Filed under: Taxation
By Robert Budden and Josephine Cumbo – FT
Tens of thousands of investors with money tied up in offshore financial centres have been successfully exploiting loopholes in the new EU savings directive, allowing them to escape the scrutiny of tax authorities or bypass withholding taxes introduced last year under the new law.
Figures released by the Swiss Finance Ministry reveal only €100m (£69m) was raised by Switzerland – the world’s largest offshore financial centre – in the second half of 2005, the first six months of the new law’s operation.
Over the same period, Jersey raised just £9m and Guernsey just over £3m, a tiny fraction of the £70bn of assets held in these offshore financial centres.
Tax accountants said the surprisingly low figures were the latest signs that many offshore savers had channelled their money to centres such as Singapore which are not covered by the EU savings directive or had re-organised their offshore savings so they escaped the scrutiny of tax authorities.
Under the directive, which came into force in July last year, all EU member states and more than a dozen offshore financial centres from the Cayman Islands to Liechtenstein must share account holder information with relevant local tax authorities or levy withholding taxes of up to 35 per cent. The rules apply to money held in offshore savings accounts.
Tax experts said there was evidence that as well as moving money to offshore jurisdictions not covered by the directive, many savers had taken less dramatic steps to escape the directive – including moving money into deferred interest accounts where interest is paid only when the account is finally closed. Offshore insurance “wrappers” have also become more popular as these also escape the directive.
“The average amount held in these accounts before the EU savings directive was about £50,000 but now it is just shy of £100,000,” said Tim Harvey, director of HR Independent Financial Services.
Offshore insurance bonds are exempt from the directive because all the assets in the bonds are technically held by the life company running it rather than by individuals.
Many savers also appear to have set up corporate accounts as companies are exempt from the directive.
Andrew Watt, head of tax investigations at Chiltern, a firm of accountants, said there was strong evidence that this was happening widely: “It’s the easiest thing in the world to do. You just leave the money where it is and instead of being held by Joe Bloggs it will be held by Joe Bloggs Ltd.”
Christine Ross, of SG Hambros, the private bank, said she was not surprised that the tax amount raised had been less than expected as most of her clients had opted to allow their European banks to exchange information about their accounts with UK authorities.
Under the directive’s rules, those opting to exchange information do not have a retention or withholding tax deducted from their accounts. Instead, information about interest accrued in the foreign-held account is handed over to the tax authorities where the account holder is resident.
Filed under: General News
Retail investors will soon be able to bet on the racy world of equity volatility – usually the preserve of hedge funds and proprietary trading desks at investment banks – after the launch of a new fund.
Dresdner Kleinwort, the German investment bank, and Kleinwort Benson, the private bank, are launching two open-ended investment companies in the UK that aim to profit from the difference between implied and realised volatility on the S&P 500 index.
The funds, thought to be the first of their kind, have been made possible by innovations in the derivatives market and by the Ucits III legislation, introduced last year by the European Commission and allowing mutual funds to invest in instruments previously banned.
It joins a growing number of special investment vehicles to be listed in London focused on areas such as hedge funds and structured finance. It aims to list in mid-September.
Trading volatility has become increasingly popular in recent years, while specialists such as Volaris, a unit of Credit Suisse in New York, now offer volatility management strategies to institutional investors.
Developments in the world of derivatives have opened the door to trading volatility through instruments such as variance swaps. These swaps are bespoke derivatives constructed to give exposure to volatility that will be used by the new OIECs.
Serge Desmedt, managing director in capital markets at Dresdner Kleinwort, said the idea for the new funds, called the Deva 80 and Deva 90 Alpha Funds, came from the trend that the level of volatility implied by the price at which equity options traded in the market generally overestimated actual or realised volatility.
Mr Desmedt said the trend was observable back to 1990. “It’s one thing to spot an arbitrage opportunity but quite another to execute it.” Mr Desmedt said new financial instruments allowed funds to do this now.
He added that the S&P 500 index had been chosen as the basis for the funds because it was the broadest and most liquid index. “We thought it provided the best stability of returns,” he said.
Andy Halford, head of structured products at Kleinwort Benson, said the new funds would offer an exposure to an asset class that had previously been unavailable to many investors.
He said trading equity volatility would offer an investment that had historically given attractive returns with low volatility and low correlation to other assets.
