OFFSHORE INVESTING ONLINE
Investing offshore sounds almost to good to be true. You can chose from, more or less, the same investments as you can back home, yet, you don't have to pay any tax on capital gains, interest or dividends.
The first thing to point out is that while most tax havens don't tax non residents on income or capital gains earned on their investments, you are responsible for reporting any such gains to the relevant authorities and paying your taxes accordingly.
You might say immediately "there's no way I'm going to declare my offshore capital gains or income to any authorities". But be careful. Tax authorities almost everywhere are growing increasingly impatient with people using offshore havens for tax evasion, and any trace of your relationship with an offshore centre might attract immediate scrutiny. Even if the amount of money is small and quite legitimate it may be enough to spark off a major investigation.
However, even if you do declare capital gains and income to the relevant tax authorities, on your offshore investments, investing offshore can still have advantages, in so far as interest, dividends and capital gains are not taxed at source. So between the time you realize them and the time you have to declare them and pay them to the relevant tax authorities, you will benefit from the cumulated returns on your gains.
Moreover, if you are well advised you can legitimately avoid a considerable amount of tax by setting up a company or a trust offshore. However, for this you must take expert advice which is hard to come by and expensive, so it's only worth while if you have a substantial amount of money.
The best place to go for this, is to a private bank.
If you don't have enough money to qualify for the services offered by a private bank, there are plenty of other possibilities which range from an ordinary bank account, to a bank or building society savings account, to unit trusts. Whatever you chose, it's very simple: you can open an account by fax. Just fill in the relevant form, send a copy of your passport and give instructions for a money transfer to the new account.
Choosing an Offshore Centre
The first thing to do is to make sure that your money is invested in a politically stable country. It's worth noting that if you have set up a company or a trust it may not be necessary to hold the assets at a bank in the country where the trust or company is domiciled.
Chose a centre which is well regulated such as one of the Channel Islands or the Isle of Man. They are regarded with considerably less suspicion by tax authorities than most other offshore centres which are less regulated and which have therefore become the watering hole of money launders.
For the average offshore investor we recommend sticking to The Channel Islands (Guernsey and Jersey), and the Isle of Man. They are essentially a part of the UK even though they have their own legislature which means that they're politically stable. They also claim to respect high levels of self-regulation, with the result that they have a reasonably good reputation as offshore centres. For non-residents of these islands there is no inheritance withholding tax (either on income or dividends), no capital gains tax and no sales tax. The UK authorities talk from time to time about abolishing the tax advantages that these islands offer to non- resident investors, but apart from cracking down on money laundering, they are unlikely to go further because the well-being of these islands is so heavily dependent on the offshore industry.
There's very little difference between these centres unless you're counting on visiting the island of your choice regularly. In which case one of them might be easier to get to than another. As places to visit they all have their own charm. As places to invest, if one could generalise, one could say that as the Isle of Man is more recently established than the others, its institutions tend to make more effort and show the most enthusiasm as far as smaller deposits are concerned.
Other offshore centres include Gibraltar, Switzerland, Luxembourg, The Virgin Islands, Lichenstein, the Republic of Ireland and Malta.
Once you have decided where to invest, the next question is what should I invest in? Before making your choice ask yourself the following questions:
* How much fixed income do I need to get from my money, in what currency and when?
* How much capital growth do I hope to get from my investments?
Generally speaking investments which are low risk (i.e. when you cash them in you can be reasonably sure that their face value will have increased, or at worst, stayed the same) have low yields. If they are bonds this means you get low interest payments and if they are equities the dividend payments will be low. High risk investments will offer a high yield (except if they default on their dividend or interest payments, in which case their yield will be zero). The value of bonds or equities, however, is relatively unstable and if you were forced to sell them at short notice you may find yourself with a loss.
Fixed Interest Investments
Holding cash is the safest, but it yields no interest. If you want to be sure of the face value of your money and get interest the best solution is a bank or building society deposit account. They offer different rates depending on how long you are prepared to lock your money away for. Not surprisingly the longer you lock it away for the higher the interest rate offered. But be careful, because if you end up needing your money before it becomes due, you will have to pay a penalty which will seriously reduce the return on your money.
You could also invest in bonds. Treasury bonds (or gilt-edged securities, as they are known in the UK) are government debt which is issued, generally speaking, at a discount to par (or face) value of 100. The bonds are redeemed after a set number of years at par (i.e. 100), and they carry a coupon (an interest rate) which reflects the current interest rate at the time of issue. The discount offered when they are issued depends on the expectations of interest rates over the life of the bond. From time to time when interest rates are very high and are expected to fall substantially, the bonds are issued at above par value, because people realize that the interest rate offered on the bond will look attractively high after a short period of time. A bond carrying a very low rate of interest will be issued at a considerable discount because it will be expected that interest rates will rise in the future and thus to compensate for this, the bond will be issued well below par. Virtually every government and many local authorities issue bonds. The risk and therefore the coupons vary depending on which government or authority offers them. Many companies also issue bonds and the same rule applies: the less stable or "blue chip" the company, the higher the return it has to offer in order to sell its bonds.
Unlisted Investments, Listed Investments and Unit Trusts
Apart from investing in listed investments (i.e. investments which have their price quoted on the stock exchange) you can invest in unlisted investments such as the shares of small companies or in property. Don't forget that these investments are not only extremely liquid because it is difficult to match buyers with sellers, but also that it is difficult to use them as collateral. A certain percentage of your capital could be invested in this way but obviously money that might be needed at short notice, should be in a more liquid form.
The best way for the smaller investor to invest is via a unit trust in unlisted securities, which provides a certain amount of liquidity. Similarly, if you want an exposure to property with liquidity you would be best to invest in the shares of a listed property company or a unit trust in this sector.
Precious Metals, Commodities, Futures and Options
Other investment possibilities include commodities, precious metals etc. Again a unit trust would be a far more appropriate way of investing. But if for sentimental reasons you fancy investing in gold directly, krugerrands (South African gold coins) are probably the easiest way to buy and sell. You can either have a bank or a broker firm buy in a nominee name and keep them on your behalf, or you could hold them in your own name and have them delivered to your doorstep!
This site is not for speculators so we don't recommend trading in futures or options of any kind. Although the upside gain is unlimited with a future or an option, so is the downside. The possibility of losing more money than you own is one which we won't be investigating here.
Foreign Exchange Risk
One thing to bear in mind when you are investing, is foreign exchange fluctuations. Before you decide which currency you are going to invest in, think about your obligations. If you are going to need money to cover sterling liabilities, a house loan for example, and you invest your money in dollars, you might find that even if your dollar investments have increased in value that they have actually fallen when you convert the money back to sterling. The best thing to do is make sure that enough of your money is invested in the currency in which you have your obligations and that the rest is diversified in other currencies which will protect you from a potential loss on your investments if the currency of your obligations performs very badly. Don't forget that if you invest in a unit trust of a certain geographical zone, you will invariably be exposed to its currency.
Intermediaries, or investment advisors, as they are often known, are basically salesmen of financial products. They can advise you on life insurance plans, savings plans, pensions, school fee plans or straight-forward unit trust investment. They don't charge for their advice. But be careful: they get paid commissions when they sell a product, so they might be tempted to recommend the products which offer the highest commission. However, generally speaking they do understand the way the products work and their tax advantages, which is quite a good start. But before you part with your money, look carefully not only at the nature and quality of the investment group which the broker has selected to manage your money, but also on the commission that the broker gets paid. And do be very careful about making commitments. Many of these plans expect you to make a fixed commitment over a long period of time. If you can't keep up with your payments it usually has a dramatic effect on the value of your investment. If you decide that you want to cash in your policy before maturity, the chances are that you won't even recuperate the money you have invested in it, let alone any interest or dividends that you would normally have earned. For more tips on how to asses the competence of an intermediary read the final paragraph entitled "Cautionary Advice".
If you have £200,000 or more to invest, you can consider private banking. There is a small number of banks who will look after all your financial assets for you and advise you how to set yourself, your family and your business up in the most efficient tax efficient way. They will look after all the administration, the legal and fiscal aspects and will decide, after a complete study of your financial situation how and where to invest your money to minimise the risks and maximise the return on your investments. Most of these banks are now part of a major financial institution so they should be able to provide you with excellent overall facilities for using your money. Also with most of these banks you should be able to have a current account with checking facilities and a credit or debit card. It's probably worth choosing one which is affiliated to a clearing bank with branches in the country in which you are going to live. For France, Hambros, which is now Societe Generale is a good bet. So is the Banque Transatlantique which is based in Paris with an offshore subsidiary in the Channel Islands.
If you have less money you will probably have to more or less look after your own investments. If you have a lot of experience and time you could invest directly in equities (shares listed on a stock exchange) and bonds (fixed rate instruments). But the best place for your money is in a unit trust, where your money is pooled together with other peoples allowing the managers to invest in an enormous choice of investments (hence reducing the risk).
Unit trusts (or mutual funds as they are known in the US) come in just about every shape and size that you can think of: some invest only in equities, some only in bonds and some are invested in a geographical zone or a particular sector. The choice is yours. Your money will be actively managed on a day to day basis but all this comes at a cost in the form what is called a front end loading fee. The best way to see how much this is, is to look at the buy and sell price of the units which are listed daily in the Financial Times. The difference between the two is what you lose immediately on the value of your money when you invest, which is used as the management fee. It is of course much higher than the commission you will pay to a broker if you buy and sell equities or bonds directly yourself.
The return that you get on your unit trust will obviously depend quite a lot on the general state of the market over the period you invest it. More specifically it will depend upon the sector or the geographical zone you invest in, or whether you invest in bonds or equities. Although stock markets tend to move up or down collectively, sometimes sectors or geographical zones can out perform or under perform the market or even move in the opposite direction. To minimise the risk it's best to spread your investments.
The performance of the unit trust or mutual fund will also depend on the quality of its management. The only way of getting an idea of how good it is, is to look at its past performance. Yet this can be very misleading because it depends on the dates over which the performance was measured. Also don't forget that investment managers come and go. A company who has had the same managers over a long period of time and a relatively good performance is probably as good a bet as any. The best way to check past performance is to use Lippers Analytical Service where unit trust performance is compared on a like with like basis: in other words using the same dates. Beware of the impressive claims made in brochures, they will have measured performance using the most favourable dates.
Apart from straight forward investment in equities and bonds whether directly or via a unit trust and keeping a certain amount of money in an emergency, you might need the following products as an expatriate.
Life Insurance and Pensions
Apart from putting some money in deposit or savings accounts and perhaps some in bonds and equities, via a unit trust, or unit trusts, you should think about investing in a life insurance policy and a pension plan, if you haven't already done so.
There are many different life insurance schemes, depending on how much money you can invest and when. These schemes are basically unit trusts with an insurance policy attached, which means that you are entitled to a set sum of money on a certain date, or on your death, (whichever happens first), after paying in a carefully calculated sum of money over a certain period of years. Most plans offer the prospect of a bonus at the end of the term depending on the success of the fund's performance to which the policy is linked, over that period.
All this might sound quite complicated and if you don't have more than the £200,000 or $333,000 which enables you to go to a bank that looks after all your financial needs (see private banking), you might consider taking advice from an intermediary or an investment advisor.
You might want to buy a house back home whilst you are overseas. This is a kind of insurance policy that covers you even if house prices double while you are away. In the meantime, you can rent it out. Some of the offshore institutions who are accustomed to dealing with expatriates specialise in these. Alternatively you might decide to buy a house in the country where you are temporarily residing. Again this is a specialised service and there are only a small number of financial institutions who will offer you a loan.
If you're in a foreign country and you are entitled to treatment from the public health sector, the first thing to do is to check out the quality of the care. Even if it appears to be good, you will find that many people top up what they are entitled to with an insurance policy, enabling them access to the private sector if necessary. You might be able to find a local company to do this. Otherwise there is a long list of companies that specialise in international expatriate health insurance. The main advantage with these is that you can go to the most expensive hospitals where English is invariably spoken, and if necessary, you can be repatriated, whatever your condition is at no cost to you.
Over the past century expatriates have been the target of numerous fraudulent offers. And today, in spite a maze of regulations you can still get 'ripped' off. But if you read the following carefully, you should be safe.
* If you take advice from anyone, make sure that it is a professional adviser who is registered to give you advice in the territory concerned. Ask to see the relevant documentation. Ask him exactly what he gets as compensation from the company concerned if you are not paying for his advice. Get everything in writing so that you are protected by law if anything goes wrong.
* Ignore fanciful claims made by unknown parties or even friends. People often try to get you to buy into something to drive up the price so that they can sell at a profit, themselves.
* Check these points very carefully when you invest your money: how much commission you are paying, to whom, if and when you can cash in your investment, and on what terms. Always make your check out directly to the financial institution in which you are investing, not to an advisor or intermediary.
* If you use an intermediary ask for three references from him before you part with your money, and consult with two other intermediaries before making a final decision. Take a meeting with at least a couple of intermediaries, explain your situation and your needs and ask them to put their advice in writing. A quality reply should be indicative of quality service.
* If you invest in unit trusts, savings accounts, etc., always check the yield on at least three other similar institutions before making a decision.
* Stick to brand names. Lesser known financial institutions may offer more attractive returns, but they carry more risk.
* In the Channel Islands and the Isle of Man individual investors are insured against loss but only for a limited sum of money. This means that if the institution you invest in, goes bust, you will be reimbursed. Make sure you don't exceed the limit with any one financial institution, so that you can be fully reimbursed if there is a problem.
Keep all records of your investments locked up and confidential. Don't keep these records or receive correspondence at the address where you are a resident.
Never talk about investing offshore because many people associate it with tax evasion, money laundering and the very rich, which might not be an accurate description of what you're about!