An umbrella in the sun

Offshore benefits may have been restricted, but new products fill the gap.

The idea of going offshore for investment used to have a "naughty but nice" feel about it, with the promise of gains growing tax-free out of sight of the Inland Revenue. However, such an impression is a bit old- fashioned and certainly misleading.

UK residents for tax purposes nowadays have to declare the income and capital gains to the Inland Revenue. There is virtually no way out of this because loopholes in UK legislation on offshore investments have been closed remorselessly in the past two decades in an effort to combat tax evasion. But there are still some advantages to be had from some offshore investments.

The 1984 budget introduced a change to the tax regime governing investment in offshore funds that distribute at least 85 per cent of their income to investors as either dividends, shares or units. The rest of the gains on the fund are treated as capital for tax purposes. These can be offset against the investor's annual capital gains tax allowances, and have indexation relief applied to them.

Investors in funds that do not have this distributor status are called roll-up or accumulation funds. They find that all gains are taxed as income at the highest rate to which the investor is liable when the fund is encashed.

This only temporarily dented the market for offshore investment, however, for many UK investors saw benefits in offshore fund structures called umbrella funds.

An umbrella fund is an offshore fund which is managed in a similar way to a UK authorised unit trust but offers a much wider spread of assets between which the investor can switch. The investment options will cover equity, fixed-interest and currency funds, sometimes with further specifications as to risk, geographical sector and income or growth requirements.

Since the May 1989 budget profits made when holdings are switched between sub-funds in an umbrella count as disposals, and are thus liable to capital gains tax.

But, despite these blows to their appeal to UK-based investors, both distributor and roll-up funds still present tax avoidance and investment advantages. With both types of fund, the investor can time the encashment of his fund to coincide with retirement and perhaps a lower income tax rate, or even with retirement abroad, for example.

Some still believe that there are advantages for UK innovators in looking at offshore funds. One is Nigel Parker, director of Jersey-based Gartmore Fund Managers International, which manages the Gartmore Capital strategy umbrella fund. This has distributor status, and is currently worth pounds 489m. There are 227 sub-funds in the umbrella, including 14 equity funds, five bond funds and eight money funds. Minimum investment is US$2,500 or the equivalent, and initial charges are 5 per cent for equity funds, 3 per cent for bonds and nil for money funds; annual charges are 1.5 per cent (equity), 3 per cent (bond) and 1 per cent (money).

Mr Parker says: "The reason to look to offshore umbrellas is because of the flexibility rather than the tax advantages. Because of the changes to the tax regime for a UK resident it is not really a tax-driven investment at all. However, there are advantages compared with UK-based unit trusts.

"For instance, where you switch between UK funds, you have to take into account the charge incurred because of the bid-to-offer spread. However, with Capital Strategy, sub-funds all are single-priced on a net asset value basis so there are no conversion fees and we do the foreign exchange for you.

"In the UK all funds are denominated in sterling, even a US or Japanese fund, but here such funds are denominated in dollars and yen. This means the manager does not incur the currency conversion charges when purchasing the underlying assets. I would also point to an ease of asset allocation provided by the ability to switch free between funds as an asset in an increasingly volatile world."

Perpetual, a fund management group with a fine performance record, offers offshore unit trust funds with distributor status from its Jersey base, but they are not part of an umbrella structure. Roger Cornick, Perpetual's marketing director, sums up the reasons for UK innovators looking at offshore funds as: "Ultimately, it depends on the personal circumstances of an investor, ie where they want to be when they redeem the funds because that is when the tax charge will come. It may also be the case that the UK investor may take a view on currency and decide to move all his assets to a fund denominated in a currency other than sterling. It may also be the case that an investor feels a change of government is in prospect and that taxation rates may rise, in which case they may look to an offshore roll-up fund to shield investment from the UK government."

Investors seeking details of both distributor and roll-up offshore funds can find information in such magazines as the International, Resident Abroad, What Investment and Money Management, as well as companies such as MicroPal (Tel: 0181-741 4100).