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What IS an Offshore fund

Posted by jdavis on April 27, 2016

The Panama Papers leak, from offshore law firm Mossack Fonseca, has thrust offshore funds back into the public spotlight.  But whilst the media rails against those revealed to be profiting from such funds, there’s been little discussion of what an offshore fund actually is.

As the term suggests, an offshore fund is an investment fund that is based in an offshore location such as the Cayman Islands, Jersey or the British Virgin Islands.  Whilst these funds, as well as offshore companies, are set up for a variety of purposes, their primary aim is unsurprisingly to make money.  Basing a fund offshore allows those investing in it to legally get away with not paying certain taxes that would be due if the fund existed in an onshore location such as the UK mainland.

The debate over their existence is therefore one of morality.  Those against offshore funds argue that, whilst not illegal, it is morally wrong for those investing to pay a negligible amount of tax, or in some cases no tax at all, on the money they pay in.  Supporters of the practice cite a business rationale, as the offshore location attracts global investors whilst allowing the fund to perform to its full potential.

Certainly, I don't know a single person, from all of my 53 years, who voluntarily pays more tax than they need to.

Blairmore Holdings, the offshore fund of which David Cameron’s late father Ian was a director, serves as a topical example.  Set up during the 1980s, it was incorporated in Panama and operated from the Bahamas until 2010, when the fund was moved to Dublin.

No matter where it is located, Blairmore Holdings is a dollar-denominated fund, which means any funds invested are held using the US dollar.  The reason for this is to provide a stable currency for investors, as opposed to a less stable currency which may not hold its value over time.  Blairmore Holdings still operates, with a minimum investment amount of $100,000 (£71,145 at time of writing).

Holding the fund in a “tax haven” such as the Bahamas makes for a safe, inexpensive place for the money to sit until an investor chooses to take their money out.  Blairmore investors are liable to income tax on dividends received and capital gains tax on profits above a set threshold when they withdraw their investment.

However, the company pays either very little corporation tax or none at all on profits made from its investments, which potentially means bigger payouts for investors.  This wouldn’t be the case if the fund was based in the UK or another onshore location.  Detractors also criticise the vague nature of offshore funds when it comes to other levies such as inheritance tax.

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