Offshore investment funds: what are they and why should you invest?

If you already have some experience of investing, you may have wondered about offshore investments.

Contrary to popular belief, holding money offshore is common practice and perfectly legitimate – indeed, if you have a pension fund then it’s likely that you already hold some offshore investments in it.

This kind of investing can sometimes play a useful role in a broader investment strategy, though it should be approached with care as it holds risks as well as potential advantages.

Here’s an introduction to offshore investments and the main things to bear in mind.

What does ‘offshore’ mean?

For a UK investor, an offshore investment is one that is legally registered outside the UK.

It may be a fund that invests in foreign companies, or equally it may invest in British companies but simply be registered abroad.

Offshore funds can apply to HMRC for reporting status. This affects the tax treatment of investments. 

Investments held in reporting funds are subject to capital gains tax on disposals, whereas gains in non-reporting funds are charged income tax.

Why invest offshore?

So, why invest offshore?

Here's a brief summary of some of the main advantages. 

Different regulation

If a fund is registered outside the UK, it may be subject to different regulation than a UK fund.

Investment opportunities

It may also have access to a wider variety of investments and financial products, creating opportunities for different investing strategies – although at the same time it may expose your money to higher risk.

Different tax regime for investment companies

UK-based funds are often taxed at the source, allowing offshore funds reinvest growth before tax is applied.

However, UK investors are still taxed on any income or gains.

Choice of investment jurisdictions and currency

If the country where you are staying has poor financial regulation or an unstable currency, you may prefer investment funds based in more stable jurisdictions.

Simplicity if you move between jurisdictions

If you move between different jurisdictions, it may be simpler to keep your investments in one place.

What are the different types of offshore investment?

Offshore investments can include various types of assets and financial products.

Here are some of the different offshore investment options available:

• Stocks

• Bonds

• Saving accounts

• Fixed-rate accounts

• Mutual funds

• Real estate

• Forex trading

• Precious metals

• Private equity

• Hedge funds

A financial adviser can help you choose the best option for your investment goals.

Can offshore investments save me tax?

Many people assume that investing offshore is about paying less tax.

In reality it doesn’t work like that – the tax you pay in the UK is based on your own residential status here, not where the income originates.

You will still need to pay UK income tax on your dividends from foreign shares, and UK capital gains tax on any growth.  

However, the UK has ‘double taxation’ treaties with many countries, which should usually prevent you being also taxed in the country where the fund is based.

Ask your adviser about this to ensure you don’t get taxed twice.

There may be an advantage if the investment company itself enjoys a favourable tax status (see above), as then your investments may benefit indirectly from this if the company chooses to pass on some of its savings to its customers.

The tax you pay also depends on the reporting status of the offshore fund.

Here’s a quick summary.

What are the disadvantages of offshore investments?

A good rule of thumb in investing is that risk and growth go hand-in-hand. That is, your investments may grow faster in a differently-regulated environment – but equally, they may lose value just as sharply.

Here’s a summary of the main disadvantages of investing in an offshore investment fund.

Different regulation

Different regulations may expose you to unfamiliar risks and offer less protection for your investments.

Complexity and varying risks

The risk involved in any offshore fund depends largely on the companies it invests in and on the country where it is registered.

Some jurisdictions have unstable currencies or regimes, which may affect your investments.

Tax treatment

The tax treatment of offshore investment funds is more complex than UK investments.

UK investors will still be subject to Capital gains tax and Income tax, so make sure you do your research.

What should you consider before investing in offshore investment funds?

Before you make a decision on whether to invest in offshore investment funds, here are some things to research and consider.

Regulation

How is the regulation different here? What are the potential benefits, and what are the risks?

And how much protection do I have if something goes wrong?

Protection

Consider, too, how well your funds may be protected.

In the mainland UK, for example, under the Financial Services Compensation Scheme (FSCS), up to £85,000 deposit, per UK-regulated financial institution, is protected by the government. 

However, under the Jersey Bank Depositor Compensation Scheme, for example, only eligible deposits of up to £50,000 are protected.

Reputation

Consider the reputation of the fund and its management, and how it has performed in prior years.

Remember, past performance is no guide to future returns, but if a fund has been very volatile in the past, don’t be surprised if it continues to be so in the future.

The risk involved in any offshore fund depends largely on the companies it invests in and on the country where it is registered. In other words, research each one on its own merits before making any decisions.

Fees

Also, as with any other investments, consider the fees charged by the investment fund, such as management fees or annual charges, and how much these may eat into any profits you might make. 

Some offshore investments may charge a fixed fee or a percentage of your funds under management.

Tax

Check the tax treatment of any offshore investment funds you’re considering.

UK investors are still liable for Capital gains tax and Income tax, but the precise tax treatment depends on the fund's tax status.

Is offshore investing right for me?

Offshore investing is more common than you might think – many pension funds and investment funds have some offshore elements in them.

Sometimes a portfolio made of largely dependable assets can be ‘spiced up’ a little by adding a small proportion of higher-risk offshore funds.

These can generate useful growth, while the damage from losses can be limited because the slice is so small.

As always when taking on a higher level of risk, know your limits.

Talk to your adviser about your own level of risk tolerance and how much (if any) offshore investments you want to include in your portfolio. Find out how a wealth manager can help.

If you found this article helpful, you might also find our article on how to spot investment scams informative, too!