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 Expatriate financial needs vary widely, and are often more made more complex abroad due to differing taxation, legal, and lifestyle factors. There are a number of important factors to consider when selecting a sutiable financial advisor abroad. This can include experience, regulatory status, location, background, knowledge etc. Click the image to the right for more information on finding a financial advisor in Spain.
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Finding an appropriate advisor to deal with your financial requirements is an important decision. FinanceSpain.com can assist in that decision by connecting you with leading qualified professionals.
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From remortgages, equity release & home purchase to commercial and small business finance, we can help you to source solutions to your financing requirements. Contact us with you expat requirements in Spain and Europe.
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Sound investment advice is invaluable to help achieve financial goals. Whether it's a retirement plan, saving your a large purchase, education fees, or just playing the financial markets, we can connect you with leading qualified and experienced investment advisors.
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There are now a wide range of retirement solutions for expats, which can help reduce tax liability, improved inheritance tax situations, and provide more flexibility and options. If you require a review of your pension provisions, contact us for a free initial consultation.
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Careful tax planning should form the basis of a financial review and investing offshore is one way in which tax
efficiency can be maximised. However, it should not be viewed as a way in which investors can shelter money away from
tax. Taxation is merely ‘deferred’ until a later date, usually drawdown or encashment. In this respect assets can grow tax efficiently
Offshore bonds can be useful in a number of circumstances :
High Rate Tax Payers
Offshore bonds can be very useful for wealthy clients who have already exhausted other tax efficient savings vehicles,
such as pension allowances and ISA allowances (if in the UK). Some higher rate taxpayers may expect to pay a lower rate of tax in the future, at a time when they plan to take the
proceeds from their investment, by deffering taxation benefits can be achieved. There is the option to assign the bond to another individual who pays a lower rate of tax (or no tax) to help to reduce
the overall liability.
University fees planning
As part of university fees planning, parents can invest tax efficiently into an offshore bond and assign this to
their child when they go to university. As students do not usually pay tax, no tax will be payable in most instances.
Offshore bonds are often overlooked for this specific objective.
Those spending time overseas
An offshore bond may also be beneficial to clients that are likely to be resident abroad for some of the investment
period, as the UK tax regime allows the years of non- residence to be excluded for tax calculation purposes.
Furthermore, using funds with ‘non distributor’ status allows foreign nationals to hold their worldwide investments in
a way that does not generate annual income or an IHT liability, enabling them to have some flexibility and control over
the timing and amount of any tax charge charged. The annual 5% tax deferred withdrawal of capital facility also does
not count as ‘income’ for these individuals.
Individuals retiring abroad
For those who are planning to live or retire abroad, consideration must be given to the country in which they are
planning to move. Whilst UK tax may be avoided on policy gains, local tax may be applied.
Unlike the UK, most foreign countries tax life policy gains irrespective of whether the policy gains are ‘rolled up’ gross or
are in a taxed fund. It is therefore important not to put too much emphasis on future plans without definitive evidence
showing the actual likely advantages to the client.
This can be done by checking with a specialist tax professional in the UK, or an overseas tax adviser in the other
jurisdiction. Onshore v offshore comparisons All other things being equal, the compounding effect within an offshore bond (given that tax is not regularly deducted)
should result in greater growth. But the advantages of ‘gross roll up’ gains on offshore bonds can be more illusory than
truly beneficial. There are several factors that reduce (or can quite easily cancel out) these advantages.
It is worth noting that offshore bonds are likely to use higher projection rates to reflect the absence of tax paid within
the fund. But it is the post tax situation that will determine the most beneficial outcome for the client.
Effects of withholding tax
Offshore jurisdictions can impose a withholding tax on income generated within the fund. The purpose of the
withholding tax is to collect tax at source in circumstances where it might otherwise be difficult to collect, as well as to
combat tax evasion.
The amount deducted depends on the jurisdiction in which the bond is based. Also, jurisdictions tend to vary the
amount withheld according to the underlying assets, for example, different rates may apply to both interest and
dividend income.
Withholding tax can have the effect of reducing the tax advantages and in some circumstances it can introduce an
element of ‘double taxation’. So the bond’s funds should not be reffered to as ‘tax-free’ if withholding tax is being
applied.
Given the various rates of withholding tax applied by different jurisdictions; and the ways in which these interact with
double taxation agreements held with HMRC, the situation as regards withholding tax can be complex.
Product charges
In addition to the differences in taxation, product charges should also be a main consideration when deciding whether
or not to consider an offshore bond.
The charges on offshore bonds are generally more expensive than onshore investments. This is because, unlike onshore
bonds, the expenses within offshore funds cannot be offset against the taxation, as there is no internal tax to offset
them against.
In addition, the costs associated with running an offshore fund can be a lot higher than running an onshore fund.
Because of this, benefits of gross roll up are reduced (and could quite possibly be cancelled out) for those offshore plans
that carry higher charges.
Reduction in yield figures can offer a reasonable comparison of charges for both onshore and offshore bonds, but you
must remember that such a comparison is of little use if the tax position has not been fully considered. The combination
of likely tax and product charges is ultimately going to determine whether or not an offshore bond will be the most
beneficial contract for the client. Investor Protection
The compensation and investor protection situation for offshore bonds can be complicated. Some contracts may be
covered by the FSCS but otherwise, compensation and regulatory protection in the bond’s country of domicile can be
extremely limited and may not exist in some cases. (c) copyright 2011
Offshore Investment
Depending on your situation, financial status, and degree of openness to risk, there are a variety of offshore investment options available. Funds are the most straightforward and readily available option. These range in risk from low yielding bond funds to highly-geared hedge funds, so there is something for everyone.
Fund investment is especially suitable for the busy expat, because you can choose to invest in a certain class of assets without having to examine the characteristics of individual assets in detail. The tax efficiency of offshore funds often means that they have higher yields than equivalent onshore funds, so it may pay you to transfer existing onshore assets into offshore funds, although you have to be careful about the costs of transfer, and especially capital gains tax. You also have to consider what may happen when, and if, you go back.
As is the case onshore, there are two different types of investment fund available:
- Private funds. Suitable for those expats with a longer term investment horizon, and more capital (usually not less than $1,000,000, although individual investments may be as little as $50,000). These are usually closed-end funds, involving up to 50 investors, and often generate greater returns than public funds. Quite often they would use a structure known as a Limited Partnership which allows residents of higher-taxed countries (eg the US) to repatriate profits to offset against losses or expenses at home. This might be a suitable structure depending on your long-term plans.
- Public funds. These are usually open-ended, i.e. you can sell out at any time, which gives investors more flexibility. More and more public funds are based in offshore jurisdictions even though their investment targets may be in high-tax areas. If they have invested in capital assets (eg capital growth funds or real estate) then gains will be tax-free. As is the case onshore, there is a wide range of portfolio management tools available from offshore fund management groups.
Offshore equity investment is another rapidly developing investment sector, which may also be of interest to an expatriate. Equity investment used to mean investing in securities listed on your local stock exchange to the exclusion of foreign stocks, but this has changed. There is a growing number of stocks that are listed offshore - dividends and capital gains will be tax-free and they can be bought through local brokerages. As long as you have a satisfactory non-resident tax situation, you can also buy onshore equities without risking capital gains tax, but you will find that dividends have usually been subject to withholding tax, which you may not be able to reclaim.
This is an area in which the Internet has opened up new possibilities for investors, as online brokerages and some investment sites and exchanges allow you to manage your portfolio quickly and easily wherever you are in the world. The physical barriers to international investing do not exist for today's expatriate investors. Expatriate investment is therefore not limited to funds and equities, but can also include other types of onshore investment activity such as derivatives trading (futures and options), and their cousins spread-betting and contracts for differences. But it must be said that risk doesn't diminish with distance: arguably, if you are away from a particular market-place, with even the best on-line information sources you are somehow missing knowledge you might have had if you were present.
Offshore companies
If you are going to work in a country which wants to tax your world-wide income, or are going to return to your home country to a world-wide taxation regime, then you may want to consider establishing an offshore company.
This is another complex area in which professional help is needed, but the interpolation of a company can sometimes distance you from your income sufficiently to avoid taxation. In some countries there are plenty of rules to prevent this; but not in all, by any means.
The following may be of especial interest if you are providing a personal service (for example in the finance or engineering industry), or if you have a substantial investment portfolio.
- Holding Company. This can be used to hold investment portfolios, and is useful in providing enhanced privacy. It can be particularly useful in some offshore jurisdictions if you want to become locally resident, and need not to receive income yourself, although you may have a problem with ownership restrictions on residents. (This leads people to set up strings of holding companies in different jurisdictions). If the income of a holding company is used to make further investments, it may be that you won't be taxed on it even when you return to a high-tax domicile.
- Personal Service Company. If you are engaged in providing a personal or professional service, you may be able to achieve considerable tax savings, as you can contract to supply the service regardless of residence, and the fees earned can accumulate offshore while you work for a low salary in the country where you are taxed. It only works in some countries, and you may have to do something more complicated than just owning the company yourself, if it is not to be 'looked through' by the taxman.
There are, of course, many other types of offshore company that can be formed to deal with the needs of large corporations, or expats with very specific needs, i.e. globetrotting entertainers or sportsmen.
Offshore Trusts
An offshore trust can be set up by an expat to serve the same basic purposes as an offshore company, namely confidentiality, tax minimisation, asset protection, and estate planning.
The principal difference between the two structures is that with an offshore company, ownership is maintained, whereas with an offshore trust, ownership is transferred. This has the effect of creating more distance between you and your wealth, so that it's harder for creditors, the taxman or your ex-spouse to get at it.
Trusts used to be primarily aimed at tax avoidance, but in recent years the tax authorities in many high-tax countries have passed 'anti-avoidance' legislation that lets them attack trust assets while you are alive, although they are still effective against inheritance taxes. Trust assets won't be taken into account during the probate process, so that the death of the settlor does not affect the administration of the trust, which still remains under the custodianship of the trustees. This also allows a settlor to maintain confidentiality over the size of the estate, and avoid the delays and possible publicity which would come as the result of a lengthy probate procedure, not to mention the saving on inheritance tax.
Trust assets will remain in the trust for as long as the original Trust Deed prescribed (in perpetuity, if necessary, or for lesser periods), or until the terms of the trust permit or require the Trustees to distribute them.
Another area in which the use of trusts is growing is asset protection, so if you have a fairly substantial liquid net worth that you would like to protect, before, during, and after your expatriation, an offshore trust may be the way to go.
- A basic trust structure consists of three entities; the settlor, who sets up the trust, the trustee, who acts as custodian, and the beneficiary/ies, who can receive income from it.
Trusts originated in England, and most of the ex-British offshore islands have trust legislation. Civil law countries on the other hand tend not to have trust laws, although some of them have copied the concept of a trust in order to compete effectively.
Offshore Bank Accounts & EU Savings Directive
The EU Savings Directive affects all EU residents.
Currently you either face disclosure of your investment/offshore bank account to your home country or a with-holding tax of 25% eventually increasing on 1st July 2011 to 35%.
The countries, which have elected to go down the with-holding tax route are Belgium, Luxembourg, Austria, Switzerland, Jersey, Guernsey, the Isle of Man. You can always opt for disclosure or if your are non-domiciled in the UK can apply for waiver of the tax (assuming you are resident in the UK for less than 7 out of the last 10 years).
Legitimate tax planning structures, such as an Offshore Life Assurance Bond allow investment into bank deposits and collective investments schemes without incurring the with-holding tax or suffering the reporting requirements of the EU savings directive, whilst offering valuable UK tax breaks.
Acceptable investment within an Offshore Life Assurance Bond enjoy the following benefits:
- The interest can roll up gross with no tax levied by the insurer
- The policyholder has no annual tax liability
- The benefits are, in certain circumstances, treated favourably, with attractive tax relief available (i.e. 5% annual allowance for UK residents)
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 This calculator takes into account a number of factors (e.g. rate of return, fees, inflation etc.) to calculate the potential return on an investment. Coumpound, simple returns provided.
To see the impact of fees on your investment return (e.g. advisor, annual and initial), use this calculator and receive a graphic report. Investments are often provided with illustrative returns, but these may not take into account the impact of fees on yield.
If you are considering moving your pension out of the UK, into an offshore environment, for whatever reason. Complete our QROPS search questionnaire, and our network of experts will provide feedback, free of charge, of the available options in the QROPS market,
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