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Home > Investments > Tax Efficient Investments

From Adviser Guide: Offshore Investments

Q. What are offshore investments?

Offshore investments take a variety of forms, all of which are designed to offer tax advantages.

By Ashley Wassall | Published Aug 02, 2012 | comments

Put simply, an offshore investment is any fund, bond, savings account or other collective investment vehicle that is domiciled outside of the UK.

Such vehicles are typically resident in so-called ‘tax havens’, that is jurisdictions that have a lower rate tax - often significantly so - than in the UK and thus can offer substantial benefits to investors.

In many cases offshore investments marketed to UK investors are based in former British colonies or crown dependencies, such as the Isle of Man, or in established financial centres that offer lower rates of taxation, such a Luxembourg.

An offshore funds is any type of fund that is resident outside the United Kingdom or established under foreign law that would constitute a collective investment scheme for the purposes of the Financial Services and Markets Act 2000 (FSMA).

According to a spokesperson for the Investment Management Association, all offshore funds must be authorised in their home country and comply with European product legislation.

Offshore funds do not pay UK tax on any of the underlying investments, which can help to boost the performance of the funds, but investors are taxed on gains arising from these funds in a similar way as with onshore funds, subject to the status of the fund.

For funds with ‘reporting fund’ status, granted by HM Revenue and Customs if the fund meets certain disclosure requirements in terms of reporting income, gains from disposals are taxed at capital gains rates while income is taxed at marginal rates. Gains from disposals from funds without this status are treated as income.

Offshore bonds are similarly resident outside of the UK and offer investors the opportunity to accrue gains free of UK tax until the bond is encashed, at which point the investor will pay tax at marginal income tax rates. This gross roll-up feature allows gains to accrue on capital that would otherwise have been lost in ongoing taxation in an onshore product.

According to Neil Chadwick, technical manager at Royal London 360, for UK tax purposes an of shore single premium investment bond is a non-qualifying policy which can be written on either a life (whole of life) assurance or a capital redemption basis.

Where a policy is written on a life assurance basis, the policy will come to the end on the death of the sole or last surviving life assured. The policy can be surrendered at any time but may be subject to early surrender fees.

Where a policy is written on a capital redemption basis, it has a fixed term and a guaranteed value at the end of that term. The policy can also be surrendered at any time subject to any early surrender fees.

Many platforms now offer offshore bond wrappers, into which a range of funds or portfolio of assets can be placed.

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