Home bias vs diversification: some home truths about investing

Think about where you hold your savings and investments. Is there one area that stands out in terms of geographical region and asset type? For many expatriates, it is common to have a skew towards UK assets and investments. Britons also tend to favour property as an approach to invest and grow capital.

Home may be where the heart is, but is it where the savvy expatriate investor should focus? Here, we explore the tax implications of two types of ‘home bias’ – UK-based investments and a concentration in property – and look at why diversification is so important.

Home bias #1: UK investments

With familiar rules and benefits, it is understandable that many expatriates keep savings and investments in UK structures. However, once you no longer live in the UK, this approach becomes less beneficial. ISAs, UK life assurance policies and pooled vehicles such as unit trusts and Venture Capital Trusts (VCTs), for example, lose UK tax relief once you are resident elsewhere, and interest or dividends received can become liable to taxes in your resident country.

If you are non-UK resident, take time to explore alternative investment options that may be more tax-efficient where you live, and that may provide estate planning or other advantages. For example, many expatriates in Portugal benefit from wrapping investments in a form of life policy that provides income tax benefits and potentially mitigates capital gains and inheritance taxes. Some investment structures also offer flexible income options, including the freedom to take income in Euros instead of Sterling to minimise currency conversion risk.

Even if you remain UK resident, being overly weighted in UK investments is ill-advised, especially amidst Brexit uncertainty. To minimise risk, you should spread your interests across various geographical areas as well as different sectors, markets and asset types in line with your risk profile. More on this later.

Home bias #2: Property

While investing in real estate has advantages, it can carry a heavy tax burden. Wherever you own property, you are likely to face some sort of council tax, stamp duty and capital gains tax charges. Since 2017, Portuguese property valued from €600,000 (€1.2 million if jointly owned) even attracts an annual wealth tax charge, whether or not you are resident here.

Taxes on UK properties have surged in recent years. This includes new liability for expatriates on capital gains since April 2015, a stamp duty surcharge on second and subsequent homes, increased council taxes on vacant properties and the gradual elimination of buy-to-let tax relief. Since 2017, UK residential property owned through certain offshore structures – including trusts – has also become subject to UK inheritance tax.

Brexit may complicate things further. When the UK leaves the bloc and UK property becomes a non-EU/EEA asset, it is possible that it will no longer qualify for the capital gains tax relief available today in Portugal.

You need to calculate the overall tax burden of investment property alongside other expenses – such as management fees and maintenance costs, plus inflation – to establish the real returns.

There is also the issue of liquidity – being able to access your capital when you need it. With property, it can take many months to retrieve your initial investment and you could invite a loss by selling at the wrong time.

Why diversification matters

Having a home bias – in either sense – does not just present concerns regarding tax efficiency and liquidity. When you concentrate your money in one or just a few areas, it becomes exposed to more investment risk. By spreading across different regions, market sectors and asset types – including equities, gilts, corporate bonds and cash, as well as property – your capital has the chance to produce positive returns over time without being vulnerable to any single area under-performing.

Investment funds offer a way of combining a suite of different assets across a variety of countries and markets. While most private banks and wealth managers offer this strategy, often a significant part of their portfolios is placed in their own in-house funds. You can better enhance your diversification with a provider who uses a multi-manager approach to blend several different fund managers; reducing your reliance on any one manager making the right decisions in all market conditions.

Ultimately, successful investing is about having a strategy specifically based around your personal circumstances, time horizon, needs, aims and risk tolerance. British expatriates in Portugal can benefit from professional guidance from an adviser with in-depth knowledge of the tax regimes and investment opportunities in both countries. With personalised, cross-border advice, you can reduce your exposure to risk while ensuring you hold all of your assets – home and away – in the most tax-efficient way possible.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.

By Dan Henderson
|| [email protected]

Dan Henderson, Partner of Blevins Franks, is a highly experienced financial adviser, specialising in retirement, investment and succession planning. He holds the Diploma for Financial Advisers and advanced CII qualifications in pensions and investment planning.