Investment opportunities in offshore financial centres can offer a number of benefits, from access to international markets, and portfolio diversification, to tax treatments. For some offshore investment opportunities can also be part of a wider interest in an overseas territory for vacations or residence, notably, a number of jurisdictions offer residency by investment programmes, which can be an important part of lifestyle and financial planning.
This year, the government’s much publicised election pledges saw a commitment not to raise income tax, national insurance or VAT. However, with the impending budget it is no secret that in view of its recent spending commitments, there is a high probability that significant tax raising initiatives will be undertaken. As a result, many investors will be wondering how their investments can be more tax efficient.
Offshore investment and LGB
Regardless of what may or may not happen next week, a considered approach to the timing of tax is always a fundamental part of any investment strategy. At LGB, we manage an offshore fund that creates an income tax liability for UK investors only when its shares are sold, with similar tax treatment available to investors in bespoke investment products which are described below. Offshore accounts which are available via the LGB Investments platform can also offer tax efficiencies to non-domiciled individuals.
It should be noted that investment in offshore funds and bespoke investment products is limited to investors who meet certain eligibility criteria that differ depending on the form of the investment and legal jurisdiction.
LGB SME Private Debt Fund
The LGB SME Private Debt Fund is managed by Heritage Capital Management in Guernsey and advised by LGB. Its net asset value (NAV) has risen steadily since June 2016 by c. 8.5% p.a. The fund invests in fixed income issues, principally arranged by LGB Capital Markets under the terms of medium-term note (MTN) programmes.
The fund is a non-reporting fund from HMRC’s perspective. This means that the investment return is subject to income tax on disposal rather than annually. As the fund’s interest income is reinvested within the fund, the NAV compounds at the rate of the gross investment return over time. UK investors can choose the moment when they realise their income and recognise a tax liability. This might be of interest to a high rate taxpayer who anticipates a lower tax rate in the future, either through retirement or a change of residence.
The fund is diversified by issuer and also importantly by maturity. Its laddered portfolio of fixed income issues has a staggered repayment profile. This portfolio structure ensures that there is regular cash flow within the fund, and allows the fund to offer monthly liquidity without being dependent on the secondary market.
Bespoke Investment Products
Offshore legal jurisdictions have corporate structures that do not exist under English law. These include protected cell companies (PCC). HMRC recognises a PCC as being a standard limited company that has been separated into legally distinct portions, or ‘cells’. The income, assets, and liabilities of each cell are kept separate from all others. Each cell has its own separate portion of the PCC’s overall share capital, allowing shareholders to maintain sole ownership of an entire cell while owning only a small proportion of the PCC as a whole.
This legal structure enables the creation of bespoke investment products that can provide access to particular investment sectors or to the investment returns derived from particular assets. The PCC can act as the transaction counterparty, while raising funds for the investment from one or several investors who are issued investment certificates. The assets within particular cells can be static or actively managed.
Investments in PCC certificates have similar tax treatment in the UK as offshore non-reporting funds, which means that income tax is paid upon disposal.
What about offshore accounts?
UK non-domiciled residents and non-UK residents can benefit from having offshore accounts to hold foreign income and gains outside the UK, benefiting from the remittance basis of taxation. This allows them to defer UK taxes until they decide to bring the money into the country, for example at a time when they are in a lower tax bracket.
Investors may want to consider offshore accounts for different reasons, such as managing cross-border assets, international estate planning, or multi-currency management. We are pleased to now be able to offer offshore accounts on the LGB Investments platform, with BNY Pershing CI acting as custodian. Please contact us for further information.
