Investment Trusts as Tax Havens

In the world of investments, there are many things to consider and ways of protecting the investment.  In this article, we want to address one of these tax havens being in the form of investment trusts.  In standard terms, a tax haven includes countries or territories where certain types of taxes can be levied but at an extremely low rate, or perhaps not rate at all.  Obviously, enjoying investments with little to no tax is appealing to corporate investors, as well as individual investors.  With the reduction or elimination of taxes associated with a tax haven, competiti

In the world of investments, there are many things to consider and ways of protecting the investment.  In this article, we want to address one of these tax havens being in the form of investment trusts.  In standard terms, a tax haven includes countries or territories where certain types of taxes can be levied but at an extremely low rate, or perhaps not rate at all.  Obviously, enjoying investments with little to no tax is appealing to corporate investors, as well as individual investors.  With the reduction or elimination of taxes associated with a tax haven, competition among governments pertaining to taxes becomes extremely high.

Before we get into the benefits of using tax havens for investment trusts, we wanted to go over some of the specifics about an investment of this type.  For starters, first investment trust was created in 1868 called the Foreign & Colonial Investment Trust.  With this, investors were provided a slight advantage due to large capitalists diminishing risk of spreading the investment over several stocks.  The way investment trusts work is that money from various investors would be pooled as the result of a fixed number of shares from a trust being sold.  Usually, responsibility of the trust would be delegated to a qualified fund manager who in turn would make investments in stocks and shares for multiple companies.

Traditionally, rather than having employees, most investment trusts are set up with a board of directors, which includes non-executive directors only.  However, in the past several years this longstanding policy has begun to change with more private equity groups and commercial property trusts popping up.  For trading, these shares are sold on stock exchanges although the price of the share may not accurately reflect the actual value of a share portfolio of which the investment trust holds.  In this case, the investment is known as being traded but at a discount to Net Asset Value or NAV.

When comparing a unit trust and investment trust, the difference is that the fund manager overseeing movement of the investment trust is actually allowed by law to borrow capital as a means of purchasing shares.  Because of this, there is potential for leverage to boost gains on the investment.  Although this is good news to investors, it also means more risk.  Keep in mind that in most cases, just one type of share would come from an investment trust and that share would have a limited lifespan.

One exception to this rule is with Split Capital Investment Trusts.  Because the structure of Splits is more complex and the class of share is different, usually more advanced investors would go this route.  The life of Splits is also different, usually between five and ten years.  As a part of each Split Capital Trust, shares are broken down into one of two classes.  Investment trusts could also be related to real estate, as seen in the United Kingdom.  In this case, a resident of the UK would need to list on a stock exchange publically and at minimum, 90% of the income would need to be distributed.

Regarding taxing on trust investments, as long as the investment was approved by HM Customs and Excise, no special taxing would apply.  The only exception would be on capital gains, which are not taxed.  The benefit is that unlike shareholders who sell investment trust shares and are taxed on the capital gains, choosing HM Customs and Excise-approved investment trusts, double taxing would be avoided.

For an investment trust to quality for approval to avoid this double tax, certain criteria would need to be met.  First, the individual must be a resident of the UK.  In addition, the investor’s income would need to come primarily from investments.  Along with this, a minimum of 85% of any income in the form of dividends that comes from the investment trust would need to be distributed.  In other words, a company is not allowed by law to maintain more than 15% of the investment.

For tax havens, each is setup to work with different types of investments.  In addition, different tax havens are designed for different groups of people and/or corporations.  Many corporations within the United States use tax havens as a means of paying less or no taxes on investments.  Along with this benefit, others exist to include the following:

•    Tax information exchanged with foreign tax authorities is ineffective
•    The operation of legal, administrative, and legislative provisions have no transparency
•    Substantive local presence has no requirements
•    Self-promotion as an offshore financial center is possible