If you are thinking of moving abroad to offshore tax havens, in order to avoid tax, take stock as all you really need to do is set up a self-administered trust.
Self administered trusts, which are small self-administered pension schemes, are amazingly generous but largely unused schemes that are ideal for company directors, business owners and senior employees who want to:
- reduce their income tax bills and
- invest in property without having to pay high income tax on the profits.
An equally generous scheme with similar rules (called a self-invested personal pension) is available for sole traders and professionals such as, doctors, barristers, solicitors and accountants and anybody in business but not incorporated.
A self-administered trust is like any other pension scheme in so far as that:
- contributions into your trust are tax free.
- any profits made in the trust are completely tax-free.
So if you pay tax at the higher rate of 42%, every €100 investment will only cost you only €58.
You can invest a considerably higher percentage of your total annual' income tax-free than you would be able to with a normal personal pension:
- up to 150 per cent of your annual income at age 40, for instance;
- up to 250 per cent of your annual income at age 50.
The highest sum that you can contribute is set at €5,000,000.
You could start accessing your money as young as age 50.
You can vary the amount you put into your trust from year to year.
There is much greater flexibility regarding the choice of investments. In particular, these schemes are ideal for investing in property.
Your trust can borrow to further boost its profits. In other words you can borrow up to three times the amount held in order to make further investments. This rule was introduced in the Finance Act 2004 and is the reason why self-administered trusts are so attractive.
John Paul, a businessman, sets up a self-directed trust into which he makes sufficient contributions to do a lucrative property deal. The trust buys a well-appointed and well maintained office building, let to a blue chip client at an annual rental income of 6% of the purchase price. The total cost of the purchase, including expenses, is €1,350,000, financed with a 20-year loan of €1,000,000 at 4%. The rent from the building is €81,000 per annum, but the interest on the loan is only €40,000 giving an annual profit of around €41,000 per annum before expenses.
- The rental income profit is tax-free.
- All the mortgage repayments are tax-free, as they are deemed pension contributions.
- When the building is sold any capital gain is also tax-free.
- John Paul's initial contribution was only €350,000 was tax-free.
Also it is important to note another benefit that arises upon retirement, is the provision that allows you to take 25% of the value of the fund as a tax-free lump sum. The 75% balance of the fund can be placed into an approved retirement fund (ARF), which can be reinvested back into another property. Approved retirement funds will also give a way to pass on your assets to your family.
Setting up a self-directed trust is inexpensive. You should budget around €4,000 in fees (including Vat) and allow annual management costs of between 1% and 1.5%, depending on the size of the fund.
The body of pensions legislation is complicated and so you are advised to take professional advice before taking any action. Also, as the investment rules are quite strict you will need guidance on what you can invest in as not all forms of investment qualify.
If you are a business owner, company director or senior employee and you want to dramatically cut your income-tax bill and make a tax-free property investment, nothing - not even moving to an offshore tax haven - beats the advantages offered by a self-administered trust. Especially as you can gear your investments to further boost your profits.
If you would like to set up your own self administered trust - click here
