Offshore, but not off limits

There's nothing illegal about moving funds abroad - and you don't have to be rich, says Ken Welsby
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The Independent Online
Forget all thoughts of men in long raincoats lugging bags of cash across frontiers, or secret accounts in Zurich accessible only to the holders of the mysterious password. Investing offshore is as simple, and legitimate, as any other kind of investment in managed funds - and one which is increasingly popular among a wide range of investors who want to reduce or defer their tax liability.

Read those last few words again: reduce or defer tax liability. Not escape it altogether: offshore investment is not about tax avoidance, or looking for loopholes in the law, but simply one way of cutting your tax bill.

Virtually all the leading names in UK fund management operate offshore funds. Fidelity, Gartmore, Mercury and Guinness Flight, for example, all have strong track records and solid financial backing, and manage assets counted in billions. Although the funds are based in financial centres such as Luxembourg or Dublin - and thus are not regulated by the UK authorities - the risk in most cases will not differ much from funds based in London or Edinburgh which invest in similar assets.

As with any investment, you need to weigh the risks and rewards: funds that invest in corporate bonds, for example, will be safer than those investing in emerging markets - but the prospects will be lower. Funds that invest in futures, commodities or the world's smaller and more obscure stock markets - in which UK funds would not be allowed to invest - may offer very tempting returns, but they are risky; if you cannot afford to lose most or even all of the money you put in, stay well away.

Many offshore funds are known as roll-ups, and that is the key to the way they work. You buy shares in the fund, but do not receive any dividends. All the earnings - both income and growth - are accumulated, or rolled up, in the fund year after year until you sell your shares. That is the point at which you have to pay tax, which will be charged at your marginal rate.

One of the most common uses of roll-up funds is for people approaching retirement, explains Stewart Aylward, financial planning manager at accountants Grant Thornton. He says: "You might be paying 40 per cent tax now, but in retirement will be back to the basic rate - and might want to put off the income until then.

"Non-working spouses of higher-rate taxpayers often find roll-ups attractive, since they can use their personal allowance to reduce the tax bill when shares are sold. In similar fashion you might also think about using a roll-up to fund higher education for your children. On present trends, whoever wins the next election, students entering university in the early years of the next century will face far bigger bills than they do at present."

Even today, says Philip Saunders, a director of Guinness Flight, children of parents with a joint income of pounds 32,000 a year could well not receive any grant. "An investment made now, designated in the child's name, will grow tax-free until he or she reaches 18 and realises the investment. The child is likely to have little or no taxable income so any gains can be set against unused tax reliefs."

While roll-up funds pay no dividend, another type of offshore investment - the distributor fund - must distribute at least 85 per cent of its income each year. It pays gross, so you must declare the income on your tax return, but you can have the use of the full amount for more than a year before paying the taxman his share.

Traditionally, offshore funds have been regarded as vehicles for wealthy individuals but a recent addition to the lists may have wider appeal - for example, to those seeking a home for funds from maturing Tessas. This is the Murray Financials Bond Fund, from Murray Johnstone. It is a roll- up that invests in short-dated bonds issued by financial institutions and government bodies. Investors can defer income indefinitely, or draw it when needed by selling part of their holdings.

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