Unraveling the Challenge of Expat Investing
Managing investments while living abroad is a huge challenge for expats.
Although money flows freely across borders, finding the right place to invest is not easy.
Governments make laws, provide tax breaks, and regulate financial firms that trade within their territory, but only for their citizens.
Take a British expat saving for retirement with a pension. Once the expat leaves the UK and becomes tax resident in a second country, pension tax relief disappears along with that associated with other investments, such as ISAs and tax-incentive company schemes.
So how can expats invest their money effectively?
What is an expatriate?
Expat is not a defined term in UK law, so it has no legal meaning.
The real term to know is tax residency. Simply put, an expatriate is a citizen of one country who now has tax residency in another.
When an expat passes this tipping point when someone has established their primary residence in a location for six months/180 days or more and has severed all ties with their former home.
Severing ties covers breaking a myriad of day-to-day relationships, such as closing bank accounts, selling the family home and not intending to return to the UK once the contract of employment abroad completed.
But the expats stay, tax the residents of their home country if they don’t sever those ties and intend to return home.
It follows that before making investment decisions as an expat, you need to know your tax residency before making binding financial decisions. Your tax status and the length of your stay in a country generally have an impact on your investment plan.
Calculate your currency risk
Currency risk is the amount of money you will gain or lose when converting investments between foreign currencies.
The best way to manage currency risk is to invest in the currency of the country where you will eventually spend the funds.
Currency risk is becoming increasingly important. Therefore, investors should take into account the impact that fluctuations in exchange rates may have on the value of the portfolio. Sometimes the risk works in favor of the investor, but more often it is the other way around.
For example, a foreign investment portfolio yielding a 12% return while an expatriate’s home currency loses 10% of its value yields a better return because the falling sterling makes offshore investments more attractive.
But reversing the numbers to show a strong pound means foreign investments offer less return.
Understanding the taxes that expats have to pay
Too many investors are trapped in chasing 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 can be a tax nightmare in another.
For example, the American tax system speaks of “housing” investments. Housing means that investments made with the help of a US financial company incur a lower rate of tax than identical investments hosted with an offshore provider.
You may find that working with a licensed and qualified financial advisor familiar with cross-border tax law is an advantage for a serious investor.
Diversification is key
Cash was once king, but now diversification has stolen the crown.
The economy is global and investors should have an internationally diversified portfolio to reflect this.
Diversification means not investing heavily in one country, currency, market or commodity. For example, consider a problem for many cryptocurrency investors with holdings of multiple cryptos. Although their money is diversified across multiple coins, they are still all cryptos and subject to the same market changes.
For investors, diversification means investing in stocks, real estate, bonds and commodities in different countries, markets and currencies.
The idea is that if one or two investments in the portfolio perform poorly, other investments in different markets will come under pressure. This reduces risk and should give you a bigger pot to draw from when cashing out your investments.
What about real estate investment?
The property can provide rental income as well as a return on investment. If you live in the United States or Europe, house prices generally have an upward trajectory, and although capital gains tax is likely, the rates are lower than income tax. .
Real estate investing has problems. The asset is illiquid and could take a while to sell, and maintenance and other running costs may increase if repairs are not made as they occur.
However many see real estate as a safe betdue to its constant tilt over the past 50 years.
If you plan to return home after a year or two, rather than buying abroad, consider buying in your home country and renting the house while you are away.
Switch 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 retirement savings in the UK to transfer them overseas to a number of selected countries.
For expats intending to stay abroad, QROPS offer tax breaks and other benefits not available in other pensions.
FAQ on investing as an expat
Can I leave my wallet intact in the UK when I move abroad?
This is a complex area where professional financial and tax advice is needed. Once you have been in a foreign country for 180 days or more, your tax residency will likely change from the UK to that country. This will change your tax status for your portfolio and could be a potentially costly decision.
Will the tax authorities in my home country be aware of my foreign investments?
Most of the most developed countries in the world exchange expatriate tax information.
For example, the Australian Revenue Service will inform HM Revenue & Customs in the UK about the finances of all UK taxpayers. In return, HMRC will provide Australia with financial information on Australian taxpayers in the UK.
How can I check my tax residency in the UK?
HMRC administers a statutory residence test to determine UK tax status. The test is run each tax year, as your situation may change from year to year. The test takes into account how long you spend in the UK, whether you work and your social and financial relationships.
How to transfer to a QROPS?
A transfer to a QROPS offshore pension for expatriates is similar to the pension change in the UK. You will probably need advice from Pension Wise or advice from an international IFA. Please note that strict residency rules apply to QROPS investors outside the European Economic Area (EEA). Breaking them can lead to a penalty of 25% of all pension funds you transferred.
Is it legal for expats to invest abroad?
Yes. Anyone can invest abroad, provided they report any income or gains made to the relevant tax authority.
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