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You are here: Home Finance & Business Tax Guide to offshore investment products

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30/07/2003Guide to offshore investment products

Overwhelmed by the number of offshore investment products available? Here's a guide.

Types of investment product
Funds
An equity fund
A trust investment
Cons
Bonds
Basic investment bond
Large investment bond
'Guaranteed Income' and 'Growth Bonds'
With-profits bonds

More and more expatriates are reading up on offshore investment as they struggle to find comprehensive trans-European packages to match their country-hopping lifestyle.

Many expatriates find themselves overwhelmed by the cumbersome bureaucracy involved when they switch countries. They require quick and easy access to their funds, and are interested in saving money via lower tax arrangements.

Finance expert Christine Cartey works at the Guernsey-based Merill Lynch Investment Managers, and says before considering any investment product an expatriate must first assess his approach to risk.

"Those who are very adverse to risk can choose investment models to suit them. But those who can accept the concept that they might lose, as well as make some money, can look at a more flexible investment product," she says.

Types of investment product
There are literally tens of thousands of offshore investment products offered to expatriates by offshore banks.

This is because these banks pride themselves on being able to suit all of their customers' individual financial needs and desires and are prepared to tailor-make products as much as possible, as well as offering their own products.

But for all this flexibility and the multitude of tailor-made investment products and the bank's own products, all are essentially either a variation or combination of one of three main investment types - funds, trusts and bonds.

As these tend to be thrown together to make an investment product which suits the needs of each individual expatriate, these products are to all intents and purposes as flexible as the expatriate makes them. However, each still have distinct characteristics which tend to suit particular types of expatriate.

Funds
A fund is either an investment company or a mutual fund.

For the purpose of individual investment - a mutual fund is what applies here. With an offshore mutual fund, the expatriate to all intents and purposes surrenders the right to manage the money invested, and instead assigns responsibility to a fund manager to manage, administer and promote the fund.

Again, there are a huge variety of fund types with such weird and wonderful names ranging from an "aggressive hedge fund" to a "blend fund", a "principal rate fund" to the highly confusing "fund of funds".

However, all still tend to fall into two categories depending on the investor's attitude to risk - either "pro-risk" or "risk-adverse". Two investment types which epitomise these extremes are equity funds and trust investments.

An equity fund
This is a mutual fund which invests primarily in stocks, usually common stocks, which are securities that represent equity ownership in a corporation. They entitle the holder to a share of the company's financial success by receiving dividends.

However, the risk is noticeable in the fact that in the event of liquidation those holding common stocks may only apply for access to the (ex)company's assets after bondholders, other debt holders, and preferred stock holders have taken their share first.

A cash fund is simply the investment of a lump sum of cash into a fund. They clearly are the two different extremes, therefore, for expatriates wanting to invest, but with opposing attitudes to risk.

Christine Cartey explains: "Generally speaking, the risk adverse are more suited to cash funds, and those with a more flexible approach to the concept tend to find equity (stock) funds more appropriate."

A trust investment
A trust is a legal arrangement whereby an individual (the trustor) gives financial control of property to a person or institution (the trustee).

An offshore trust is based in an offshore country which does not tend to tax the company's profits. When assets are transferred into an offshore trust structure they are to all extent and purposes surrendered and placed into the hands of the manager, and not the trust settler.

This means the income and capital gains generated by those assets are taxed according to the rules in the country of residence of the legal owners - the trustees, and not by the rules of the country the investor may be living in.

Trusts can therefore prove a very wise option for tax planning purposes as a well organised and administered trust is likely to mean big savings on capital gains tax, inheritance tax and, above all, income tax.

Cons
One problem with offshore investments is that unlike local (onshore) accounts, the expatriate will also have to cover the cost of opening a new bank account and making long-distance telephone calls.

With offshore investment, expatriates can invest two, three, four, or even five different jurisdictions in their offshore structure - if they can afford it. Companies with substantial funds might invest in one country for the corporations, one for the trust, and one for the bank account.

Simply by having information held in separate areas, companies can exploit all opportunities to be as discreet as possible, and can prove difficult to track and trace.

This type of investment product is therefore a good choice for the expatriate who lives in a high tax country and wants to save money by paying a lower tax rate.

Although healthy elderly expatriates should not have much of a problem managing this type of investment product - many factors lend it better to the younger expatriates - such as coping with having to make expensive long-distance phone calls maybe early in the morning to cope with the different global time-scales.

Also, many elderly expatriates want their offshore investment to give their lives simplicity (along with attractive tax-rates).

However, expats can also choose to make the most of their opportunities of reward by spreading out assets into various offshore financial centres.

This type of expat will therefore win by making it very difficult for anyone to find out confidential financial information, but this will also mean he needs to familiarise himself with the often ultra complex financial and tax laws of each offshore financial centre he has invested in.

This is especially difficult with trusts as many were loosely based on a piece of English legislation which dates back 600 years.

Bonds
The expatriate's attitude to risk applies again when considering bonds.

Whilst private funds tend to be large and are more suited to longer term investment, such as gilts or bonds, public funds end to be more flexible, cheaper to buy, and allow for an indefinite period of investment.

Basic investment bond
This allows investment in a restricted number of the bond provider's funds. The general rule is here is that as not much has been invested, only a degree of flexibility is permitted.

This is a single premium investment into a contract - an agreement provided by an assurance company, and can be 'fixed term' or 'open'.

These contracts, however, are really best suited for long term, or if not, medium-to long-term trading, and therefore suit the young expatriate who is not hoping to make a quick buck, but who is slowly considering saving for his pension.

Large investment bond
A 'managed portfolio bond', however, allows investment into a larger number of funds which includes 'external' funds.

As a result of the special institutional rates offer to the bond provider, it can cost significantly less to invest in these external funds as opposed to making a direct investment into to the external fund manager.

The best possible investment bond, however, is the 'personal portfolio' which allows investment into almost anything - which includes all tradable securities from funds to stocks to shares in practically any country around the world. Even if you do one day become lucky enough to have such an invest

ment arrangement, it might still prove a good idea to appoint a personal investment manager for guidance. This clearly therefore would only really suit a very well-off expatriate, and age is really irrelevant, although it is less likely that a young expatriate would already have built up enough assets to invest in such an expensive investment product.

'Guaranteed Income' and 'Growth Bonds'
Those expatriates opposed to risk but still wanting to invest offshore, such as elderly expatriate with some, but not vast amounts of money to invest, can make use of this form of investment.

Whilst they can vary greatly, these schemes tend to relate to all, if not at least some of the following:

Original capital invested
Income Capital growth

The general rule to remember is that the higher the amount of guarantees, the lower the amount of return to be expected. In short - you pay a price for your security and peace of mind.

Both of these bonds run for a 'fixed' term from a few to around ten years. Whilst they may seem prude and unprofitable, they are a perfect option for investors who know what they want are who are prepared to invest for the entire period.

With-profits bonds
But even if the above -mentioned options seem secure enough, investors can always go one step further and seek to use 'With profits' bonds.

These tend to be used when the country into which the investor has placed is savings, may experience political and therefore economic volatility.

To better understand the concept of these schemes, they can be viewed as somewhere between building society accounts and direct stock market investments.

In short, you are still making an investment, as you would on the stock market, but you are protected from dangerous stock fluctuations on a daily basis.

A set amount of the fund growth is paid out each year as an annual bonus, referred to as a 'loyalty' bonus. The balance is then deposited into a reserve account, so that if the fund were not to perform as well as it should - there are sufficient funds to be able to pay the bondholders their annual bonuses.

All this makes for a rather safe form of offshore investment, or at least, as safe as one can be in the complicated world of offshore investment.

The investment can only increase, as the capital cannot decrease in value and the bonuses distributed cannot later be reclaimed.

Freelance journalist Rob Hyde is a regular contributor to Expatica. A British national who recently returned to the UK, he spent most of his youth living in various parts of England, France, Germany and Austria.


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