Introduction to offshore investments

Investments might be made via funds, bonds, savings account or various collective investment vehicles domiciled overseas.

When we talk about offshore in the UK, popular destinations for offshore investments have typically been crown dependencies such as the Channel Islands and the Isle of Man, but there are many other popular places such as Ireland and Luxembourg.

Being based in these jurisdictions means that the investment is generally subject to a different, lower taxation regime and therefore can be a tax-efficient means of saving or investing.

Fund performance can be improved by being based offshore as they will not be subject to any UK tax on any of the underlying investments.

However it is not an entirely tax-free investment, as investors are taxed on gains arising from these funds.

The main attraction of offshore bonds is ‘gross roll-up’, a feature that allows the compound interest to deliver its long-term benefit. Rather than tax being taken each year, only when the bond is encashed is the investor then taxed at marginal income tax rates.

For funds it is similar. For those that meet disclosure requirements and are granted ‘reporting fund’ status by HM Revenue and Customs, 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.

In the past, poorly regulated offshore domiciles have been used for tax evasion and money laundering, notes Darius McDermott, managing director of Chelsea Financial Services.

However, he insists that these domiciles are now much better regulated and “allow legitimate investors to keep their tax burdens to a minimum”.

Tax is not the only concern, though.

Offshore centres can provide a diverse range of investment strategies that benefit from the advantages offered outside of an investor’s country of residence, says Simon Willoughby, head of proposition at Axa Wealth International.

The range of services offered offshore generally include fiduciary services for trusts, corporate services, banking and other financial services such as life insurance.

The regulatory requirements for offshore investments will depend on the jurisdiction in which the product is held and where the advice is given.

Rachael Griffin, head of technical marketing at Skandia, says this means an FCA authorised intermediary is able to advise a UK resident on investment into an offshore bond in, for example, the Isle of Man.

“An offshore product provider will generally, if marketing into a particular jurisdiction, have to comply with local ‘general good’ rules such as disclosure, cancellation and any commission restrictions.”