The offshore issue

Ian Muirhead

The rule of thumb for UK residents considering investing offshore, as opposed to investing overseas through UK collective investment vehicles, is the same as that for investing in investment bonds: don't, except in a small number of specific situations.

The reason for this caution in relation to investment bonds is that they are usually less tax-efficient and bear higher charges than alternative investment media.

With offshore investments the charges can be higher still, and in addition UK investors suffer from an unfavourable tax regime on realisation coupled with a

reduced level of security compared with investments which are regulated by the UK authorities.

The main advantage of offshore investments is that they enjoy the gross roll-up of income and gains. Most are managed in territories which benefit from very low or nil tax rates, such as the Channel Islands, Luxembourg, the Isle of Man and Dublin. And it has been suggested that Edinburgh might be added to this list in the event of devolution. However, even gross roll-up has its drawbacks in that no double taxation relief is available, which means that offshore investments are better suited to investment in bonds and currencies than in equities.

The choice of offshore

vehicles is not dissimilar to that available onshore: deposits; offshore insurance bonds; and offshore funds, including money funds, which may take the form of a unit trust or an investment company.

There was a rash of interest in offshore building society accounts following the introduction of independent taxation for spouses, but most non-taxpayers now prefer to receive their gross interest onshore, where they enjoy convenience, security and the possibility of demutualisation benefits.

Offshore insurance bonds are subject to higher rate tax on realisation, and are likely on balance only to offer advantages over on-shore bonds when there is a possibility that this tax might be avoided, for example when the bond is written subject to a trust which permits the trustees to delay encashment until the year after the death of the settlor.

Offshore funds will be

appropriate for clients who are non-resident, or expect to become so, and offer a convenient vehicle for more sophisticated UK residents who wish to obtain exposure to bond and currency markets.

In addition, accumulator money funds can provide a tax-efficient way of rolling up income until such time as the investor may become subject to a lower rate of UK personal tax or, in the case of corporate investors, until such time as the company might register a tax loss.

In all these situations, however, the onus is on the adviser to justify the use of what for UK residents can only be described as a more esoteric approach to investment.

Ian Muirhead is managing director of Solicitors for Independent Financial Advice.