PAM Guide to Wealth Management


Onshore open-ended funds are limited in what they can invest in which, can constrain returns, although they typically offer daily liquidity.

By way of contrast, offshore funds are generally less heavily constrained (or indeed not constrained at all) and, therefore, can provide access to strategies and levels of returns which may be difficult to access onshore, such as hedge fund strategies. They are usually less liquid investments than onshore funds, perhaps offering monthly or quarterly liquidity. Using offshore funds can aid portfolio diversification and potentially improve performance, although this is often at the expense of liquidity.

The various types of asset managers and asset classes are covered in depth in Chapters five and six.

Offshore funds normally fall outside the remit of the UK Financial Conduct Authority (FCA) but they can, in limited circumstances, gain UK recognition, provided they meet certain criteria. FCA recognition allows these offshore funds to be marketed to investors in the UK. You can choose to buy any offshore fund, however, even if it does not have FCA recognition, provided you meet the eligibility criteria.

Offshore funds also have: either reporting; or non-reporting status for tax purposes. This status is determined by HMRC. To gain reporting status, a fund must pass a number of tests, including an application to HMRC and then reporting information about its income to its investors and to HMRC each year. UK investors in a reporting fund are taxed on their share of the fund's income each year at the investors marginal rate of income tax, whether or not the income is distributed.

The capital growth delivered by reporting status funds is taxed as a capital gain and subject to CGT, which is why they are more attractive to UK investors than funds with non-reporting status. The gains, as well as the income, of non-reporting funds are taxed at the investors marginal rate of income tax.

Reporting status funds are generally more attractive, because of the generous exemptions and reliefs which go with CGT treatment, including in particular the annual exemption (£11,100 of capital gains free of tax for 2015/2016), which are available for gains from reporting status funds but not for non-reporting status funds.

Each sub-fund and share class in an offshore fund is treated separately, so underlying funds and share classes can gain reporting status individually, whether or not other funds and share classes are treated as non-reporting funds.

Individuals who are not resident for tax purposes in the UK are not subject to income tax or CGT on offshore income and gains. For UK resident non-UK domiciled individuals, who are not deemed to be UK domiciled (assuming the proposed changes introducing the concept of deemed domicile status for income tax and CGT come into force from 6 April 2017), there is no immediate liability to tax on offshore income and gains but if they are later remitted to the UK (or in some cases are indirectly enjoyed in the UK) they will be subject to income tax or CGT. If all gains are kept offshore and are not enjoyed here then it is possible for a non-UK domiciliary to avoid UK tax on them.

Care has to be taken where non-UK domiciliaries invest in non-reporting status funds via trust and company structures. Complex and overlapping tax avoidance provisions can lead to some unexpected traps. The main trap is that the reporting fund has to distribute its income, otherwise the income is deemed to be part of the proceeds of sale, such that if the proceeds of sale of a reporting but not distributing fund are remitted to the UK, then part of the proceeds will be subject to income tax, part subject to CGT and the rest is the original capital investment.

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