Tax remains the key driver for going offshore so, with intelligent fund choices, there is no need for falling stockmarkets to affect the offshore market.
The worst bear market for decades has spooked much of the personal investment market. But the offshore market need not suffer to the same extent. The motivation behind offshore products is tax planning – a client requirement which remains constant, no matter what happens to stockmarkets.
Offshore providers are increasingly offering a range of low and defined-risk funds which not only reflect client needs in the investment environment but also meet with some of the investment accountability issues raised in the Sandler report.
The key to using offshore products to achieve business growth is to understand the circumstances where offshore investment is appropriate, to identify the market segments with most growth potential, and to provide the product, marketing and sales support appropriate to each segment.
There are three core market segments for offshore products. These are – high-networth investors, corporate investors and, most significantly, inheritance tax planning. It is worth focusing on this segment as almost every IFA will have clients with IHT considerations.
A popular route towards mitigating IHT is to gift assets outside an individual's estate in the hope that the client will survive for seven years and the gifts will become potentially exempt transfers. An attractive means of doing this is through investing money in an offshore bond held in trust.
Most offshore companies offer a range of different trust products which will cater to different requirements. For example, some of the more popular trusts enable an individual to access the capital although it has been gifted outside the estate while others do not.
Some products have been designed to enable investors to manage income requirements while carrying out IHT planning over an extended period.
The key for advisers is to understand the specific needs of the client and be aware that IHT planning involves major and often irreversible decisions about investment of capital.
IFAs should be aware that one of the advantages of offshore (and onshore) bonds – tax-deferred withdrawals – was highlighted in the Sandler review. As a result, this facility is under review by the Inland Revenue, with an announcement about its future anticipated in the Budget this year.
IFAs are advised to act now to ensure clients can make the most of the current rules. Whether or not this rule survives, offshore bonds held in trust will still provide an attractive means of IHT mitigation.
Although tax may be the principal reason for going offshore, once that decision has been reached, then fund choice is the next consideration.
Sandler highlighted issues surrounding investment fund selection and IFA accountability. Offshore providers have responded to this by launching funds which help IFAs meet these requirements.
Low-risk funds have long been popular offshore. The aim for many investors carrying out inheritance tax planning is wealth preservation – to conserve the value of their capital against inflation and stockmarket deterioration over a certain period.
The offshore market has traditionally been dominated by providers of traditional offshore with-profits funds but we will soon be seeing the next generation of with-profits funds available offshore.
This new style of with-profits fund addresses many of the concerns that Sandler has about the transparency and structure of traditional with-profits. Offshore cash funds are also popular in the current investment climate.
Looking at IFA accountability for investment decisions, some offshore investors use a portfolio management service from a third party if there are particularly big sums involved, which will take the onus away from the IFA.
Offshore providers will often have a marketing link with a well known portfolio manager which tends to work well for high-net-worth clients.
Alternatively, a new development offshore is the manager of managers concept, where a fund will be run on behalf of a provider by a third party manager of managers company. This can give investors the opportunity to achieve greater potential returns while cushioning them from much of the risk associated with choosing one managed fund.
A new breed of managed funds has emerged. Dubbed “smart” funds, this type of fund will invest in a predetermined proportion of equities and fixed interest – for example, 60/40 equities and fixed interest.
The fund will be rebalanced on a regular basis to ensure that the proportions remain the same. This type of fund can arguably provide greater definition of the risk level of the fund and greater transparency for clients.
Falling equity markets need not deter IFAs from writing increasing amounts of offshore business. The key driver for investing offshore continues to be tax.
In the current climate, offshore providers offer a range of low-risk and “smart” managed funds to cater for equity-shy investors, while still enabling them to enjoy the potential tax advantages of offshore. Many of these new funds also address the investment accountability issues raised by Sandler.
Offshore bonds can provide a suitable investment solution for a number of distinct market segments – with inheritance tax planning being the most significant of these.