YOUR MONEY: Hidden rocks offshore

Extra charges for investing in tax havens can drastically reduce returns

THE problems of investing offshore - perhaps to try to shield money from the taxman - are underlined by a survey that reveals such investment can cost five times more than the stated management fee.

Offshore investment funds - in effect unit trusts based in such tax havens as the Channel Islands or Luxembourg - can consequently be much more expensive than at first sight, making cost comparisons with equivalent unit and investment trusts or even between offshore funds potentially "grossly misleading", according to Richard Timberlake of the London-based Timberlake & Company, who compiled the survey.

In addition, he says there are few legal tax advantages in investing in offshore funds, and tax evasion can be caught easily.

Offshore funds may carry significant "hidden extra" charges that can drastically reduce investment returns. Typically extras nearly double the quoted annual management fee and are higher than for most other important types of investment. Funds with high charges tend not to justify them with better performance.

"[The extra charges] can be a hell of a handicap. Going round the [investment] racetrack they add of lot of extra weight," says Mr Timberlake. He also part-runs a unit trust company, Portfolio, which invests wholly in other investment funds, including those based offshore.

In some cases, offshore investment funds can appear to carry lower charges than equivalent unit trusts. But the extra charges typically double the quoted fee to a total of more than 2 per cent a year of the value of your investment, creating that much bigger a drag on your investment's growth.

Unit and investment trusts also carry extra charges - but smaller - and in total will normally charge less than 2 per cent a year.

Mr Timberlake says that investors should particularly beware offshore funds that have been launch- ed recently or have less than $10m (pounds 6.5m) under management. Fixed costs on these funds tend to make their overall level of charges a higher percentage of the investment.

Investors considering an offshore fund should ask any management company what a fund's "total expense ratio" is. This includes the stated annual fee plus the hidden extras.

Most companies should be able to provide this TER figure even though they do not publish it. And regulators, if genuinely interested in investor protection, should insist on funds publishing the figures in their reports and accounts, he says. "Anything over 2.5 per cent should send the red lights flashing."

Lower-charging offshore funds include those of Morgan Grenfell, Rothschild and Lazard, and Guinness Flight's funds investing in shares (but not those investing in bonds). Among the higher-charging are Fidelity, Hypo Foreign & Colonial, Barclays, Midland, Sun Life and Templeton. The survey, however, notes the huge variance incharges. Some funds can even be cheaper than equivalent unit trusts. And, Mr Timberlake says, higher charges may be justified - for example for specialist emergxing market funds

In addition, he notes that money put offshore simply to evade tax can be just as easily caught offshore as it would be if kept in mainland UK. The Inland Revenue could simply demand to see the records of the companies managing the money, he says. "If the taxman was looking for cheats, they would look offshore first."

He says the tax benefits of going offshore for most investors are "illusory". The main benefit is only cash flow - income is paid gross but it is still liable for income tax.

Most investors looking for tax shelters should stick to such mainstream vehicles as PEPs or Tessas, where all returns are tax-free subject to certain conditions.

Start your day with The Independent, sign up for daily news emails
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine
Letterman's final Late Show: Laughter, but no tears, as David takes his bow after 33 years

Laughter, but no tears, as Letterman takes his bow after 33 years

Veteran talkshow host steps down to plaudits from four presidents
Ivor Novello Awards 2015: Hozier wins with anti-Catholic song 'Take Me To Church' as John Whittingdale leads praise for Black Sabbath

Hozier's 'blasphemous' song takes Novello award

Singer joins Ed Sheeran and Clean Bandit in celebration of the best in British and Irish music
Tequila gold rush: The spirit has gone from a cheap shot to a multi-billion pound product

Join the tequila gold rush

The spirit has gone from a cheap shot to a multi-billion pound product
12 best statement wallpapers

12 best statement wallpapers

Make an impact and transform a room with a conversation-starting pattern
Paul Scholes column: Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?

Paul Scholes column

Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?