Offshore Investments

There are numerous advantages in using offshore funds, not to mention the attractive tax sweeteners on offer – but what are they? And when should you consider using offshore funds?

Lower taxes on fund build-up

Offshore funds are funds established outside the UK, traditionally in low tax areas such as the Channel Islands and the Isle of Man. With the European Union’s encouragement of cross border financial services, they have become more prominent in recent years with new EU tax havens such as Luxembourg and Dublin becoming established.

Like their UK-based counterparts, offshore funds are a form of collective investment, i.e. they provide a method of investing in a wide range of companies or stocks within one fund. They invest in the same types of underlying investments as UK funds, primarily equities and fixed-interest investments. In addition, there are fewer restrictions on their investment powers.

Flexible structures

Given the number of offshore centres, all of which have their own legislation, there is no set structure for offshore funds. Broadly, however, they are structured in much the same way as a UK unit trust, or an open-ended investment company (OEIC).

Fund categories

The Inland Revenue classifies offshore funds into two categories for the purposes of UK taxation – Distributor and Non-distributor Funds. Distributor fund status is generally given to an offshore fund that pays out most of its net income to investors (at least 85% after charges and other expenses) with income and capital gains being taxed on an arising basis. Non-distributor status is effectively an offshore fund that accumulates income within the fund and pays no dividends. For such a fund, gains arising on the disposal of units/shares are subject to income tax rather than CGT.

Residency and tax

For investors who are non-UK tax resident, all offshore income and gains will be free of UK tax. They may, however, be taxed in their country of residence.

UK resident but non-UK domiciled investors will only be taxed in the UK on any offshore income or gains, which they bring into the UK. Income and gains would have to be declared and may be subject to tax depending on an individuals circumstances.

with profit