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 holds your money 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.

It’s not always easy to identify an offshore fund at first glance – for instance, an investment company may be physically based in the UK, but may run funds that are registered elsewhere.

Why invest offshore?

If a fund is registered outside the UK, it may be subject to different or lighter regulation than a UK fund. It may also have access to a wider variety of investments and financial products.

This can create more opportunities for generating greater returns – although at the same time it may expose your money to higher risk.

Furthermore, UK-based funds are often taxed at the source, whereas some offshore funds are not.

This means that these offshore funds reinvest growth without paying tax, which can improve their rate of return.

Although this may not help you directly as a UK-based investor (as you are still taxed the same on any income), this arrangement can save money for the fund company itself, which may pass on some of the savings in bigger returns and/or lower management fees.

If you yourself are based outside the UK, or only live here for part of the time, there can be other benefits to holding offshore investments.

For instance, if the country where you are staying has poor financial regulation, you may prefer investment funds based in more regulated jurisdictions.

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
• Time deposit 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.

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 low-regulation environment – but equally, they may lose value just as sharply.

Regulation works both ways, in that while it may result in slower growth, it also offers more safeguards to you, the investor.

When you invest with a fund that’s registered outside the UK, you forfeit the protection offered by domestic regulations in favour of a different environment.

Before you do anything else, do your research: how is the regulation different here? What are the potential benefits of these differences, and what are the risks? And how much protection do I have if something goes wrong?

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

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

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!