the structure of the solution the adviser is recommending. For each case, there may be different factors that can affect the suitability of a particular jurisdiction and therefore a blanket approach for all investors may not be the most suitable approach. For example, where a DIM is used, an Irish-based provider can offer a cost advantage. However, the Isle of Man can offer security from a policyholder protection perspective. Moving from one jurisdiction to another can generate a tax liability, so it is important to select the most suitable at outset.