Home bias vs diversification: Some home truths about investing
By Matthew Krystman, Partner, Blevins Franks
Home may be where the heart is, but is it where savvy investors should focus? 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.
Many expatriates keep savings and investments in UK structures, but this becomes less beneficial once you are no longer UK resident. Interest and dividends from ISAs, for example, will attract taxes in Portugal.
Non-UK residents should explore investment options that offer more tax-efficiency and additional advantages in Portugal. For example, wrapping investments in a Portuguese-compliant life policy can provide income tax benefits and currency flexibility while mitigating capital gains and inheritance taxes.
Even if you remain UK resident, being overly weighted in UK investments is ill-advised, especially amidst Brexit uncertainty. To minimise risk, it is important to spread your interests across geographical areas, sectors, markets and asset types in line with your risk profile.
While investing in real estate has advantages, it can carry a heavy tax burden, including council tax, stamp duty and capital gains taxes. 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 include non-resident capital gains tax (since April 2015), a stamp duty surcharge on second homes, increased council taxes and the gradual elimination of buy-to-let tax relief. Since 2017, UK residential property owned through certain offshore structures has attracted 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 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 needed. 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 tax and liquidity concerns. When you concentrate 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.
Ultimately, successful investing is about having a strategy specifically based around your personal circumstances, time horizon, needs, aims and risk tolerance. 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.
Summarised tax information is based upon our understanding of current laws and practices which may change. Individuals should seek personalised advice.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com