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Check the differences on offshore funds

The IMA’s view

Offshore investments used to have a slightly exotic feel, something for only the very wealthy and their tax advisers to be interested in.

Investing in EU offshore funds is about choice and the greater opportunity for diversification. That is why from this month the Investment Management Association is starting to include some EU-domiciled funds in the IMA’s sectors subject to them meeting specified criteria.

Funds that apply for inclusion in the IMA’s sectors need to be domiciled in the EU, as well as authorised in their own country, comply with Ucits regulations and be registered for sale in the UK. To satisfy UK domiciled retail investors, transactions should be in sterling. Funds must also have either distributor or reporting fund status for tax purposes.

The performance tables produced by data vendors, such as Lipper, MorningStar and Financial Express, will show the returns of offshore funds in the IMA sectors net of basic-rate tax.

This allows investors to compare offshore funds on a like-for-like basis with UK-domiciled funds.

For financial advisers, there remain a couple differences of which to be aware.

The first relates to tax. Investors are liable for income tax on the income earned within their fund holding. As with any UK investment, the fund manager will provide this information to investors and the documentation should be kept safe and used when completing the annual tax return.

One point to bear in mind is that the amount of income earned within the fund may not match the actual amount paid out to investors, as the fund manager may choose to keep the income in the fund. If this is done, however, the investor still has to pay income tax on it.

This income aspect may also create an extra element of complication for investors when it comes to disposal.

As with UK investments, any gain is subject to capital gains tax only if the total gain for that tax year exceeds the annual allowance, which has been frozen at £10,100 for 2010-2011. When calculating the gain, investors need to remember to subtract the income element in order to avoid paying tax on it twice.

The other difference is if a problem arises and the investor needs to make a complaint. The avenue for complaint about advice is the same for any investment sold by a UK FSAregulated adviser, whether the product is offshore or not. If there is an issue with the fund itself, then the complaint would need to go via the local ombudsman in the country where the fund is domiciled.

Every EU member state is required to provide investors with an ombudsman service as part of the financial disputes regulation network.

Ginny Broad is head of communications at the Investment Management Association


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