Sunnier climes

TAX PLANNING: Make your investment go further - sending it abroad in an offshore fund can help to defer tax payments

The offshore managed-fund industry has grown by leaps and bounds recently, but sophisticated investors have long realised the advantages of offshore funds. Sometimes called mutual funds, they appeal to two different types of investor. Firstly, they provide familiar investment expertise for expatriates used to British unit trusts and a home for the investments of people who knew that they were going to reside abroad either for work or in retirement.

Secondly, because many of the offshore unit trusts are "roll up" funds (accumulator funds), they retain the income in the fund paying no dividends and so offer distinct tax deferral advantages. The funds themselves, even if they invest in UK equities, are only liable to the tax regime of their offshore home. This frees them from UK income and capital gains taxes.

Invest offshore and you pay no tax until you cash in. When you do cash in, however, you are liable to income tax on the gains - you cannot take advantage of the UK capital gains tax allowances nor the indexation provisions.

What you can do, of course, is to control the timing and often the amount of tax you have to pay. If a former top-rate income tax-paying investor cashes in after his income has fallen, usually after retirement, he will have deferred his tax liability.

Luxembourg, with more than 13,000 fund management companies, is the most popular home for offshore unit trusts. Other favourite locations are Jersey, with more than 300 registered collective funds, Guernsey, the Isle of Man (home to over 14 offshore branches of UK insurance companies) and Dublin. All the latter offshore locations offer shareholder protection similar to mainland UK, with at least compensation up to pounds 48,000 if their unit trust becomes insolvent.

Offshore operations can offer distinct investment advantages, being less restricted in their investments than authorised unit trusts. They can invest in property - something a UK unit trust cannot do. If the fund manager likes a particular share or sector anywhere in the world, he can invest what he likes in it.

The choice of offshore funds is vast. Some are very exotic and high risk. Not so long ago, a 500 Plus fund was offered to those prepared to risk a minimum of $500,000 to invest in Latin America, with the warning that while investors could make considerable gains, the whole investment could be lost.

Most offshore funds have less exotic and more mundane investment aims. A large number invest in the UK, and have produced good returns. Over the last three years, the top performing UK Growth Fund of Scottish Value has grown by nearly 130 per cent, while Jupiter Tyndall GF British Lion has gone up by more than 80 per cent. The average offshore UK growth fund has risen some 35 per cent in this period, compared with 23 per cent growth for their mainland competitors.

Offshore funds exist for those investors who wish to defer tax. If you have significant capital to invest, you could well be advised to look at them as part of an overall investment and tax planning strategy

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown


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