What to do and what not to do!
Little did I know, when I signed my first expatriate contract back in 1981, just what effect working overseas was to have on my life. As a university student, I had sampled life abroad, working briefly in New York, an experience which had given me the itchiest of feet. It meant that a few years later, when the U.S. engineering and construction giant Bechtel, for whom I had worked in London for about 18 months, offered me a two year posting in Riyadh, it took all of, oh, three seconds to decide to go.
As I scoured Bechtel’s draft contract, it struck me that, apart from improving my relatively lowly status within the company by roughly a million grades, I was about to earn a lot of money, for when I reached the section marked ‘remuneration’, my eyeballs nearly popped out.
I couldn’t believe it: with almost immediate effect, the company was undertaking to virtually treble my base salary and, among other things, to pay me a 25% annual bonus for the period of time I remained ‘in Kingdom’. There could be no hesitation. I signed and was on my way to my first real international assignment, armed with the guaranteed promise of Arabian riches; in my mind, I had already spent half of the cash, invested the other half in everything from property to bonds and I was just 23.
A life-changing experience
Most of us who have (or who are contemplating) working overseas will have experienced a similar range of sensations and emotions to the ones I first encountered 25 years ago – a mixture of elation, anticipation, apprehension and no little uncertainty. Expat life can be immensely rewarding, not only career-wise, but also from a personal development perspective, as travel really does broaden the mind. Financially, however, the experience can be, particularly if you spend time preparing properly prior to your departure and have the good sense to invest regularly while you’re away.
Back in 1981, the only thing I knew I must do was to open an offshore bank account as my residency status ensured I would not be taxed on any overseas earnings. Residency status? Ah yes, we’ll come to that in due course, but for now, imagine you have landed that plum overseas posting, just what, exactly, is your next step, the one designed to maximise your returns from your time overseas?
The Revenue form to file before you go...
At the risk of stating the obvious, the short answer is planning. It is clearly much easier to prepare for your forthcoming international assignment before you leave the UK rather than act retrospectively when you arrive at your new foreign home. For this reason, it is essential that the prospective expat seeks professional financial advice at the earliest opportunity in order to establish what he can and cannot do during his period of residency abroad.
First and foremost, the soon-to-be expatriate should complete form P85 and whisk it off to our friends at the Revenue, an undertaking which should prompt bringing tax affairs completely up to date before setting foot outside of the UK. Mission accomplished, the forward planning expatriate will find he/she is then faced with what may appear a perplexing variety of investment options best suited for the overseas resident. In some respects, this would be an accurate assessment, although once again, effort spent sifting through these options will ultimately save time and potentially significant sums of tax when eventually returning home.
It is imperative, therefore, that prior to investing one’s first monthly salary into a dollar-denominated European equity fund operated by an obscure organisation no one has ever heard of, the soon-to-be expatriate should open an offshore bank account.
How to choose an offshore bank
It will come as no surprise to learn that there are literally dozens of offshore banks, each offering a variety of expatriate accounts, so what should the budding expat look for?
I write as someone who, during the course of nearly six years working as an expatriate and a further five running an expat-related business with two non-UK offices, encountered a number of offshore banks, several of which I would not recommend to my worst enemy.
Based upon my experience, first and foremost, the expat should search for a recognised bank with a well-established credit rating and one preferably quoted on the London Stock Exchange. Internet banking options are now a must for the resident abroad and even at this preliminary stage, consideration should be given to the period of time the expatriate expects to spend overseas. Your chosen bank should also offer account facilities in a variety of major currencies. This last point is an important one: it is essential that when opening a non-sterling account, say in U.S. dollars, for example, that the currency is actually held in U.S. dollars by the expat’s bank.
Why should this be so important? Well, a colleague of mine, who was scheduled to receive payment in U.S. dollars during her most recent expat posting, opened a U.S. dollar account with a well known high street bank. Nothing wrong with that, you might say, except that the bank proceeded to take a commission on every penny she deposited AND withdrew because they were exchanging it into sterling each time. Costs mount fast when you’re being charged commission on every transaction.
Up until very recently, gross rates of interest accrued to all expatriate accounts as a matter of course, but the European Savings Directive (ESD), which came into force on 1 July 2005, changed all of that.
Should your expat assignment be in any EU country, it is probable that you will be directly affected by the ESD. Essentially, this means that any interest you receive on deposits will probably have tax withheld at source, i.e. you will receive your interest net of tax.
Alternatively, you may choose to receive your interest gross, although banks are now under a legal obligation to report details of the interest you earn to the tax authorities in the EU country in which you are resident.
Ordinarily, expats resident outside of the EU will be exempt from the ESD.
Once a bank account has been opened and the necessary paperwork in respect of the ESD submitted, the expatriate can set about exploring an intriguing array of investment options.
It goes without saying that by the time our eager expat has arrived at this stage, investment is the principal consideration and tax will probably be a secondary concern. However, where a direct choice between two investment options exists, the one with the most favourable tax implications will invariably get the nod – and rightly so.
What to think about before investing that tax-free income
Making decisions about where to invest will inevitably be directly related to the amount of time the expat expects to spend overseas and upon his principal objectives while resident abroad. Of the investment factors which may need to be considered, the following guidance notes should be of some initial assistance:
1. What amount will be available for regular investment and will the expat receive any year end bonuses?
2. Are there any other investments (UK or overseas) already held by the expat?
3. What level of regular home country liabilities have to be met?
4. What is the expatriate investor’s attitude to risk?
5. What is the expat’s age and that of his spouse and, if appropriate, his dependents? Will they be joining him on the international assignment?
6. When will the expat require access to his investment, bearing in mind the probable length of his contract?
7. Does the investment allow for emergency access?
8. Is capital appreciation or income the principal raison d’être of the investment/time spent abroad?
9. What are the expat’s existing tax liabilities?
10.Are there any constraints such as double taxation treaties which may influence the investment choice?
11. What does the expat want his investments to achieve and over what period?
This list may seem a little daunting and while prospective (and existing) expats will be keen to add to it, as a basis for establishing investment criteria, it does provide a useful start point.
Offshore companies and trusts
One final point: most investments will probably, initially at least, be held on an individual basis, although the expat may want to give consideration to holding them via a nominee, something which does not alter his beneficial title to the investments nor, usually, his tax position. Perhaps the principal benefit of holding investments via a nominee is logistical – the nominee may be closer, geographically-speaking, to the investment or be in possession of a standing instruction in respect of the same.
Alternatively, the expat may prefer (and many do) to establish a trust or a company for holding his/her investments. There can be significant advantages to establishing a company or trust. In effect, the legal status of either entity means they can be used as tax efficient investment holding vehicles, thus keeping the expat’s tax liability to a minimum.
There are an incredible number of advantages to working overseas, more than enough to make the experience both enjoyable and life-enhancing. Indeed, many people find that once they start on the expat trail, they remain on it for many, many years. Yet whatever period you intend spending abroad, if you want to garner the maximum possible rewards, it will pay to plan your investment strategy from the outset.
There are pitfalls to avoid, however, and before entering into any transaction, make sure you obtain your own professional advice.
Peter Sharkey is a director of several companies and writes on offshore matters for a range of publications.
P.S. If you enjoyed this article then we encourage you to sign up for the free Fleet Street Daily eletter. Learn what you can expect from today's markets -- and how to prosper in the face of uncertainty. You won't find more thought provoking writing anywhere on the Internet.