The Isle of Man can provide a unique range of benefits for UK-resident investors.
Not only is it geographically close to the UK, in the same time zone and without language barriers (even though the Manx language is alive and well on Ellan Vannin), but it can offer distinct advantages for investors. Many in the UK know the island for the TT races, but few may have visited – so why do advisers recommend the Isle of Man as a suitable jurisdiction to invest through?
A well-regulated jurisdiction
The Manx Government is committed to the financial services sector and has been for many years. It generates a large proportion of the gross national income and provides significant employment opportunities for islanders. It also appreciates the impact any local decisions may have on overseas investors – for example there are lower probate fees for those individuals domiciled outside the Isle of Man, who only have a policy of life assurance with Manx company.
Many individuals will hold their investments in an international investment bond. Much has been written in recent years about the use of offshore investments, however investment bonds are not contentious and their familiarity with HMRC in the UK can make them very attractive to those seeking a tax efficient, compliant, investment. Legislation and HMRC practice is clear and comprehensive on how, when and if international bonds are taxed and UK advisers are familiar with how the benefits they can offer.
A clear approach to taxation
For the UK market, an international investment bond is a policy set up by a life assurance company based outside the UK. This company will be in a jurisdiction with a favourable tax regime, such as the Isle of Man where no local taxes are applied to the investment. International bonds can accumulate gains free of UK tax allowing an investment to grow faster than a similar one held onshore. There can be UK tax payable when any profit, known as a ‘gain’, is realised from the investment but with an effective exit strategy this tax can be minimised.
Wealthier investors may prefer this method of taxation than using a policy issued by a UK-based provider. This would have UK corporation tax payable within the fund and a credit for basic rate tax on any profits taken. Whilst it may be cheaper and less complicated, the effect of tax drag on the investment can have a larger impact over a longer period of time.
As an example of tax drag, if someone invested £1,000 on day one and it achieved 5% growth each year for 10 years, they would have £1,629. However if they paid 20% tax on the investment return each year then it would only be worth £1,480; over 9% less. If they paid 40%, then the drag on performance is over 17%. This can make a significant impact to investments and increases with time.
The lack of tax within a bond also allows providers to offer greater flexibility, so the investment options available under an international bond are generally broader than for its UK-based cousin. Investors can therefore access investment platforms and discretionary fund managers as well as choosing from any permissible investment fund from around the world. Some providers, including Canada Life, also allow portfolios on a full discretionary basis including the use of direct equities.
So, we have tax-efficiencies, and a committed Government but what about security for investors?
Firstly the financial strength and commitment of a provider will give comfort and these are two areas for an adviser when recommending a suitable provider. Although the Solvency II requirements for UK-based providers do not extend to the Isle of Man statute books (remember it is not part of the UK or the EU) it does have similar legislation. June last year saw the introduction of an updated risk-based capital and solvency regime.
The ability to have its own legislation allows the Isle of Man to keep legislation relevant to the companies based there and the customer base on which they focus. However the Government recognises the importance of policyholder protection for investors and the policyholder protection scheme in place protects 90% of the policy value. Not all international jurisdictions have a scheme in place.
Over thirty years ago Canada Life established itself on the Isle of Man under the then name, Albany International. The company’s commitment to the Isle of Man and the UK adviser marketplace has enabled the company to become one of the key providers based on the Island. Over the years it has developed products and continually seeks to improve these to make sure they remain relevant to the markets in which it operates.
Overall, the combination of effective compliant products, forward thinking providers, effective risk-based regulation and a proactive Government provides a very strong story for the Isle of Man.
Neil Jones, Market Development Manager. Neil is an investment specialist with over 20 years’ financial services experience with life and pensions providers, an investment company and as a professional adviser specialising in pensions, investments and estate planning. Neil has been involved in product development, investment research and training.