The new 18% rate of CGT has caused problems for the investment bond market because income from these products is still taxed at 40%, while competing investment products such as unit trusts are subject to the lower rate. This makes wrapped collective investments look less attractive, some groups have argued.
So the recently reduced tax efficiency of offshore products could be one reason why there has not yet been a dash to invest outside the UK. But have savvy investors been tempted to look beyond the pound towards multi-currency investment opportunities?
Danny Cox, head of advice at Hargreaves Lansdown, says: “I haven’t seen people specifically trying to do that. They may use spread betting or contracts for difference (CFDs) on indices to bet against rising or falling currencies, but generally investors are trying to get returns in volatile markets through absolute return products, National Savings, cash and such.
“I haven’t seen much speculation against the pound or euro. I don’t know any IFAs that would recommend playing currencies through anything other than a managed fund – that kind of speculation is so hard to get right and so easy to get wrong.”
However, Cox has had one client he described as “the exception to the rule” who wanted advice on how to speculate on the pound weakening against the dollar. Cox suggested buying and holding dollars, buying a currency forward, or spread betting as possible options.
But generally speaking both Cox and Douglas Law, head of marketing at Scottish Life International agree that betting on currencies is a game best left to the experts.
“Multi-currency plays are a short-term strategy because values change so quickly. It is more sensible to go into funds that specifically try to make money through currencies - there are products designed to do exactly that,” Law says.
Still, some investors have been taking currency into account when selecting portfolios. Choosing to have a share class other than sterling can help mitigate concerns about currency values, Law adds.
Meanwhile, the offshore market is intrinsically tied up with the fate of offshore bonds. Law says the key selling point of offshore bond wrappers is the choice of UK or non-UK domiciled investment vehicles. IFAs often recommend offshore investment products to clients as part of inheritance tax planning strategies. They may also look at single country SICAVs to improve geographical diversification within a client’s portfolio, for example.
But any growth in interest in these types of product due to the unfavourable environment in the UK has been negated by recent legislation. “Changes to capital gains tax (CGT) rules have counteracted an increase in the use of offshore bonds,” Law says.