The Brit Haven Hit List: Why London’s Opinion Matters

Last week, the faltering British Labour Party suffered its worst defeat in 40 years in local council elections nationwide. They even lost the mayor’s office in London. That’s the first time in half a century.

Indeed, after 10 years in power, it looks as if PM Gordon Brown’s "New Labour" has gotten very old. And this past week’s defeat could mean a resounding victory for the Conservative Party during parliamentary elections in 2010.

Why is Labour going down? U.K. political experts are pointing to Labour’s high tax policies. These sky-high taxes have driven British corporations to business tax havens in nearby Ireland and Switzerland. Also, individual citizens who can afford it have picked up and moved their residence to Monaco or Andorra.

Labour also just slapped a US$60,000 annual tax on "non-domiciled" foreigners living in the U.K. – a radical reversal of their long-standing tax-free status.

High-Taxes May Cost Labour Power

The Labour party has aimed their high tax attack squarely at Brits’ offshore investments, banking, trusts and asset protection plans. U.K. banks have been forced to reveal accounts of all U.K. residents with offshore financial activity.

Tax collectors have also been hounding those named. Indeed, her Majesty’s Customs and Revenue, (aping the U.S. IRS), now seems to assume that any Brit with offshore financial activity is evading taxes.

Before the election rout last week, the House of Commons Treasury Select Committee announced one more major inquiry into tax havens. Committee MPs said they wanted to look at "offshore financial centers." They wanted to investigate whether these jurisdictions "threaten financial stability," transparency for U.K. tax purposes and their impact on the U.K. tax collections, among other things. The committee wants written evidence submitted by June 19.

Judging from the committee’s list of slanted questions released to the media, they could have been drafted by kooky groups such as the U.K.’s Tax Justice Network or the sanctimonious preachers at Oxfam.

This Isn’t Anything New

So here we go again.

Since the Labour Party came to power in 1997, this party has severely restricted the financial freedoms of its British offshore colonies (officially called "overseas territories") and of its Crown dependencies – even though they are some of the world’s leading tax and asset protection havens. The irony is that for decades British governments promoted these offshore havens, encouraging their growth and expansion.

In a reversal of traditional policy, since 1997 Labour has forced "reforms" on the 13 U.K. overseas territories. That list includes the Channel Islands (Jersey, Guernsey), the Isle of Man, the Cayman Islands, Bermuda, the Turks and Caicos Islands, the British Virgin Islands, and Anguilla.

Labour imposed new "international standards" against money laundering. The party also demanded their financial systems become more "transparent," and cooperate with law enforcement and tax authorities. London threatened unilaterally to change laws within the colonies using the arcane royal "Orders in Council" signed by the Queen. In effect, these new laws would impose the Labour government’s policies without appeal on any overseas territory.

British Havens Play Ball

For years, the London authorities have wanted an end to financial privacy. They want total bank and investment account surveillance. And strangely, authorities have tried to curb the financial freedoms that allowed U.K. offshore jurisdictions to prosper as tax and asset protection havens.

This included making foreign tax evasion a criminal offense. The changes also forced disclosure of previously confidential information about true ownership of international business corporations registered there.

In addition, London and the European Union also imposed the EU savings tax directive on the British islands. The directive demands either complete exchange of tax information with other EU governments, or a 35% withholding tax on EU nationals.

While these changes mainly affected U.K. residents, the Labour party also targeted U.S. persons for a very different approach. As a result, the Isle of Man, Jersey and Guernsey each signed Tax Information Exchange Agreements (TIEAs) with the United States (as have most of the U.K. overseas territories, including the Cayman Islands and Bermuda).

What London did not expect were the major "clean house" policy changes these U.K. offshore havens adopted on their own. They came out fighting. These havens adopted stricter anti-money laundering, tough know-your-customer rules and much stronger criminal investigations aimed at financial fraud and terrorist cash. Indeed these jurisdictions now have much tougher laws and better law enforcement than the U.K. itself.

If You’re a Normal Investor Abroad – This Shouldn’t Affect You

I have serious concerns about the Labour government’s continued crackdown on all overseas territories. But these islands still offer a great deal of financial services that you can invest in without worrying about U.K. government intervention.

To the average offshore investor, all this recent U.K. history means is less financial privacy. For those trying to hide funds abroad, it means, as it should, an increased probability of discovery and prosecution.

The danger lies in a middle area in which foreign tax collectors try to conduct "fishing expeditions." They’re looking for possible tax evasion simply because their citizens are active offshore financially. The TIEAs with the United States may lend themselves to just this sort of tax overreaching. However, this depends on how the island governments administer the TIEA terms, although each has denied that they will allow IRS fishing expeditions.

Because these islands are under ultimate control of the United Kingdom, they lack the greater privacy and freedom to act that independent tax havens, such as Panama, Singapore, Hong Kong or even Switzerland, enjoy.

Five years ago I wrote: "As long as the British Labour government continues in power, you can expect it will continue its unrelenting efforts to curb tax and asset havens, including those under its colonial domination."

So this latest announcement from the House of Commons Committee is just another skirmish in a decade-long war against British financial privacy and freedom.

And if you are interested in using these jurisdictions as a base of offshore activity, you may be wise to wait for the outcome of the British parliamentary elections due within the next two years.

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