An offshore bond could be the key to a better return on your money
Such bonds have advantages for expats who are moving from a low-tax to a high-tax environment, explains Charlotte Beugge
Interest rates on savings accounts are at such low levels that many expats will be looking for an alternative home for their money.
Currently, the best rate expat savers can get on a variable rate savings account is 1.25pc, if they don’t want to give notice of withdrawals, or 2.75pc if they are willing to take a fixed rate and lock their money up for five years.
While everyone needs to keep money in savings, investing can offer better returns, albeit at higher risk. For expats, the two main choices for those who want a change from saving are offshore bonds and structured products.
Offshore bonds – or collective redemption bonds – are a framework in which expats can hold a mixture of investments including investment funds and cash deposits. The tax advantages make these bonds particularly attractive. You can roll up the income and dividends paid by the investments in the wrapper, which helps with tax planning as you only pay tax when you cash the bond in.
The downside of offshore bonds is that you need to watch out for charges, as these can be on the underlying funds as well as on the bond wrapper.
These bonds can be particularly useful for expats leaving a low-tax environment to move to a higher one. Tim Harvey, managing director of Offshoreonline.org said: “For an expatriate who has reached the end of a contract but who does not want to lose the advantages of offshore gross roll up of interest on deposits or dividends paid, these accounts can be ideal as interest can be left to accrue while you look for your next contract abroad.”
Mr Harvey added that if you hold investments, as opposed to cash deposits, in a bond, you should be prepared to do so for a minimum of five years.
Last month, Skandia International launched its latest offshore bond, the European Capital Account, aimed directly at UK expats living in Spain. Phil Oxenham, head of international proposition marketing at Skandia International, said: “We see a great opportunity in the Spanish market for a flexible investment solution which meets the evolving needs of expats living in Spain.
“The launch of the European Capital Account means investors can benefit from greater choice and flexibility together with wider investment opportunities.”
According to Skandia, the European Capital Account “has been designed to meet local tax rules to ensure tax deferment, so it is not subject to year on year tax assessment. It is normally only subject to tax on encashment so, for example, you are able to change funds and no tax charge will arise.”
As there is no need to make set regular payments after the initial lump sum deposit of £10,000 (15,000 euros) the European Capital Account could work for those who receive large but irregular payments – such as those who get paid bonuses. Investors can choose from 150 different international investment funds to hold in the bond. The charges are 1.6pc on each investment for five years plus a 1pc annual management charge and an 8pc early surrender charge in the first year of any investment, falling to 1.6pc in year five.
Another alternative to deposits for expats are structured products. These are usually sold by banks and you invest for a set period – often five years – and get a return based on a stock market index such as the FTSE 100. They are complicated products and as such, you should take financial advice: you can lose money if you cash in early. Few of the offshore banks are currently offering structured products.
