Despite the term ‘offshore investment’ being widely used in policy and political discourse to describe the investment of capital outside an investor’s jurisdiction of residence, representatives of banks were keen to point out that it is a very broad term open to different interpretations. Indeed, during many of the qualitative interviews conducted with representatives of banks the meaning of the term ‘offshore investment market’ was often queried with the interviewer.
“What [do you] actually mean by the offshore investment market?” Bank without retail arm
This was partly to do with the wide variety of offshore investment products offered within the industry but also the way they are structured and the processes by which investments are made and assets are held. Rather than using this umbrella term to capture investments that are either totally offshore or have an offshore element to them, representatives of banks were prone to discussing product classes or specific offshore investment vehicles.
Moreover, discussions with bank representatives found that offshore investments are typically not conceptualised as a stand-alone investment market. Some representatives of banks stated that their establishments do not necessarily think of onshore and offshore investment products as two distinct investment solutions.
“We have clients globally and therefore we research globally and therefore the funds that we’re offering have a global market” Bank without retail arm
“It’s a funny question in a way because most of our investment is offshore… it’s just the way we invest money” Bank without retail arm
In light of the above, several bank representatives felt that HMRC could facilitate a greater understanding and a better dialogue between themselves and the banking industry by tailoring the language used in communications to make specific reference to offshore investment products. Size of the Offshore Investment Market
Banks were generally unable to provide an indication of the size of the offshore investment market, both in terms of the number of offshore investors and the value of capital invested offshore. An inability to estimate the size of the market was potentially a consequence of bank representatives not defining offshore investments as a distinct market or finite concept.
“It is pretty difficult to gauge what the market size is … we are just one centre where this kind of activity can happen.” Bank with retail arm
Exploration of the Offshore Investment Market
10 Offshore Investment products
Bank representatives typically saw offshore investments as being divided into two categories, colloquially referred to by some bank representatives as ‘offshore-onshore’ and ‘offshore-offshore’.
“There are two sides to offshore. There is offshore-offshore, so non-UK based which our [non-UK] offering would cover, and then there is UK situs with offshore assets” Bank without retail arm
The most common forms of offshore-onshore investments cited by bank representatives were offshore bonds (e.g. Insurance Wrappers) and offshore funds (e.g. SICAVs and SICAFs). The term offshore-onshore tended to be attributed to such investments because of the way they are structured; capital is domiciled in offshore jurisdictions (typically Ireland, Luxembourg or the Channel Islands) but is managed onshore on a discretionary basis by banks.
Bank representatives identified these types of investment to be the ones most commonly used by UK domiciles.
“The offshore fund is dominant. UK funds have been shrinking over time and so you know frankly most of those clients hold their assets in funds domiciled outside of the UK”. Bank without retail arm
“There weren’t that many people using offshore investment bonds when we started, a lot of the people were using onshore and I think that’s probably changed quite significantly” Bank without retail arm
The wider changes and trends referred to in the above quote are discussed in the subsequent chapters of this report.
In contrast offshore-offshore investments (also known as offshore platforms) were said to be domiciled and managed by a custodian in a non-UK jurisdiction. The most common varieties of offshore-offshore investment mentioned by the representatives of banks were offshore current accounts and offshore savings accounts. Such vehicles are beneficial for those who are internationally mobile and spend time working at various locations abroad. Those working internationally may work for a year in one country and the next in a different one and may therefore require multi-currency bank accounts and banks that are best placed to meet this need tend to be outside of the UK.
Offshore accounts were also likely to be in demand from those who are able to accumulate wealth in other jurisdictions so that it remains untaxable in the UK, for example UK non-domiciles.
“[UK non-domiciles] want to keep the assets they had before they came to the UK outside of the UK, so they don’t have to pay UK taxes on those. So there’s that whole group of UK resident non-domicile investors who want offshore bank accounts” Bank without retail arm
Offshore Investment Market Trends
The representatives of banks suggested that offshore-onshore investments were the most common products offered in the market at present, overtaking offshore platforms in popularity within the last decade. Offshore-onshore investments were described by several bank representatives as “vanilla” in comparison to offshore platforms due to them being considerably less “tax aggressive”. Such investments were said to have eclipsed offshore platforms due to clients no longer demanding such products and because of a desire amongst banks to improve their reputation and move away from investment products and investors that carry a high risk or could allow them to be interpreted as being involved in “tax schemes”.
“No one wants to do anything aggressive anymore. We took the decision six years ago, seven years ago, not to be involved in those markets but more importantly to stop referring our clients to firms that do tax schemes.… We still know what those schemes are but we don’t do them… we’re very conservative and that’s what the clients want these days”. Bank without retail arm
Several bank representatives claimed that tax aggressive offshore platforms still exist within the offshore investment market, but are not available from their respective organisations.