What Are Offshore Investments?
‘Offshore' can mean different things to different people. For residents in the UK, when dealing in the context offshore investments, it generally means holding investments outside the United Kingdom mainland.
There are various offshore investment mediums available from simple lower risk deposit accounts to complex high-risk specialist funds. Many are generally subject to fewer investment restrictions which may allow them to invest in higher risk areas such as commodities, futures and options.
Offshore funds and bonds are investment vehicles established outside the UK, generally in low tax jurisdictions, such as the Isle of Man. In recent years, the European Union's encouragement of cross-border financial marketing has resulted in new tax havens such as Ireland becoming established.
Offshore funds and bonds are forms of collective investment. Under these types of arrangements, individual investors' assets are combined together in a centrally managed fund investing in equities and bonds, which is then held on a collective basis overseas.
What Type of Offshore Investments Are Available?
Deposit accounts - cash based accounts generally paying interest gross.
Investment bonds - Often bonds offer a wide variety of fund choices allowing investors to switch from fund to fund. Switching within an existing bond does not give rise to any tax implications.
Open Ended Investment Companies (OEICs) - the majority of offshore funds are structured as OEICs. Their legal framework is that of a company with an ‘open-ended' capital structure. This means that the company's share capital and assets can fluctuate to reflect the effect of sales and purchases together with investment growth or losses on the fund.
Unit trusts - behave in a similar fashion to OEICs although their legal framework is that of a trust. The assets are held for investors by trustees and the money within the fund is invested by a fund manager.
Undertakings for Collective Investments in Transferable Securities (UCITS) - were introduced by the European Union in order to promote the cross-border marketing of collective investments. UCITS also have an open-ended structure with assets held on behalf of investors by a trustee or depositary, independent of the fund manager.
Distributor funds - distribute the majority of their income to the investor. Investors may be subject to income tax on this income. Any gains will be subject to capital gains tax.
Non-distributor funds - do not distribute the income and it is accumulated within the fund. These are known as ‘gross roll-up funds' as the income is added back to capital without any tax paid. This may appear attractive to some investors but when the funds are brought back to certain countries all growth is subject to income tax for the period that the investment was held offshore and the investor was resident in their now domicile country.
What Facilities Are in Place to Look After Consumers?
Many of the more established offshore ‘tax havens' have very good investor protection. As is always the case, investors should seek advice prior to making any investments.
Are There Any Benefits in Investing Offshore?
Many myths surround the perceived tax advantages of offshore funds. This generally stems from the fact that offshore funds are held in ‘tax havens' or territories with low rates of tax. Despite this for example UK residents are still subject to have the growth or income on offshore investments taxed when they bring those funds back to the UK.
Investors resident overseas looking to retire overseas may well find offshore investments of benefit. The low taxation environment and the fact that they will not suffer tax on repatriation could be attractive. Tax havens in the Channel Islands and Isle of Man tend to have regulatory standards similar to those in the UK which should also give them some protection.
