Take 5: Investing in offshore funds
More on Tax Efficient Investments
Say the phrase ‘offshore fund’ to some people and thoughts of lightly regulated investment vehicles based in the Caribbean may come to mind. In reality, Ireland and Luxembourg are two of the largest markets for offshore funds and their regulations are similar to the UK. Nevertheless, there are still many things to consider when investing across borders.
1. Make sure the fund is suitable. Whether a fund is onshore or offshore, it is always important to ensure it is the right fit for the investor. Just because a fund is based outside the UK is no reason to rule it out, but choosing it simply because it is offshore is no good reason either. Like any fund, it is important to make sure it fits the right investment strategy for the client.
2. If investing beyond Europe, buyer beware. There may be a time when a fund outside the IMA universe, and outside the regulatory reaches of Europe, is desired. While not all offshore funds can be tarred with the same brush, the regulator regimes in places like the Cayman Islands and British Virgin Islands are very different from those in Europe. In many cases the funds based here are for sophisticated (high-net-worth) or institutional investors.
3. Understand there may be no tax advantages. It is often believed offshore funds exist as a way to mitigate taxation, but for investors based in the UK this is not actually the case. When it comes to offshore funds in the IMA sectors in particular, they have little or no tax benefits compared to UK funds. The investor will still have to pay tax on income and capital gains no matter where the fund is based.
4. Know how income is distributed. Depending where the fund is domiciled, the way the fund is taxed and how this affects the investor may be different. Offshore funds in the IMA sectors must have reporting fund status, which means they need to report to investors annually on 100 per cent of their profit. The fund can choose to pay out all or some of the income to investors and reinvest whatever might remain. The fund must tell an investor what he has earned so this can then be reported to HMRC.
5. Be careful of the CGT treatment on disposal. Believe it or not, selling an offshore fund can be quite different from a UK fund, particularly if it does not pay out all of its relevant income to the investor. If this is just reported to the investor, rather than paid in full, when the fund is sold it means part of the value will be attributable to income on which tax has already been paid and part will be attributable to capital growth.
More top tips from Money Management