Are offshore investments only for tax dodgers?

Jun 13, 2022

Offshore investments come with something of a reputation – some of it fair, and some not so much. 

So, let’s take a look at what they actually are, how they can be used legitimately and when they cross the line into tax avoidance.

What are offshore investments?

Simply put, an offshore investment is one that is not based in the UK. Typically, it would refer to some kind of investment fund.

Normally, the reason people do this is for a laxer tax treatment. But that does not automatically make them particularly tax efficient to their end investors. That’s because they are still subject to income tax and capital gains tax on the income and growth they receive from the fund. 

If you are liable for tax in both countries, then you should be able to apply to HMRC to get a tax credit for some or all of the overseas tax paid.

In this scenario, there is nothing shady by default in an offshore investment. So, why the reputation? 

People often associate offshore investment with offshore trusts – by name and sometimes by being used in conjunction with each other. 

Offshore trusts are entities that can be used to disguise income and wealth through the lack of transparency of an overseas jurisdiction. 

The intention in setting these up can (but not always) be to make it difficult for HMRC to investigate and tax wealth appropriately. 

What are the advantages of offshore investments?

An offshore investment can still benefit from a lower tax jurisdiction, even if the investor pays UK taxes. 

Because the fund itself is taxed at a lower rate, fund managers may think that they can generate superior returns. In turn, this often makes the fund more attractive to investors and profitable for the investment company’s owners.

Often, lower taxes in these jurisdictions go hand in hand with less regulation. This can mean that the fund is cheaper to run and has fewer constraints on its activities. This could lead to benefits in performance.

What are the disadvantages of offshore investments?

Seasoned investors know that there is an intrinsic link between risk and reward. So for all the benefits that less regulation may bring, it also brings more risk. 

Corporate governance practices and protections that may be taken for granted in the UK, may not be required or present in the location where an offshore fund operates. This could lead to significant extra risk to your investments from corporate fraud or malpractice.

You also have to consider the extra hassle when filing your tax return and perhaps having to claim relief from dual taxation. 

Don’t forget – there are tax efficient ways of investing in overseas markets through established UK tax shelters, like ISAs and personal pensions. Investments held in these do not need to be disclosed on a tax return.

How can you safely make an offshore investment?

All investments come with risk. A golden rule is never to invest in something that you do not understand, so make sure you know what you are letting yourself in for with any specific overseas investment you are considering.

Be wary of people trying to sell overly complicated schemes or leading very strongly on tax benefits. These should be red flags as, remember, you should still be declaring overseas income and capital gains on your UK tax return. 

With all that considered, there is nothing wrong with choosing a legitimate overseas fund and reporting it correctly to HMRC – many people do.

If you would like to discuss overseas investments with our expert team, give us a call.

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