Treasure islands

You don't have to be super-rich to benefit from offshore investments

Offshore investing tends to conjure up images of anonymous Swiss bank accounts or sun-soaked tax havens offering a range of funds suitable only for very wealthy expatriates.

Offshore investing tends to conjure up images of anonymous Swiss bank accounts or sun-soaked tax havens offering a range of funds suitable only for very wealthy expatriates.

Offshore funds, generally in the form of unit trusts or investment companies, are resident outside the UK, so profits and gains are not subject to UK tax or controls. This means offshore funds are ideal for those living outside the UK, whether permanently or temporarily, because they are not subject to UK income tax.

Offshore funds are also being increasingly used by UK residents who want to minimise their tax by sheltering income offshore until their tax rate drops, either on retirement or if they plan to move abroad.

After all, tax-free investment opportunities in the UK are limited. If you have cash to invest and have already used up your £7,000 annual tax-free individual savings account (ISA) allowance, there aren't many other options open to you, apart from National Savings Certificates, which don't offer exciting rates of growth.

With this in mind, offshore funds are beginning to target UK residents. As we accumulate more wealth than ever before, the need to invest it tax-efficiently is paramount. With some 6.5 million people in the UK with assets of between £100,000 and £200,000 (excluding property) and a further 3 million with over £200,000, it is no wonder offshore fund managers are eyeing the UK market.

Scottish Life International (SLI) has just launched a new Isle of Man-registered Protected Investment Management Service (PIMS), designed to shelter investors from tax and stock market volatility. PIMS is a portfolio service that allows UK residents to invest in a full range of funds from leading investment houses, within a tax-efficient wrapper.

"PIMS offers a good creative approach with tax efficiency, investment choice and flexibility, capital protection and administrative streamlining," says Brian Aitchison, managing director of independent financial adviser (IFA) Aitchison & Colegrave Group, which is exclusively selling PIMS, before it is rolled out to IFAs across the country.

PIMS acts as an umbrella for investment in unit trusts, investment trusts, open-ended investment companies (OEICS), long-term cash deposits and offshore funds. Investors are not liable for capital gains tax and can withdraw 5 per cent of their original investment as income. PIMS also offers protection for your capital against stock market volatility should you die.

"You've been able to insure your life, car, home and holidays for years, so why not your capital?" asks John Allison, marketing director at SLI. "PIMS offers this cover for the first time, and it's not expensive."

When choosing an offshore fund, be sure you are happy with the regulatory regime. Some offshore centres do not carry out such rigorous checks as the FSA does in the UK, which is why the Channel Islands and Luxembourg, which have investor compensation schemes, are so popular with UK investors.

The good news is that offshore funds have to be authorised by the FSA before they can be marketed in the UK and have to be registered in an area with "designated territory status", i.e. investor protection that equates broadly to the UK's.

Investors should note that management charges can be significantly higher than those for onshore funds and may be less transparent. Exchange gains or losses may also occur on conversion into sterling.

* Contacts: Aitchison & Colegrave, 0141 332 5961; SLI, 0131 456 6000.

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