The 5-Year Expat Master Plan!
Becoming an expatriate can carry with it many financial benefits and the notion that one could come back to their home country not only more tanned, but somewhat richer too.
And so…. the plan is hatched! The usual time scale considered is 5 years and many expats will spend time conjuring up their 5 year plan master plan. A plan of accumulating as much wealth as possible before moving back to their country of domicile or moving to another location.
But how many expats actually stick to this 5-year plan?
Is it really possible to make a significant injection to your overall net worth in this period of time and what is the best way of going about it?
The sad truth is that thousands of expats have dreams of making big pots of cash, only to end up totally broke with hardly any savings, after years spent living the high life. So how do you make sure you don’t return broke and how do you make your plan as effective as possible?
Starting To Save
Well let’s start with the basics. A good rule of thumb is to try and save at least 10 – 20 percent of your income. But you must budget for this. Don’t just do it because you have money left over at the end of each month. Consider it a monthly out-going as standard. Just like you would pay for your mortgage or your car insurance. Think twice before you upgrade your car or your villa in the sun and make sure that you are regularly putting money away. It is advisable to always keep at least 3 months salary readily available in a cash account. Anything over and above this should be considered medium to long-term savings.
Ask yourself: What am I saving for? Then set yourself an achievable target over this 5-year period.
Where to Save?
But what to do with your money?
Well, if you remember investing in the 1980s, you probably remember when deposit accounts paid a handsome rate of return. Nowadays we are all too familiar with rock bottom interest rates. With inflation in most countries being higher than bank interest rates your money is standing still at best. So even if you are earning more or not paying tax you are not safe from inflation.
So sticking your money in a standard deposit account is going to get you nowhere. Fast. But there are still powerful planning tools available, which can be used creatively to help you make your newfound wealth grow. In the offshore market space regular savings vehicles and offshore portfolio wrappers/bonds via large insurance companies are commonly used.
A regular savings vehicle provides a disciplined approach to wealth creation while also providing insurance protection.
It provides a secure platform to save regular amounts, usually monthly in a disciplined manner with the opportunity to earn greater interest than you would get from a standard savings account. Each time you make a contribution to your pot your money is invested in a range of chosen funds that will be selected based on your situation, objectives and attitude to risk. Many of the advantages derive from the fact that the investment is structured as a life insurance product. There is a small amount of life insurance built into the product – usually 101% of the total value of the portfolio. Which will be paid out to the chosen beneficiary.
Offshore Bonds/ Lump Sum Investment
An offshore bond is essentially a secure place to park your money whilst enjoying protection and growth from it. A cash lump sum is placed into the bond, and then this is then placed in an agreed range of funds. Commonly used jurisdictions are places like the Isle of Mann, Guernsey and Jersey.
Probably the main advantage of an offshore bond/wrapper is the fact that they are only ever taxed when a taxable event takes place, such as redemption. Not on an annual basis. The only tax to which funds may be liable is that which is deducted at source, e.g. from a dividend. This is known as withholding tax.
Of course the specific benefits of investing in an offshore bond will always depend on an individuals circumstances but there are many advantageous elements that may be used. Two of which we will consider below. Time for the science!
A key tax benefit for a UK expat who at some stage may return to the UK is Time Apportionment Relief. This is where a chargeable gain from the bond is reduced for tax purposes if the bondholder was not UK resident throughout the policy period.
So how is this calculated?
Well, if the gain is made on/after 6 April 2013, then the gain is apportioned by offsetting the number of days in which you were not UK resident during the policy period against the total number of days in which the policy/bond was held.
Assignment is another benefit. It is also possible to assign an offshore bond to another person, so that the assignor will not be subject to any UK income or capital gains tax charge. Thereafter, all future UK income tax is charged at the assignee’s tax rate. Therefore the overall UK tax payable on the offshore bond can be reduced if the policy is assigned as a gift to a non-taxpayer, for example a child or a non-working spouse. Visit HMRC’s website for more details. http://www.hmrc.gov.uk/news/tar-faqs.pdf
Although it can sometimes feel like monopoly money, earning a different currency to that earned in your home country this can be used in your favor. In Dubai, for example, where the majority of people are paid in dirhams (fixed against the US dollar), a practical approach is to save in USD. You can then always switch to your base currency in the future when the currency exchange rate is to your advantage. It is easy to keep track of currency values on websites such as
www.xe.com/currencyconverter/ or by using famous names such as the FT or Bloomberg. http://markets.ft.com/research/Markets/Currencies and http://www.bloomberg.com/markets/currencies/
They all have easy to navigate currency data pages so you can check to see when it is or isn’t a good time to convert.
Stick with it
5 years is a reasonable amount of time to save. You can see the horizon ahead of you so stick with it. Set yourself that goal and don’t veer away from it. Whether it is to accumulate a lump of cash by disciplined regular saving or to give up that swanky new villa and put aside a lump sum for greater growth. Prioritize and think about what it is you are saving for, so that you have an end goal in mind. Don’t waste the opportunity you have and take advantage of your expat status.
Tax and returning home
Tax is never far from the minds of most expats, making it an essential part of money management. It is vital that expats understand the taxes they are likely to be subjected to before making any decisions – getting it wrong could prove to be very costly. Be careful as If you decide to return to your home country and bring back the money held offshore you may have an income tax liability on the gain.
Consider Inheritance Tax implications too. Many British expatriates may live outside the UK income tax net but, unless they change their domicile, their estate is still liable to IHT. It is always best to seek advice from a Tax Lawyer of Financial Adviser that specializes in this area.
So it might be time to give up a few of those expat luxuries and endeavor to make that 5 –year master plan a reality.
NB This article is based on an interpretation of the law and HM Revenue & Customs practice. Tax relief and tax treatment of investment funds may change.
Article Courtesy of
Private Client Adviser AES International,
Global Wealth Management
Emaar Square, 5th Floor,
Building 6 PO Box 191905
Tel: +971 (0) 4450 2500
Mobile +971 (0)50 4699 236
Fax: +971 (0) 4454 1272