Tax havens seek eastern promise

The rocky islands that lie off France's northern shores are angling for the new rich of Asia, as clampdowns on offshore tax havens and tougher regulation threaten their traditional sources of income.

Jersey and its Channel Island neighbour Guernsey, which are British, have since the 1960s thrived off financial services sold to wealthy people attracted by low, or no, tax rates and high levels of banking secrecy. Aside from its French street names, Jersey's capital St Helier resembles a well-to-do English suburb, with the island's inhabitants earning an average annual salary of £31,000 compared with around £26,000 on the British mainland.

The jobs advertised in the windows of employment agencies - senior private banker, Japanese speaking trust administrator - speak volumes about the source of the islands' relative wealth.

But the finance industry, still reeling from the global banking crisis, is facing a challenge.

Bank deposits were down 25 per cent in Guernsey and 20 per cent in Jersey last year, while the value of investment funds in Guernsey was down eight per cent and more than four per cent lower in Jersey.

At the same time, an international crackdown on tax avoidance through offshore banking, attacks on banking secrecy and proposed European laws on alternative investment funds are forcing the islands to look elsewhere for future prosperity.

"Historically, we've just sat back and all the business has come to us," said Peter Niven, head of Guernsey Finance, a publicly funded body set up to promote the island's finance industry internationally.

"It's a different dynamic now. We have to be out there pleading our case," he said.

One serious worry is the threat to a burgeoning alternative private equity and hedge fund sector from proposed European Union restrictions.

The EU directive on Alternative Investment Fund Managers could exclude funds in the Channel islands, which are outside the union, from selling into Europe.

This could be a blow to private equity groups such as Terra Firma, based in Guernsey and run by Guy Hands who recently joined a growing colony of British tax exiles living on the island.

Both Jersey and Guernsey are responding by seeking new business in the fast-growing economies of Asia.

But the push to market the financial services of two micro states to the east is proving tough. Channel Island specialities such as trusts - assets held for protection by a separate legal entity - are difficult to sell to nations like the Chinese.

"Trusts are based on a fairly esoteric branch of British law. You have to question how comfortable a first generation Beijing entrepreneur will be with the idea of handing legal title of his assets to a foreigner on an island in the Channel," said Catherine Tillotson, head of research at Scorpio Partnership, a wealth management consultancy.

Alan Chick, a Guernsey trust professional, agrees.

"It's very difficult to persuade the Chinese to actually part with their funds. The Chinese don't understand (the trust) principle," said Mr Chick, chairman of Guernsey-based Richmond Fiduciary Group in a phone interview from Hong Kong.

Another possible growth area is to persuade more fund managers to relocate to the islands where their funds are registered, to escape higher UK taxes.

While the top tax rate in the UK is about to rise to 50 per cent, income tax on rich migrants to Jersey who qualify for residency through a tough vetting process is levied at 20 per cent on the first £1 million of earnings, 10 per cent on the next £500,000 and one per cent on the rest. Guernsey taxes income at a flat rate of 20 per cent. Neither island levies inheritance or capital gains tax.

The tax benefits need to be impressive, as in Guernsey, non-natives are limited to purchasing property from a pool of 1,700 homes designated "open market" and set aside for outsiders, costing at least twice as much as "local" housing.

"It's difficult to find your dream home on the open market," said Matthew Henry of Guernsey estate agents Swoffers. He expects open market prices to rise further and reports a growing number of enquiries from disgruntled UK taxpayers.