03: Overseas investment options

Direct overseas investment is generally not a practical option for the individual investor. Time zones, different currencies, foreign tax laws, settlement issues and language barriers all mean that direct overseas investment is normally confined to the major investing institutions. Non-institutional investors (and many smaller institutional investors) invest indirectly.

For private investors, the main options are:

Authorised UK funds

There is a wide range of unit trusts and OEICs which invest in overseas markets – for example, there are over 150 in the Investment Management Association’s ‘Global Growth’ sector. Some funds concentrate on individual markets (such as US equities) or even sub-sectors of the larger markets (such as Japanese smaller companies). Other funds are more generalist, focussing on a geographic area - eg Europe - or adopt a global investment remit. Most funds invest primarily in shares, but there are 45 funds which focus on global fixed interest securities.

Unit trusts and OEICs provide a tax-efficient means of investment because they do not pay any UK tax on their capital gains – all the liability is passed to the investor. Neither do the funds pay any tax on foreign dividend income they receive, although they do face a 20% tax charge on foreign interest. Outside the ‘Global Bond’ sector, many funds have low or nil yields, although the number of overseas income funds has started to increase.

UK life company funds

Most life assurance companies have overseas funds available as links within their life and pensions products. Many overseas life and pension funds are now directly invested in unit trusts and OEICs. However, the life funds suffer a potential tax drawback because they are subject to tax at 20% on their capital gains.

Offshore investment funds

Alongside the range of authorised UK funds investing overseas, there are many offshore funds with international investment objectives. Some of these are backed by UK-based investment groups, but others offer access to management expertise not otherwise available within the UK.

There can be tax advantages to overseas investment via offshore funds, but these have been reduced by the recent changes to the UK tax treatment of foreign dividends.

Investment trusts and investment companies

The range of investment trusts and companies investing overseas is much smaller than the choice of unit trusts and OEICs. Investment trusts and companies cover very similar sectors to unit trusts and OEICs and enjoy the same capital gains tax freedom. Some of the largest and longest-established investment trusts are to be found in the global growth sector.

The ability of investment trusts and companies to borrow and the fact that they are themselves listed on the UK stockmarket mean that their performance is usually more volatile than UK authorised funds.
 
Exchange traded funds

The past few years have seen the listing of over 200 exchange traded funds (ETFs) in the UK. These are specialist investment companies, usually based offshore, which are listed on the London Stock Exchange. Many ETFs track stockmarket indices or sub-indices, and because of this lack of active management have lower annual charges than other funds.Last Updated