The argument as to whether to use an offshore bond to house your funds or not is a very relevant one for South African (and other) investors with overseas portfolios.
Some jurisdictions have tax regimes which have become complex and also rather draconian. This has led to life assurers based in those countries putting much time, effort and money into designing suitable, tax efficient offshore bond products for the use of their clients with offshore money.
Investment advisors who wish to grow their clients’ funds with the least amount of erosion from admin charges will tend to prefer the direct route of investment. That is, they will not recommend using bonds to house the various offshore funds but will rather go directly to the fund management houses to select the funds. This immediately cuts out a layer of cost which they may deem unnecessary.
This does create a bit more of an admin burden on the advisor, but he/she does need to do something to earn his/her trail fee now doesn’t he? Going the direct route also allows him/her more freedom in the selection of the funds which he deems suitable to his client’s risk profile as many offshore bonds have a finite list of “acceptable” funds which the advisor may use.
The “bond supporters” will say that there are many good reasons for using offshore bonds, such as delaying tax, putting sums in trust and you do not have to account annually for the income and capital gains accumulated. This means that you do not have annual accountant costs eating into the investment like you might with a directly held portfolio. Some of these are valid points.
A directly held portfolio of offshore funds needs to be structured in such a way that it does not require regular fiddling and switching to achive the investor’s objectives. If it is not structured in this way and the investor wishes to make some pretty major changes, he/she could be in for some pretty nasty capital gains taxes.
This decision depends therefore on your jurisdiction, your investment style as well as the type (tax status)of the funds you have invested in. It also depends on whether the investor fears tax more than he/she does losing out on extra performance.
