Investment & Savings Glossary
Confused by asset allocations and accumulation, derivatives and domicile? Don’t worry – you’re not alone. When it comes to investments and savings, there’s a whole new lexicon of terms to learn so whatever stage you are in the game, use our handy glossary as a go-to reference.
Everything You Need to Know
These are funds where all income is automatically reinvested (rather than distributed to shareholders). They are tax efficient for those investors who wish to minimise investment income and cash in at a more tax-advantageous time. Also known as roll-up funds.
The concept of allocating investor funds in different countries, industries and / or asset classes e.g. bonds, shares and property etc according to a specified risk profile. Asset allocation depends on the investor goals such as growth or income.
Banking offshore plays a pivotal role in expat investing with many of the world’s leading banks having a presence in tax havens such as Jersey, the Isle of Man and Gibraltar.
This is the difference between the buying price and the selling price of a fund. In the offshore world, this difference can be substantial so always try to buy funds through a third party in order to reduce the bid / offer spread.
There are two financial tools called bonds that matter to expat investors. First up, is the debt issued by a government or company for which investors will receive a regular interest payment (income) and hopefully, the return of their initial outlay and secondly, there are bonds issued by offshore banks and life assurers. These will often link returns to a global index such as the FTSE or the NASDAQ. Your returns then depend on the performance of the index. In most cases, your initial outlay is guaranteed.
Capital Gains Tax
CGT refers to the tax on the growth of your capital. In the UK, a specified amount of gains each tax year is CGT-exempt – normally around £7,500. The top rate of tax is 40 per cent. Those who have been resident in the UK are liable for UK CGT for five years after leaving the country (subject to double taxation agreements). A main UK residence should not be liable to CGT, but any other properties almost certainly will be.
Derivatives come in many forms but essentially they are financial instruments that are derived from an underlying security, but do not entirely represent the underlying security. One kind is the option to buy or sell a security at a pre-agreed price so if you have a sell option, for example, which is known as a put, then if the price of the shares goes down and you buy at the lower price, you are then able to make the other party purchase your option at the higher price (and in doing so make a healthy profit). The reverse is true if you take an option to buy, which is called a call. Options per se are risky, but correctly used can help reduce or risk in an investment portfolio.
Domicile is broadly defined as where a person thinks they belong and where they think they’ll die. If you are British and wish to shed your UK domicile (a complex process) you need to show that you’re leaving the UK and will never return. UK domicile means you’ll be liable for UK inheritance tax.
Equities are the stake someone holds in an asset and normally refers to the shares a person holds in companies.
Gearing is the act of borrowing money and investing it. It can increase returns but also increases risk. Also known as leveraging.
This is debt issued by the government. You buy the debt and receive fixed annual returns and the return of your capital at some fixed point down the line. Also known as bonds.
An important feature of expat life and in the UAE, soon to be mandatory. Medical expenses in the UAE are expensive so comprehensive healthcare cover provides peace of mind should unexpected medical costs arise.
Hedge funds are highly speculative, geared assets that take huge bet on movements in the financial markets.
Tax on income. In the UAE, there is no income tax but in other countries there is and depending on your nationality, even if earning in the UAE, you may need to pay tax on your income to your own country.
This is a hotly-debated issue for British ex-pats. If you retain your UK domicile, you will be liable to inheritance tax.
Life assurance is literally an insurance policy on your life, paid out on the death of the policy holder. A policy provides peace of mind for property owners and those with a family, should the unforeseen happen. Many life assurance products allow investors to buy any variety of assets and hold them in a life assurance ‘wrapper’. These can be very tax efficient and administratively easy to use.
Managed Currency Funds
These are funds with holdings in more than one currency. They seek growth by switching between currencies.
Funds that invest in the best possible deposit accounts.
Loans to buy property. In most cases, a property purchased in the UAE would be done so with a mortgage from a UAE bank rather than an off-shore one.
You become non-resident in the UK if you leave the country to work abroad permanently. If you subsequently spend more than 183 days outside the UK every year, you remain non-resident. Other expat countries have their own rules about what constitutes a non-resident.
A structure used to hold an investor’s assets. Some will allow you to own various securities but be warned that if a domestic tax authority suspects you are controlling the offshore company, you may find yourself obliged to disclose the full nature of your activities.
A fund that is domiciled in a no tax or a low tax haven. Responsibility lies with the investor to declare any growth or income that the fund achieves. Failure to do so could be construed as tax evasion.
A British invention used to allow people to pass assets to the people of their choosing rather than who the state decrees.
The term means Open Ended Investment Company and is the same thing as a unit trust. OEIC’s often operate as umbrellas for sub-funds allowing investors to switch between sub funds and are generally set up as a limited liability company.
A pension refers to the savings you build up to pay for your retirement. Generally, tax havens offer life assurance-based products that investors can buy into for tax-free growth as long as the investment remains offshore.
A widely used phrase that refers to a dedicated banking service. Private banks will provide access to every sort of investment and the expertise to set up appropriate financial services. The wealthier you are, the more dedicated and senior your private banker should become.
As per life assurance except term assurance lasts for a limited period only.
This is a fund that houses several sub funds allowing investors to switch holdings when they think it appropriate. Umbrella funds can be subject to high charges although they are normally very flexible.
The value of the units an investor holds in a life assurance policy or in a unit trust.
Volatility This refers to the fluctuations of a given investment. High volatility is not always a bad thing, but investors should be aware of it, and understand the consequences it could have.
A warrant is an option issued by a company that allows investors to buy shares at a pre-agreed price. The duration of a warrant will last years, rather than months.
A will is a legal document that sets out how your estate is to be split when you die. If you plan to spend the rest of your life outside your country of origin, then you should write a legally watertight will in both countries to avoid legal problems.
This is tax levied at source on investment returns. Withholding tax is unavoidable once you’ve made the investment.
Policies issued by life assurers. You hand over your cash and the life assurer invests it on your behalf. These funds are generally viewed as low risk because in years of good performance, the fund sets aside growth to make up for future bad years.
A measure of return on an investment. Divide the dividend you receive on your investment by the cost of the investment, then multiply by 100 and you have the yield.
A bond that has an issue value of zero, but redeems at a higher value. No dividend is paid until maturity.