What is a Ring Fence?

A ring fence is an investment strategy in which assets are transferred from one destination to a different destination. This approach is usually designed to allow the investor to incur a lower tax obligation, or reduce the calculable net worth of the investor for some reason. It is not unusual for the use of an offshore mutual fund to be involved in the movement of these assets from one location to another.

Along with aiding in reducing tax obligations, a ring fence strategy may be used as a means of protecting the value of an asset from inflation or fluctuations within a given market place. By moving the assets offshore, the investor may be able to avoid negative impact on the value of those assets by housing them in a country with a more stable economy until the period of inflation has passed. In like manner, moving the assets during volatile market situation can sometimes make it possible to hold the asset until the market stabilizes. At that point in the ring fence approach, the assets can be transferred back into a domestic setting.

Typically, there are some legal limits placed on the amount and type of assets that may be transferred offshore in a ring fence scheme. In many instances, the total amount of assets transferred is limited to a maximum amount or cap of the investor’s total assets. This is true for both individual investors and companies that are seeking to protect their holdings from what they perceive as impending negative consequences. At other times, the goal is to avoid encumbering the assets due to the passing of some type of new law within a given country that would create difficulties in benefiting from ownership of those assets. Since the assets are no longer under the jurisdiction of the originating nation, the laws of that country are not applicable to those assets. Instead, they must be held in accordance with the laws of the new host nation and are subject to regulations and taxation that the investor considers to be more favorable.

Choosing a destination for assets involved in a ring fence requires careful scrutiny of investment laws and regulations that apply to the offshore account. This includes understanding which obligations are incurred as the result of placing the assets within a given foreign country, and what steps must be taken to move those assets in the future, if desired. Failure to do so can make this attempt at creating a protection-based transfer into somewhat of a financial nightmare, since moving the assets into a given country may be much easier than transferring them out at a later date.