Cross border tax reporting and changes to the European Savings Tax Directive

04/04/2011 - 17:51

  2005 created a landmark change for the tax status of offshore jurisdictions with the implementation of the EUSTD ( European Savings Tax Directive).  It brought in the retention tax (upto 35% on interest) on offshore bank accounts or the exchange of information across European borders.  Whilst most bank accounts in these offshore jurisdictions gave customers the option to share information or exchange information, others did not, namely Cyprus and Malta and therefore lost their previously tax efficient status. However, the implementation of this directive left open a loop hole for investors who wanted to continue to benefit from tax efficient investments.  This continues to be the Offshore Life Assurance Bond or Personal Portfolio Bond.  The wrapper ensures that the assets within the Bond are ‘rolled up’ gross and therefore do not generate any income.  In this way and combined with the life assurance element meant that they fall into a loop hole created by the directive….until now. A raft of changes are being made to the directive and are likely to come into force in 2011 whereby any holder of an offshore life assurance bond will no longer be in control of the tax declaration when a chargeable event takes place.  Now, it will be the responsibility of the company/life assurance company to report to the relevant authority when a potential tax liability has been made.  These will be in the event of the policy coming to an end and the proceeds being paid out, partial surrender, death and where the ultimate beneficiary is resident in a different jurisdiction to that of the insurance company.  It is likely that all foundations and trusts will fall under the Directive’s remit as well. So for anyone holding an offshore Bond and hoping to reduce tax liabilities, it might not be the best vehicle to do so when these changes take effect.  It it unclear exactly what may happen but certainly some tax planning opportunities would seem to be required for a lot of people.  Don’t get caught out and landed with large tax bills for previously undeclared assets.


As far as my understanding goes, one of the great advantages of the offshore bond was the ability to withdraw up to 5% of original capital value without triggering a chargeable event. if annual income is not needed, the 5 percent allowance is rolled over to subsequent years so a cumulative withdrawal allowance can be built up over the years. And this is not deemed to be "income", so doesn't affect Age Allowance.  Another advantage is the ability to assign the bond to someone else (e.g. a non-taxpayer), also without triggering a chargeable event. Both of these mean that the offshore bond should still be a very useful tool if used properly. Unless I am out of date? Terry

To answer the first question: So what would be a tax efficient savings vehicle for UK citizen resident in Italy? If you are a UK citizen resident in Italy then you can use a pension savings vehicle which would allow you to contribute up to approx €5000 euro a year, tax free. If it is lump sum you wish to invest then it is merely a case of managing your investments in line with the income and capital gains tax rules as there are no real tax break accounts, like the UK ISA. As for the second comment about the 5% withdrawal limit.  Yes, this does apply in the UK, but Italy does not subscribe to the same rule, so if you are an Italian resident for tax purposes you would not get the same benefit and it would be deemed income.  If you are a UK resident for tax purposes then this would still apply.  However, remember that the 5% rule is tax deferred and not tax exempt, so that you may do so for 20 years but then at that point you would have to pay tax on the cumulative withdrawals. As for assigment without a chargeable event this is again true. However, the reason for the posting was that because of the new legislation likely to come into effect soon (and dependent on your residency, i.e to which set if tax rules you fall under), these events may become reportable to the country in which you reside.  So the simple answer is that your residency is key.  If you are spending more than 183 days a year in Italy then for all  intents and purposes you could be considered Italian tax resident and fall under the laws of this country.  If you spend less than that time plus time in another country i.e UK, then you may fall under the rule of that country instead. The idea of the European Savings Tax Directive is to harmonise and make transparent sources of income.  This does not mean that individual countries rules will not apply, it depends on your own situation.  Lastly, if the offshore Bond is used correctly, i.e for Inheritance tax purposes, it is still a good tax planning tool.  However the myriad of uses is being slowly withdrawn. I hope that helps.

  However, remember that the 5% rule is tax deferred and not tax exempt, so that you may do so for 20 years but then at that point you would have to pay tax on the cumulative withdrawals. Unless you had assigned it to a non-taxpayer just before this happens....... wink