Since many of our clients are located outside of their home country, we felt it would be prudent to suggest that you look into offshore portfolio bonds, along with a discussion of the drawbacks associated with these types of investments.
So, if you’re thinking about purchasing an offshore portfolio bond, here are five things you should know.
1. The fees reduce the overall value of your investment
When compared to other investment platforms, the fees associated with an offshore bond might be quite substantial.
Therefore, such fees can nullify any expected improvement in investment return brought on by investing abroad.
On top of that, your investment could be hit with a wide variety of fees. Here are a few of the more typical ones we’ve encountered:
- There will be an opening fee of 10% or more of the first principal amount invested in your bond.
- Fees for ongoing administration, which can be a set amount or a percentage of revenue.
- Upfront fees of up to 5% of the underlying assets (expressed or implicit) and ongoing yearly management fees of up to 2% of the underlying investments (in some situations) are common.
When broken down like this, it’s clear to see how these annual fees can significantly eat into the growth of your investments and lessen the impact of your offshore status and gross roll-up.
However, it is worth noting that many of the fees and charges can be greatly lowered by working with an advisory business that maintains an open and fair approach to billing, especially through costs that are not tied to these offshore portfolio bonds. It’s important to remember that the hefty costs you read about above are what allow the offshore bond providers to pay out such generous incentives (commissions) to financial salesmen.
2. The fine print isn’t easy to decipher
In the UK, the Financial Conduct Authority (FCA) and in Europe, the MiFID II | European Securities and Markets Authority are responsible for regulating the advice given on investments so that the fine print is clear and not deceptive. However, not all international regulatory agencies are as stringent as the FCA outside of the UK and MiFID II outside Europe. Consequently, you should not expect the same investor protections as you would in the UK and Europe. For instance, several offshore expat countries in the Middle East, Asia, and South America do not prohibit the receipt of commissions from product providers and fund companies.
It’s also possible that the contract’s provisions won’t be as straightforward. For instance, if you intend to routinely withdraw money from the offshore portfolio bond, the segmentation arrangements and limitations on relinquishing the bond may be essential considerations.
Once your bond is established, you may be subject to certain limitations based on the applicable tax system.
Before investing, you should read the fine print to make sure it suits your needs.
3. Users of the remittance basis are cautioned
Individuals who are not tax residents of the country can take advantage of the remittance basis.
Users of the remittance basis are exempt from reporting their offshore income and gains to HMRC and paying tax on them unless and until they are brought into the UK.
However, this does not apply to profits made from selling portfolio bonds issued in a foreign country. A user of the remittance basis must therefore report and pay tax on any chargeable gains realised, even though the money is never physically brought into the United Kingdom.
Investment gains made on a remittance basis can be delayed by using offshore portfolio bonds. Just be wary about falling into this trap.
4. Avoid customised offshore bond portfolios at all costs
Personalised portfolio bonds (PPBs) are an investment product commonly marketed to British expats.
You won’t be confined to the funds given by bond issuers, and the advertising pitch for these products typically emphasises that feature.
There is a dark side to this broader range of investment opportunities, though. Once you become a UK tax resident, all chargeable profits from investing in this form of bond are subject to income tax, and you should be aware of how this may influence your overall tax situation.
Further, regardless of the actual growth, bonds that can be invested in individual shares of a firm will be considered to have increased by 15% per year and are subject to taxation.
You will be subject to income tax on this presumed gain at your highest marginal rate for that year.
5. If you want to invest offshore, you should get some financial guidance beforehand
If you’re considering investing offshore or if you have questions about an investment you were previously sold, we strongly advise you to get advice, as offshore portfolio bonds are rather complex.
The sooner you begin the process of unwinding incorrect assets, the sooner you might possibly put your mind at ease.
Keep in mind that the tax implications will depend greatly on your unique situation and objectives.