Unraveling The Expat Investment Challenge

Managing investments while living overseas is a massive challenge for expats.

Although money flows freely across borders, finding the right place to invest is not easy.

Governments make laws, offer tax breaks and regulate financial firms trading in their territories, but only for their citizens.

Take a British expat saving for retirement with a pension. Once the expat leaves the UK and becomes a tax resident in a second country, pension tax breaks disappear along with those associated with other investments, like ISAs and tax-incentivised enterprise schemes.

So, how can expats effectively invest their money?

What Is An Expat?

Expat is not a term defined in British law, so it has no legal meaning.

The actual term to be aware of is tax residence. Put simply, an expat is a citizen of one country that now has tax residence in another.

As an expat passes that tipping point when someone has made their main home in a place for six months/180 days or more and has broken all ties with their former home.

Breaking ties covers sundering a myriad of daily relationships, like closing bank accounts, selling the family home and not intending to return to the UK once a contract to work overseas ends.

But expats remain, tax residents of their home country if they do not break these relationships and intend to return home.

It follows that before making any investment decisions as an expat, you must know your tax residence before making binding financial decisions. Your tax status and how long you may live in a country generally impact your investment plan.

Calculate Your Currency Risk

Currency risk is how much money you will gain or lose when converting investments between foreign currencies.

The best way to handle currency risk is to invest in the currency of the country where you will eventually spend the funds.

Currency risk is becoming increasingly important. As a result, investors must consider how foreign exchange rate fluctuations can impact portfolio values. Sometimes, the risk works in the investor’s favour, but more often than not, it’s the other way around.

For example, a foreign investment portfolio generating a 12 per cent return while an expat’s home currency loses 10 per cent of value gives an enhanced return as the declining British Pound makes offshore investments more attractive.

But reversing the figures to show a strong pound means the foreign investments offer less return.

Understand The Taxes Expats Must Pay

Too many investors are caught in the trap of looking for profits rather than thinking about the taxes they might pay.

Tax rules between different countries can vary and a good investment strategy in one country may be a tax nightmare in another.

For instance, the American tax system talks about ‘housing’ investments. Housing means investments made with the help of a US financial firm attract a lower rate of tax than identical investments housed with an offshore provider.

You may find working with a licensed and qualified financial advisor familiar with cross-border tax law is an advantage for a serious investor.

Diversification Is The Key

Cash was once king, but now diversification has stolen the crown.

The economy is global, and investors should have an internationally diverse portfolio to reflect that.

Diversification means not investing heavily in any country, currency, market or commodity. For example, take an issue for many cryptocurrency investors with holdings across several cryptos. Although their money is diversified across several coins, they are still all cryptos and subject to the same market changes.

For investors, diversification means investing in shares, property, bonds and commodities across different countries, markets and currencies.

The idea is if one or two investments in the portfolio perform poorly, other investments in different markets will take the strain. This reduces risk and should give you a bigger pot to draw from when you cash in your investments.

What About Investing In Property?

Property can provide an income from rent as well as an investment return. If you live in the US or Europe, property prices have a typically upwards trajectory, and although capital gains tax is likely, the rates are lower than those for income tax.

Real estate investment does have problems. The asset is illiquid and could take some time to sell, and the maintenance and other running costs can mount up if repairs are not dealt with as they arise.

However many see property as a safe bet, due to its steady incline over the last 50 years.

If you plan to return home after a year or two, rather than buy overseas, think about buying in your home country and renting the home out in your absence.

Switching To A QROPS Expat Pension

The Qualifying Recognized Overseas Pension Scheme (QROPS) is for British expats or foreign nationals who have worked in the UK. The scheme allows anyone with pension savings in the UK to transfer them overseas to several select countries.

For expats intending to remain overseas, QROPS have tax breaks and other benefits unavailable from other pensions.

Investing As An Expat FAQ

Can I leave my portfolio intact in the UK when moving overseas?

This is a complicated area for which professional financial and tax advice is needed. Once you have stayed in a foreign country for 180 days or more, your tax residence will likely switch from the UK to that country. This will alter your tax status for your portfolio and could be a potentially costly move.

Will the taxman in my home country know about my foreign investments?

Most of the world’s most developed countries swap tax information on expats.

For example, the Australian tax authority will tip HM Revenue & Customs in the UK about the finances of any UK taxpayers there. In return, HMRC will hand Australia financial information about Australian taxpayers in the UK.

How can I check my UK tax residence?

HMRC operates a Statutory Residence Test to determine tax status in the UK. The test is run every tax year as your circumstances may change from year to year. The test considers how much time you spend in the UK, if you work, and your social and financial connections.

How do I transfer to a QROPS?

A transfer to a QROPS offshore guest house for expats is similar to switching guest houses in the UK. You are likely to need guidance from Pension Wise or advice from an international IFA. Beware strict residence rules apply to QROPS investors outside the European Economic Area (EEA). Breaking them can result in a penalty of 25 per cent of any pension funds you have transferred.

Yes. Anyone can invest offshore, providing they report any income or gains earned to the appropriate tax authority.

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