Let’s discuss some of the main savings and investment options available to British expatriates, resident in Brazil, and the key considerations which an independent financial advisor should take into account. We’ll focus on solutions in the UK and in OFCs (offshore financial centres).
Note, all assets, income and realised gains should be declared in your countries of residence and/or citizenship.
Disclaimer: We are providing guidance and personal opinions which should not be interpreted as formal investment or tax advice.
All images c/o Rawpixel.com
International Fund Platforms
A fund platform is a flexible investment account which allows you to invest in a wide range of financial products such as mutual funds, ETFs (exchange traded funds), alternative investments, hedge funds, shares and bonds. If you would like to hold a fund which is not currently available on your platform, your advisor can propose its inclusion on the approved asset list with the investment team of the platform provider. Otherwise, your advisor may recommend a fund with similar characteristics and risk.
For most retail clients, the large selection of mutual funds and ETFs is more than sufficient. High net worth clients may benefit from additional diversification by holding alternatives and hedge funds which are typically designed to generate growth in all market conditions with lower correlations to equities and fixed income. Alternatives have higher management charges than ETFs and require additional due diligence regarding risk and liquidity.
Fund platforms are generally more cost-effective than other vehicles and the charges should be detailed separately:
- Custody fee (%). Applied by the platform provider. Reduced fee for higher amounts e.g. > £500K or £1M
- Advisor fee (% or £). Agreed between client and advisor. Should never exceed 1% or the nominal equivalent. Your advisor may reduce the % fee for higher investment amounts.
- Fund fees (%). Each fund has its own independent annual management charge. As a general rule, ETFs are cheaper than mutual funds and alternatives.
- Fixed dealing fees (£) are applied, when buying and selling, which add up to a tiny proportion of the overall cost.
Regarding initial set-up fees, we believe that a maximum of 1% or a fixed time-based fee (£) for advice and paperwork is reasonable. Your advisor may even consolidate this fee with other services.
Try to negotiate an annual advisor fee of 0.75% instead of 1.00%, especially in the current high inflationary environment (update Sept 2022).
Tax treatment depends on residency status. Let’s assume you are resident in Brazil for tax purposes. Capital gains tax is charged on realised gains and income tax is charged on distributions such as dividends and coupons.
Both taxes are payable via the federal DARF document and must be settled by the end of the subsequent month following the gain or income receipt. If the chargeable event occurs on 15 Oct, the tax is payable by 30 Nov. The DARF can either be generated online at the Receita Federal website or your accountant may provide this service. It’s important to ensure you have enough liquidity in BRL to pay taxes calculated on overseas income/gains in GBP, USD or EUR.
Income tax can be mitigated by selecting asset classes which retain income rather than making distributions to the cash account of your fund platform.
UK or offshore fund platform?
Even if you are no longer a UK tax resident, tax may automatically be deducted at source from an onshore UK fund platform. In most cases, UK income and gains will not be taxed twice; only the difference, if any, will be taxed in Brazil.
An offshore fund platform allows you to enjoy greater control over your income tax and capital gains tax in Brazil. Depending on the frequency of profit-taking and dividend receipts, you have the option of eliminating or reducing these taxes subject to your choice of asset classes.
Offshore Brokerage Accounts
These are practical if you are making your own investment decisions over medium term horizons. Brokerage accounts offer a wide suite of instruments including options and futures trading in most hard currencies.
If you are interested in high frequency trading, be aware that dealing charges accumulate and eat away at your capital. Compared to onshore brokerage accounts in the UK, US and Brazil, offshore brokerage accounts may charge up to 50% more per trade.
Also note that high frequency trading is not necessarily the most profitable way to spend your time and money given the ‘roundtrip’ costs (buy and sell) and high volatility. Day-trading may has become more fashionable since the lockdowns began and there has been plenty of media coverage about individuals entering the stock market for the first time in 2020. Research shows that only a small percentage of people is capable of generating a consistent and worthwhile profit over a longer time horizon with changing market conditions. In fact, the bear market during the first half of 2022 has eroded a large percentage of retail traders’ portfolio balances and many positions are unlikely to recover even in the long term e.g. lower tier cryptocurrencies and meme stocks. We recommend that aspiring retail traders pursue a structured education to learn a professional approach to trading.
Offshore Investment Bonds
An offshore bond is an investment structure wrapped in life insurance and has proven to be a very popular solution for expats of many nationalities around the world. Most offshore bonds are based in the Isle of Man, Jersey, Guernsey and Ireland which benefit from stable governments and high levels of investor protection.
While the aggregate fees tend to be higher than fund platforms, say an additional 0.5% extra p.a., the tax benefits are numerous. Expats, in most situations, are not subject to capital gains tax and income tax on investments within the bond. In theory, this means the investment grows at a higher rate than an equivalent onshore investment. In Brazil, income tax or capital gains tax is applied on withdrawals from the offshore bond.
When an investor returns to the UK, an offshore bond can still be held but it is worth seeking professional advice from an UK FCA-regulated advisor. Broadly speaking, periodic adjustments, based on suitability, can be made within the offshore bond but it cannot be personalised whereby the investor assumes an active role in selecting and switching the holdings. This may result in a tax charge across the entire bond. In the UK, up to 5% of the value of contributions can be withdrawn from a bond on an annual basis without incurring tax. This can be accumulated if the 5% allowance has not been used over say, two years, e.g. 15% can be withdrawn in the third year. We encourage investors to take tax advice to determine a tax-efficient drawdown strategy and understand the succession planning benefits of an offshore bond.
Minimum amounts depend on the provider of the offshore bond. In our opinion, £150K is the minimum to make it cost-effective and worthwhile for asset allocation.
Unfortunately, many individuals have been subject to mis-selling in the offshore investment marketplace. When setting up an offshore bond, ensure your advisor is charging no more than 1% as a set-up fee and an absolute maximum of 1% p.a. as an advisor fee. Unless you are building a sophisticated portfolio, your preference should be towards investments from well-known fund houses, investment banks and asset managers. As per earlier comments (fund platforms), understand the aggregate fee structure before signing anything!
There is no need to hold alternative investments from unknown providers unless your advisor can demonstrate that large institutions and pension funds are also holding these assets. Their due diligence would have been conducted to a rigorous standard before adding the fund to their portfolios; an extra layer of comfort for a retail investor. The same rule applies to structured products which are often pushed by salespeople in the expat market. Keep it simple!
Many expats hold bank accounts with credit and debit card facilities in Jersey and Isle of Man banks. The minimums are quite high, typically in excess of US$25K to be held in a current account to avoid monthly fees. Surprisingly, for expats in Brazil, there are fewer cost-effective options with minimum balances, below US$30K, available in the marketplace nowadays compared to say, 2010. This has been partly driven by increasing compliance and onboarding costs. Some banks even ask for over $50K which has to be held in a current account or a low-interest fixed term deposit! That’s a guaranteed recipe for loss of purchasing power, especially when inflation is several percentage points above the nominal interest rate.
Use your bank for liquidity i.e. current accounts, cards and fixed term deposits. With near-zero interest rates and zero to negative real returns, be careful not to hold excessive cash beyond a reasonable emergency reserve.
Often, your bank will approach you with an investment product. Repeat after me, “My bank manager is not an independent financial advisor”. Understood? No matter how pleasant the relationship is with your bank manager, they are only able to recommend products from an in-house menu, i.e. a restricted range of funds, and they are following sales targets. There is nothing inherently wrong with cross-selling, welcome to capitalism! However, as an investor, you need to be aware of their limitations and protect your own financial future by procuring solutions which suit your profile!
The issue of suitability is hardly ever discussed. At the most, the client is presented with a simple tick box questionnaire asking them to decide for themselves whether they prefer a low, medium or high risk fund. This is not comparable to a holistic fact find which allows an independent advisor to understand a client’s financial objectives and tailor bespoke solutions, often with cross-border requirements.
Based on many examples of clients that we have advised over the years, they have often held mediocre ‘global’ funds, recommended by their bank managers. These funds are subject to high annual management charges, often above 1.5% p.a. whilst delivering a weaker performance than other funds in their respective peer groups – which, by the way, are available on fund platforms. Some ETFs and institutional class funds, available on fund platforms, have annual fees ranging from 0.2% to 1.2% and a much more solid performance than in-house bank funds. I am aware of at least one occasion, where a well-known Jersey bank charged a client US$10K for ‘financial advice’ before placing their savings into just one in-house, medium risk fund!
Also quite concerning is the way in which certain expat banks run campaigns to promoted structured products to their accountholders. Structured notes are fixed term, pre-packaged products, with say 4-5 year terms, in which the returns are linked to the price of underlying asset(s) or index(es). A structured note can make payments at review dates during the term and at maturity based on the price of the underlying index or asset on those dates.
Structured notes are more suitable for high net worth or experienced investors given the lack of liquidity in the short term and the potential downside risk if one of the underlying assets falls short of the target price on a specific date.
Remember the saying, “Invest in haste, repent at leisure!” If you are offered a structured note, it’s a good idea to discuss with your advisor before signing up. An independent advisor may be able to procure a structured note which is more suitable for your needs.
Switzerland is a strong and stable jurisdiction (yes, I did think of Theresa May whilst typing that..), home to several solid banks and financial institutions. For British expats in particular, there is no harm in holding an account in a Swiss bank for the mere purpose of diversification, although it would not be near the front of the queue in financial planning priorities. As mentioned earlier, all assets need to be declared to Receita Federal and Banco Central (>$100K) in Brazil. Swiss banks tend to require opening balances in excess of $500K to start a relationship and to be truly cost-effective, $1M would be the minimum to start benefitting from discounted charges.
Some of the options discussed above would be more suitable for British expats because they are cheaper and more tax-efficient for residents of Brazil and the UK. I reiterate the need for independent advice to ensure that portfolios are designed to minimise chargeable events in the investor’s country of tax residence. For example, a corporate bond paying a coupon every 6 months would be subject to income tax in Brazil and that would have to be paid in BRL via the DARF document.
Pensions & QROPS
A pension scheme is a tax-efficient bedrock of financial planning and even more valuable if your employer is making contributions to the scheme. In nearly all cases, we recommend that clients maintain payments and build up the value of their UK pension fund. During the accumulation stage, you would be only be required to declare the value in Brazil.
Long-term UK non-residents may consider QROPS (Qualifying Recognised Overseas Pension Scheme) which allows the pension holder to transfer a UK pension to an OFC to obtain more flexibility for income drawdown and succession planning. This is an extremely delicate area of financial planning and there has to be a compelling case for such a transfer to be recommended. Nowadays, this can only be carried out by a UK FCA-regulated advisor. Other pension transfer solutions are available depending on your current and future residency status.
Please be careful of unsolicited calls from ‘advisors’ regarding QROPS. Cold-calling is becoming increasingly common in a post-pandemic world and no doubt, some older and more vulnerable expats are falling victim to aggressive sales techniques and fearmongering. Please refer to this guidance from the Pensions Regulator UK.
Individual Savings Accounts are a popular and convenient way for UK residents to save in a tax-efficient manner; no tax on interest, dividends and realised gains within the ISA wrapper. UK residents can invest up to £20K p.a. (2022/23) into an Individual Savings Account. Once you are UK non-resident, ISAs cannot be topped up, but they can be consolidated and migrated to other ISA providers. Bear in mind that in Brazil, your ISA may be subject to taxation on distributions and realised gains, and would need to be declared in your filings. ISAs are not exempt from UK inheritance tax (IHT) and they may, in certain scenarios, be subject to Brazilian death tax.
For any clarification, please contact us with a specific enquiry.
Feel free to leave a comment. Thanks for reading!
All images c/o Rawpixel.com