Monday 6 November 2017

All the Queen's Men

Fulminating about the Queen investing offshore is fairly stupid, and diverts attention from the real scandal of tax avoidance.

Firstly, this is 2% of her estimated fortune. 2 percent! As an allocation to this “asset class” it is really quite modest.  Life insurance companies, pension funds, charitable foundations probably all allocate more – possibly as much as 6-7%.

Secondly, HM appears to be participating as a “limited partner” in collective investment schemes. HM will be one of perhaps 100 or more high net worth investors in any one fund, with a small percentage of any one fund’s assets – the modest involvement in Brighthouse certainly suggests a fraction of 1% interest there.

Most of the investors in funds like this are governments (sovereign wealth funds), pension funds (private and public), and charitable foundations. You might well find fellow investors include The Ontario Teachers’ Pension Plan Board, GIC (the Singapore government social security fund), Surrey County Council pension fund, the Wellcome Foundation, and an Oxbridge college or two.  In fact, it is fairly likely that your own pension arrangements, if they are an occupational scheme, are involved in the offshore fund sector!

One thing all these entities share is this – they are exempt from tax anyway.

Such funds are almost always set up as Limited Partnerships. These might be useful for tax evasion (because the information is outside the UK’s domain, although that is about to change as the “Common Reporting Standard” comes into force with effect from 1 January 2017) but they are useless for avoidance (ie legal if immoral tax mitigation) because partnerships are fiscally transparent – their members are, in law at least, liable to report and pay tax on their individual shares of the partnership’s profits.

Most investors in such schemes wouldn’t have to pay tax anyway, and HM is one of them. She is exempt from tax, for the simple reason that Her Majesty’s Customs & Excise are collecting Her Majesty’s Revenue.

Sure, there are elements of offshore fund structures which don’t bear much scrutiny. The main tax saving they achieve is on VAT on management fees, and they may be exploiting lax regulatory standards applied outside the major economies, but the funds are only open to professional investors writing seven-figure cheques, and you might think they should be able to look after themselves.

Beside this, there is of course a huge industry in hiding income or capital from the eyes of the taxman, or laundering proceeds of crime, but can we focus on that please?