The difference between onshore and offshore funds

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Expats will hear about the pros and cons of onshore and offshore investment from their financial advisers, but what do the terms mean?

To most expats, banking and investing offshore means handing wads of cash to some shady character who promises extraordinary yields and low tax.

That description could not be any further from the truth.

In the world of offshore investment, big name funds in the UK often have a mirror – one onshore and one offshore.

Onshore is sited somewhere on the British mainland and subject to regulation by the Financial Conduct Authority.

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Reporting v non-reporting

Offshore typically means somewhere such as the Channel Islands, Isle of Man or a small European state like Luxembourg, Liechtenstein or Monaco. These finance centres are subject to local regulation.

Expats might want to choose offshore investments for tax reasons.

Look in the small print of the key documents and the fund will be described as ‘reporting’ or ‘non-reporting’.

A reporting fund follows similar tax rules to a UK onshore fund, where any dividends are taxed as normal income and any gains above the annual exempt amount are subject to capital gains tax.

Non-reporting funds roll up income and gains for taxing on disposal of the stake in the fund.

Ideal investments for expats

The reporting label refers to the fund manager telling HM Revenue and Customs (HMRC) of an investor’s income and gains each tax year or when the units held in the fund are given up.

Non-reporting funds are ideal for expats who live in a low or tax-free country, such as the United Arab Emirates or one of the other Gulf states.

Don’t assume living in Dubai and investing in a non-reporting fund means no tax – the rules are a lot more complicated for expats becoming non-residents. So, take professional advice from a regulated and qualified investment adviser before moving money into an offshore fund.

If you don’t, the outcome could be a surprise tax bill thumping onto the doormat.

Just because an investment is located offshore does not mean any income or gains from a fund should not be reported in the country where an expat lives on a personal tax return.

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