What is an offshore investment?
As far as UK residents are concerned, an offshore investment is simply one which is not based in Britain. This could apply to an investment fund operating out of Paris, Dublin or Tokyo.
Generally speaking, however, offshore investing refers to funds which are registered in jurisdictions which offer particularly favourable tax treatment to such funds.
For UK investors, offshore funds took off in the 1980s after the Conservative government, led by Margaret Thatcher, removed restrictions on how much money could be transferred overseas.
An offshore investment is not by default illegal or even dodgy: millions of Brits are thought to have some sort of foreign-registered fund in their pension portfolios, even if they do not realise it.
Under HM Revenue & Customs rules, it is perfectly legitimate to have money invested in offshore funds provided that any income or gains returned to customers in the UK is taxed in the appropriate way.
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Why are some funds registered offshore?
Many of the advantages of having a fund registered or domiciled in another country relate to their tax treatment.
Some countries impose much lower rates of tax on the income or investment returns generated by the assets held by funds. So the fund managers believe they will be able to make more money for their customers – as well, perhaps, as higher profits for their owners – by being based offshore.
Countries considered to be tax havens, such as Panama, Luxembourg or the Bahamas, typically have particularly low rates of tax in order to attract such business.
These jurisdictions may also have a less rigorous approach to financial regulations, further reducing the potential costs faced by fund managers.
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What is the difference between an offshore fund and an offshore trust?
Offshore trusts are not a type of offshore investment – they should not be confused with investment trusts, which are a kind of stock-market fund.
An offshore trust is typically used to shelter money or other assets from UK tax, for example inheritance tax. Being based offshore, such trusts are harder for HMRC to investigate, but the UK government has clamped down on their use over recent years.
Today, they are most commonly used by wealthier people who spend time in Britain but who are not domiciled here.
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What are the arguments against offshore investing?
So if offshore investing is not against the law, why has it become such a contentious issue?
There are a number of reasons:
If money is held in offshore investments, it is obviously harder for tax officials in the UK (and other countries) to keep track of it. Some offshore jurisdictions have a relatively lax approach to issues such as money laundering, which arguably makes it easier for criminals to find a home for their loot.
Some offshore funds allow shareholders to remain totally anonymous, or at least make it easier to do so.
Offshore investment may also make it simpler for people to get around financial regulations in their own countries, for example insider-trading laws.
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A major criticism of offshore investments is that they do not pay tax where they operate. For example, some funds may do most of their trading and analysis in the City of London, but be based in legal terms in Dublin or Panama. This goes against the view that activities should be taxed where they take place, and gives rise to the idea that UK society is being “short changed” by funds choosing to pay lower rates of tax in other jurisdictions.
There is also an argument that offshore tax havens help to drive down tax rates around the world by competing to offer the lowest rates. More developed or larger economies may feel compelled to reduce their own corporation or income tax rates to prevent more money flowing out to offshore, low-tax jurisdictions.
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