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A to Z

Offshore Finance A to Z

 Everything you always wanted to know about offshore finance & expat finance, but were afraid to ask.

"Your accountant does not necessarily need to be an expert in offshore finance," says David Franks, managing director of specialist firm Blevins Franks. "What he needs is to understand the different tax laws in the country where you are living and your country of origin." Of course, you do not have to get an accountant, but if you do, he should be able to help you in numerous ways, including inheritance tax avoidance and the creation of offshore trusts.


Accumulation fund
Also known as a roll-up fund, these are funds where all income is automatically reinvested (rather than distributed to shareholders). This is tax efficient for those investors who wish to minimise investment income and cash in their wealth at a more tax-advantagous moment.

Asset allocation
A service whereby investment managers allocate investors’ funds in different countries – or, in some cases different industries – according to a specified risk profile. Some asset allocation specialists will invest primarily in bonds to provide income. Others will invest primarily in equities, to provide growth.

Banking
Banking offshore can, for the right people, be the cornerstone of expatriate investing. Dozens of the UK’s biggest high street banks are also present in tax havens such as Jersey, Guernsey, the Isle of Man and Gibraltar.

The top yielding accounts will compete favourably with their onshore counterparts but the best thing about offshore investing is that you are paid interest gross. Generally speaking, you’ll need to declare these accounts in the countries where you are living.

One problem with using offshore banks can be charges. If you need to transfer funds into a domestic account, or if you plan to use the account for everyday transactions, there can be fairly heft charges.

Bermuda
Reputable tax haven in the North Atlantic. Hugely popular with the world’s big insurers and reinsurers. Bermuda also has some highly attractive offshore funds and banking facilities for wealthy investors. Top fund managers such as Orbis are based here and the Bank of Bermuda is a highly-respected banking institution for particularly wealthy clients.

Bid/offshore spread
The difference between the buying price and the selling price of a fund. In the offshore world, this difference is often extortionate. Always try to find a third party through which to buy funds, as this is a means of reducing the bid/offer spread.

Bond
There are two financial tools called bonds that matter to expatriate investors. One is the straightforward debt issued by a government or a company for which investors will receive a regular interest payment (income) and, hopefully, the return of their initial outlay.

Then there are bonds issued by offshore banks and life assurers. These will often link returns to some underlying index such as the FTSE or the Nasdaq. Your returns will then depend upon the performance of the index. In most cases, initial outlay is guaranteed, but not always – so check.

Capital gains tax
A tax on the growth in your capital. In the UK, there is no CGT on the first £7700 of gain in a tax year. The top rate of tax is 40 per cent.
Those who have been resident in the UK will be liable for UK CGT for five years after leaving the country (subject to double taxation agreements).
A main UK residence should not be liable to CGT, but any other properties almost certainly will be.

Compensation schemes
If you are missold an investment, you want to be able to turn to someone to get your money back. To this end, the Isle of Man and Gibraltar both have compensation schemes in place. These, it must be said, are much more likely to be attractive to less-wealthy investors, because the highest compensation payments are not particularly high. Those with a higher level of assets should simply be looking for the best regulatory environment in which to house their assets.


Derivative
There are many variations of derivative, but primarily, these are financial instruments that are derived from an underlying security, but do not entirely represent the underlying security.
One kind is the option to buy or sell a security at a pre-agreed price.

So if you have a sell option, known as a put, then if the price of the shares goes down, and you buy at the lower price, you are then able to make the other party purchase your option at the higher price (and thus make a healthy profit). The reverse is true if you take an option to buy, called a call. Options per se are risky, but correctly used can help reduce risk in a portfolio.

Distribution fund
A fund that pays investors dividends. Good for investors who do not need to avoid income.

Domicile
A peculiarity of English law, domicile is broadly defined as where a person thinks they belong and where they think they’ll die. The term has created a furore in the UK as many non-nationals have used it to avoid tax. There is a pressure for the UK non-dom rule to be revised.

If you are British and wish to shed your UK domicile (this is difficult) you need to show that you’re leaving the UK and will never return. UK domicile means you’ll be liable for UK inheritance tax.

Dublin

Aggressive and increasingly successful international finance centre in Ireland. Not a tax free place to invest, but Dublin has big advantages over some of its counterparts. For one thing, while Dublin is not a tax haven it is allowed to market its investment products throughout the European Union.

Equities
Broadly, equity is the stake someone holds in an asset. More often, though, equities are a phrase that means the shares a person holds in companies.

Exchange traded funds
Ultra-cheap, ultra-flexible tool for following the performance of an index. For example, you buy a share in the Nasdaq. Your asset will rise and fall relative to the index. Often volatile.

Financial adviser
In expat havens such as South Africa, Spain, Portugal, Hong Hong, the Middle East and South America, the concept (and regulation) of financial advice can frequently be more hazy than in countries like the UK and the US.

It is vital to avoid hucksters. Don’t go for small adviser firms unless they are highly recommended and have access to the world’s biggest financial institutions at discounted rates.

Names we are confident in recommending: Blevins Franks in Europe, Towry Law International in the far east, plus the offshore banks which are branching into investment advice – RBSI and HSBCI to bame a few. They may not always be the most independent, but at least they wont try and steal the shirt from your back.

Gearing
Borrowing money and investing it. Massively increases risk, can increase returns. US term is leverage.

Gibraltar
European tax haven and British overseas territory. Able to sell select financial services around Europe thanks to a ‘passport’ arrangement.

Gilt
Debt issued by the government. You buy the debt and receive fixed annual returns and redemption of your capital some years down the line. The securest form of income you’ll find, but commensurately stingy in terms of what you’ll be paid.

Gilt
Debt issued by the government. You buy the debt and receive fixed annual returns and redemption of your capital some years down the line. The securest form of income you’ll find, but commensurately stingy in terms of what you’ll be paid.

Guernsey
Much like Jersey, only smaller (but bigger in the area of life assurance).

Healthcare
A crucial element to living offshore. In many expatriate paradises, healthcare will either be unavailable or limited. A good policy will offer you every form of cover that you could think of. However, it is becoming increasingly popular to go for a ‘menu driven’ approach.

This allows customers to choose the exact cover they require and stops duplication of cover where it is provided free of charge by the state.

Hedge fund
Hedge funds are popularly described as a highly speculative, geared (see gearing) asset that takes huge bets on movements in the financial markets. Hedge fund specialists counter that such a description is too sweeping.

They counter that hedge funds are market neutral investments that perform steadily regardless of the markets. Often, hedge fund managers look to fill their boots with arbitrage opportunities whereby an asset will be inefficiently priced. So they buy at one price, sell at the other, and pocket the difference.

Hong Kong
International finance centre in the Far East. Not a tax haven, though. Rigourously regulated. Very few offshore funds are actually domiciled in Hong Kong, but many are available through the jurisdiction.

Income tax
Tax on income. In the UK, the top rate is 40 per cent.

Inheritence tax
A big issue for wealthy British expats. If you retain your UK domicile, you will

Isle of Man
Tax haven in the Irish Sea. Very popular for life assurance, but is developing an extremely competitive offshore banking sector that offers many of the highest yielding accounts. Includes Anglo Irish Bank, Alliance & Leicester, and Halifax.

Jersey
Crème de la British tax haven crème. Unfortunately, Jersey is under huge pressure to reform its information exchange protocols with EU member states. This could have devastating consequences for the island’s financial services economy if not managed carefully. Centre for banks, funds, and, to a degree, life assurance.

Life assurance
Luxembourg and the Isle of Man are probably the two main life assurance centres in the European continent. Dublin and Guersney are also seeking to develop this element of their financial services.
Many life assurance products allow investors to buy any number and any sort of assets and hold them in a life assurance ‘wrapper’ that will pay out upon the death of the policy holder. Can be very tax efficient and administratively easy to use.

Luxembourg
Europe’s top tax haven. Luxembourg boasts life assurance, banking and funds aplenty and, because of its membership of the European Union, the jurisdiction is able to market products in many other European countries.

Under pressure, like every tax haven, to become more open in its information exchange agreements with EU member states, and could be attacked if it fails to conform.

Managed currency fund
Fund with holdings in more than one currency. Seeks growth by switching between currencies.

Money fund
Invest in the best possible deposit accounts.
Mortgages
Loan to buy property. Generally, offshore banks offer loans to buy property in the UK but a handful of banks are offering mortgages to expats buying abroad – particularly in Europe.

Non-resident
You become non-resident in the UK if you leave the country to work abroad permamently. If you sybsequently spend more than 183 days outside the United Kingdom per year, you will remain non-resident.

Offshore company
A structure used to hold an investor’s assets. Some will allow you to own various securities. However, investors should be warned: if a domestic tax authority suspects you are controlling the offshore company, you may come under some pressure to disclose the full nature of your activities.

Offshore fund
A fund that is domiciled in a no tax or a low tax haven. Down to the investor to declare any growth or income that the fund achieves. Failure to do so could be construed as tax evasion.

Offshore trust
A British invention that is used to allow people to pass assets to the people they choose rather than who the state decrees. Countries whose legal systems are based on the Napoleonic code, are often uncomfortable with the concept of the trust.

OEIC
Open ended investment company. Same thing as a unit trust but generally set up as a limited liability company.
Oeics often operate as umbrellas for sub-funds allowing investors to switch between sub funds.

Pension
The savings you build up to pay for your retirement. Generally, tax havens offer life assurance-based products that investors can buy into for tax free growth as long as the investment remains offshore.

Private banking
A catch-all phrase that means some form of dedicated banking service. Private banks will provide access to every sort of investment and the expertise to set up appropriate financial services. There has never been a better time to become a customer of a private bank because of the brutal competition taking place within the industry. The wealthier you are, the more dedicated and senior your private banker should become.


Roll-up fund
See 'Accumulation fund'

Sicav
Societe d’investissment a Capital Variable. Luxembourgish (and French) for funds. Frequently umbrella structures with different sub funds available.

Switzerland
Will probably be the last bastion of truly confidential private banking. Outside the European Union, resistant to the Organisation for Economic Cooperation and Development’s plans to reform global tax practices and generally very defensive of its finance industry. Imposes a withholding tax and claims this is enough to stop tax dodgers.

Term assurance
Life assurance that lasts for a limited period only.

Top-down
A macro-economic perspective of investment. Incorporates factors such as political change, oil prices and currency risks (among others).

Traded endowment policy
An investment policy that someone else owned and planned to use to pay off a mortgage. They then surrender the policy to a ‘market maker’ who sells it onto expatriates. Can be attractive to expatriates because of various tax advantages and the fact the policies are in sterling.

Ucits
Undertakings for Collective Investments in Transferable Securities. A directive to allow funds to be sold across Europe. Follow-up legislation: Ucits 2. Good for Luxembourg and Dublin.

Umbrella fund
Fund that houses several sub funds allowing investors to switch holdings when they think it appropriate. Can be expensive in terms off charges. Flexible.
Unit linking
The value of the units an investor holds in a life assurance policy or in a unit trust.


Volatility
The fluctations of a given investment. High volatility is not necessarily a bad thing, but investors should be aware of it, and understand the consequences it will have.

Warrant
An option issued by a company that allows investors to buy shares at a pre-agreed price. The duration of a warrant will last years, rather than months.

Will
The legal document that will determine how your estate is split when you die. If you plan to spend the rest of your life outside your country of origin, then you should write a legally watertight will in both countries to avoid legal problems.

Withholding tax
Tax levied at source on investment returns. Unavoidable once you’ve made the investment.

With-profits policies

Policies issued by life assurers. You hand over your cash and the life assurer invests it on your behalf. Should be low risk because in years of outperformance, the fund should set aside growth to make up for the bad years.

Yield
A measure of return on investment. Divide the dividend you receive on your investment by the cost of the investment, then multiply by 100. You have the yield.

Zero-coupon bond
A bond that has an issue value of zero, but redeems at a higher value. No dividend paid.

ADVICE TO READERS
While this website is checked for accuracy, we are not liable for any incorrect information included. We recommend that you make enquiries based on your own circumstances and, if necessary, take professional advice before entering into transactions.

 

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