If you are thinking of moving abroad to one of the offshore tax havens in order to reduce your exposure to tax, take stock! All you really need to do is set up a self-administered trust which you can use to build a body of wealth safe from tax.
Self administered trusts, which are small self-administered pension schemes, are amazingly generous and are gaining in popularity as ideal for company directors, business owners and senior employees who want to:
- reduce their income tax bills and
- invest in assets without having to pay high income tax on the profits.
Essentially, funds are transferred from your Company to a new legal entity - a Pension Trust. This Trust is established for your sole benefit. Transfers to the Trust are tax deductible in the Company, so it helps to reduce Corporation Tax.
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 deductable from income for tax purposes. Any profits made in the trust are completely tax-free.
A Pension Trust is an entirely tax-free investment vehicle. No Corporation Tax, Income Tax or Capital Gains Tax is payable on any income or capital gains which arise within the Trust.
The Trust can invest in a wide variety of assets such as:
- Stocks and Shares
- Shares in Private Companies
- Residential Property
- Commercial Property
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. 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.
Trophy Investments e.g. yachts, vintage cars, works of art etc. are not allowed.
In relation to property investments only, the Trust may not buy, sell or rent to or from the person the Trust is established for or the employing Company.
The funds in the Trust can be accessed as follows:
- At any time due to ill-health subject to Revenue agreement.
- At age 50, if you retire from the current Company.
- At age 60, with no necessity to retire from the current Company.
The tax payable when you retire is made up as follows:
- 25% of the Fund can be taken out totally tax free if a 5% director (otherwise 150% of salary)
- Further withdrawals are subject to tax at the normal rate.
- If the remaining 75% is not required in the short term, it can be transferred to a follow on investment vehicle, which is also tax free. This in turn can be passed on to the next generation, if desired.
You are in control at all times. You are a joint signatory on all transactions involving the movement of funds.
It is a Revenue requirement that a Pensioneer Trustee, such as Independent Trustee Company Ltd, is appointed to the Trust to act as a further co-signatory. The Pensioneer Trustee looks after all the compliance work in relation to establishing and running the Trust.
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 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 contact us at tax@fixmytax.com
