Isle of Man: Offshore Investment
Companies carrying out insurance business in or from the Isle of Man are required to be authorised under the Insurance Act 2008. Regulations made under this Act provide for detailed supervisory reporting requirements. This Act consolidates most of the existing primary legislation in relation to insurance regulation, including the Insurance Act 1986, the Insurance Amendment Act 2004 and the Insurance Intermediaries (General Business) Act 1996. However, Part 2 of the Insurance Amendment Act 2004 remains in place and this Act was renamed the Life Assurance (Insurable Interest) Act 2004. Domestic insurance business is largely carried on by 'permit-holders', being foreign companies, mostly UK insurers.
The Isle of Man Government Insurance and Pensions Authority regulates the sector through an Insurance Supervisor. Insurance companies are required to satisfy the Supervisor that the company will be properly managed in the Island and will have adequate financial resources and reinsurance support for the business to be undertaken.
The Isle of Man has created a bespoke pensions regime which it hopes will attract international companies offering retirement benefit packages and schemes to expatriates and companies employing them.
Schemes offered from insurers in high-tax countries may give some tax benefits, but suffer from the lack of flexibility inherent in national pensions legislation. With more and more individuals and companies basing themselves internationally there is a growing market-place for offshore pension provision, and this is the market which the Isle of Man has set out to capture.
The Retirement Benefits Schemes Bill 2000 came into force in June 2000. The Pensions Authority consulted widely with international life and pensions companies in drawing up the legislation.
In August, 2004, the Isle of Man Insurance and Pensions Authority (IPA) introduced new regulations which allow bodies other than limited companies to carry on insurance business in or from the Island.
The Insurance (Limited Partnerships) Regulations amend the Insurance Act 1986, and the Insurance Regulations 1986, to allow limited partnerships to carry on insurance business.
The new regulations attempt to introduce a regulatory framework for limited partnerships that mirrors that already established for limited companies.
Individuals in a number of situations can gain advantage from offshore pension investment, for instance:
- Expatriate executives, professionals or entertainers;
- Residents in high-tax countries intending to become non-resident on or before retirement; and
- Residents in low-tax countries.
Expatriate executives, professionals, entertainers and similar types of global wanderer have a considerable problem with pension provision, since it is often the case that while non-resident they cannot continue with tax-privileged pension investment at 'home', ie in their original domicile, to which they probably intend to return in the end. It may well be that offshore investment is the only practicable route, even though the income they eventually receive in retirement is going to be taxed - and they may decide to retire offshore, in which case they will have preserved flexibility by not committing to any particular high-tax jurisdiction.
People who already live offshore and have no intention of moving onshore, are not really concerned with the distinction between 'pensions' investment and 'non-pensions' investment, since there are probably no taxes to consider either way. They need to have regard to security of course, and will no doubt be planning to maximise income in retirement, so that offshore pensions products are still relevant to them.
Investments intended to provide pensions income need to take into account the choice of jurisdiction for eventual retirement. The Isle of Man, like many offshore jurisdictions, provides tax exemption for non-residents, but not for residents, or at any rate not for the local income of residents, so that it may be undesirable to locate a retirement investment in The Isle of Man if that's where you plan to live.
In March, 2006, it was announced that pension rights transfers from the UK to the Isle of Man would no longer be subject to HM Revenue and Customs (HMRC) discretion, and individuals will not have to meet any HMRC conditions under simplified pension laws introduced in the UK on April 6 ('A' Day).
As a result, the existing reciprocal agreement between HMRC and the Manx tax authorities for the transfer of pension rights was terminated with effect from 5th April 2006, according to Malcolm Couch, the Isle of Man's Assessor of Income Tax.
Mr Couch explained that the ability of an Isle of Man resident moving to the UK on changing their job after 5th April 2006 to transfer their pension back to the UK will remain but it will take place under the new regime. Guidance on the new arrangements has been posted on HMRC's website.
The Isle of Man's Income Tax Division published a consultation document on the taxation of pension schemes on the Island, in October, 2006.
Changes proposed in the consultation document included:
- Tax-free lump sum: The taking of a tax-free lump sum of up to 25% of a pension fund will be permitted in the Isle of Man.
- Triviality: Commutation of a trivial pension or pensions into a taxable lump sum will be permitted up to an overall fund or aggregate fund valuation of GBP15,000.
- Concurrency: A person will be permitted to hold a personal pension plan alongside membership of an occupational pension scheme subject to an overall annual contribution limit of 15% of net relevant earnings.
The Income Tax Division of the Isle of Man Treasury on August 13, 2009, published a practice note relating to the taxation of Isle of Man pensions paid to non-residents.
As part of its program of developing closer economic and taxation cooperation with other countries, the Isle of Man has concluded new bilateral tax information exchange agreements. Many of the new agreements provide that the Isle of Man can continue to tax pensions paid to a non-resident (i.e. there is no change to the current position), but some of the agreements provide that pensions should only be taxed in the recipient’s country of residence.
In order to maintain the Isle of Man’s competitiveness, the Treasury is to allow non-resident recipients deductions from paying income tax on pensions in the Isle of Man where tax of greater value is paid in the third country.
To be eligible to receive a pension without having Isle of Man income tax deducted, an individual must:
- Not be tax resident in the Isle of Man;
- Be tax resident in a country with which the Isle of Man has an agreement which provides that pensions are taxable only in the country of residence; and
- Meet any other conditions set out in the relevant agreement, such as receiving a particular type of pension.
To make a claim, non–resident individuals must complete form R221, "Pensions Income – Application for relief from Isle of Man Income Tax", and send it to the tax authority in their country of residence.
New Pension Arrangements
In 2010, the Isle of Man’s parliament approved an order creating a new type of pension arrangement that adds to the Island’s existing local and international pension legislation, reinforcing the Isle of Man’s reputation at the forefront of international pension provision.
Following a six-month review by HMRC, the new pension arrangement under section 50C of the Isle of Man Income Tax Act was accepted into the UK’s Qualifying Recognized Overseas Pension Schemes (QROPS).
According to the Manx government's Department of Economic Development, the new pension scheme can only be provided by registered Isle of Man resident pension providers who are regulated by the Isle of Man’s Insurance and Pensions Authority. As such, investors in these schemes can be assured that they are operating in a well-regulated jurisdiction.
In addition to providing a new retirement savings option for Island-based members, the possibility of QROPS status for pensions approved under this new arrangement gives the Isle of Man’s pension sector increased opportunities to market these schemes to British expatriates who have retired outside the UK.
As well as having the ability to utilize pension drawdown applicable to Isle of Man personal pension schemes, a lump sum of up to 30% of the fund is available. Any payment made from the new scheme to a non-Isle of Man resident will be paid gross and will not be subject to Isle of Man income tax.
Minister for Economic Development, Allan Bell commented: “This new pensions regime shows that the Isle of Man continues to be the leading jurisdiction for professional, innovative, well-regulated pensions. I am sure this will be welcomed by the Isle of Man pensions industry and will enable them to increase the amount of business placed in the Isle of Man."
In October 2010, the Income Tax Division of the Isle of Man Treasury published three practice notes providing guidance on changes to the island’s pension schemes.
The first practice note, PN 164/10, announces details of the newly-launched '50C scheme', a new type of pension scheme, which is to be open to both the domestic pension market and to international investors, as approved by the Isle of Man parliament, the Tynwald, on October 19. PN 164/10 in particular details the scheme’s characteristics including its tax treatment, and the implications of the scheme accepting contracted-out/protected rights transfers.
The Division’s second Practice Note, 165/10, provides an update on ‘approved pension schemes’, in particular with respect to updated provisions in relation to:
- Pension transfers;
- The tax treatment of funds remaining in a scheme on the death of the member; and,
- The value of member’s benefits for the purposes of calculating a lump sum payment.
The last Practice Note, 166/10, addresses a number of investment issues, including:
- An outline of the basis on which the Assessor decides whether or not an investment may be approved;
- Treatment of trading income;
- Qualifying Recognised Overseas Pension Schemes (QROPS);
- Permission for investments to be made without the Assessor’s clearance;
- Prohibited investments; and
- Possible new regulations.