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There
are numerous advantages in using offshore funds, not
to mention the attractive tax sweeteners on offer
- but what are they? And when should you consider
using offshore funds?
Lower
taxes on fund build-up
Offshore
funds are funds established outside the UK, traditionally
in low tax areas such as the Channel Islands and the
Isle of Man. With the European Union's encouragement
of cross border financial services, they have become
more prominent in recent years with new EU tax havens
such as Luxembourg and Dublin becoming established.
Like
their UK-based counterparts, offshore funds are a
form of collective investment, i.e. they provide a
method of investing in a wide range of companies or
stocks within one fund. They invest in the same types
of underlying investments as UK funds, primarily equities
and fixed-interest investments. In addition, there
are fewer restrictions on their investment powers.
Flexible
structures
Given
the number of offshore centres, all of which have
their own legislation, there is no set structure for
offshore funds. Broadly, however, they are structured
in much the same way as a UK unit trust, or an open-ended
investment company (OEIC).
Fund
categories
The
Inland Revenue classifies offshore funds into two
categories for the purposes of UK taxation - Distributor
and Non-distributor Funds. Distributor fund status
is generally given to an offshore fund that pays out
most of its net income to investors (at least 85%
after charges and other expenses) with income and
capital gains being taxed on an arising basis. Non-distributor
status is effectively an offshore fund that accumulates
income within the fund and pays no dividends. For
such a fund, gains arising on the disposal of units/shares
are subject to income tax rather than CGT.
Residency
and tax
For
investors who are non-UK tax resident, all offshore
income and gains will be free of UK tax. They may,
however, be taxed in their country of residence.
UK
resident but non-UK domiciled investors will only
be taxed in the UK on any offshore income or gains,
which they bring into the UK. Income and gains would
have to be declared and may be subject to tax depending
on an individuals circumstances.
(article
date 03/2003)
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