With large tech companies setting up offices around the world – stock based compensation, is becoming more prevalent among expats.
Company share schemes, or employee stock options, are a great way to build wealth, but they might need careful attention if you want to keep it.
If someone gave you $1,000,000 today – chances are, you would not choose to invest it all in your employee stock.
But that’s the position many employees with generous company share schemes find themselves in.
90% of their wealth in a single company.
And diversification isn’t the only issue, taxes can be punishing too.
Separating your human capital and financial capital.
In Global Financial Crisis, The future of the economy always seemed to be a question mark, but I’ll never forget the story one friend told me…
Jonny’s dad had worked at Lloyds bank all his life.
Every year, he’d bought into the company share program. His pension? Also in Lloyds bank stock.
The share price had been doing well, since the bottom in 2003 it kept going up in value.
To Jonny’s dad, it seemed like madness to put the money anywhere else.
He thought he was buying at discount, and confident the bank’s share price would one day be back at its historic highs.
And he worked for the company, so who better to understand its prospects?
But suddenly 2008 came along… Lloyds was on the verge of collapse.
The problem wasn’t just that the value of his savings had plummeted – his retirement was now certainly off the cards.
But also at the same time, his future employment prospects had come into question.
Nowhere else was hiring bankers either… a double hit – suddenly no income and savings now worth very little.
Fast forward to today, and the shares never recovered, Lloyd’s stock is still down -70% from its high in 2007.
It’s not an unfamiliar story, at the time you’re most likely to get laid off, your company stocks are also likely be of limited value.
Diversifying these away from your employer, could mean you still have a stable nest-egg if the company falters.
It always pays to keep your human capital separate from your financial capital – especially if you work in a niche or cyclical sector.
You’ve already got enough exposure to that industry through your work. You don’t need to double down on it with your investments.
The top companies rarely stay the same.
If you’re thinking “that won’t happen to me, I work for ….” the odds might surprise you. Even if your employer is a huge stable company.
The average lifespan of a company in America’s S&P 500 is 15 years. And it’s expected to shrink to 12 years by 2027.
Companies that have been around for multi-decade periods are the exception, not the rule, and even their days may be numbered.
It’s not just the company closing that you need to worry about, if the value of your shares declines it can have a meaningful impact on your future.
On the table below, new-entrants to the top 10 companies are shaded in a separate colour for each period. Five years later, most of them are gone.
How could you avoid tax traps?
If you own shares in an American company, the taxes can be particularly punitive.
By holding US shares directly, you’ll suffer withholding taxes up to 30% on any dividends you receive.
And when you die, you’ll be subject to US estate taxes up to 40%, on any US assets (including shares) above $60,000.
But if the same stock was held through an offshore investment bond – withholding tax would reduce to 15%, and US estate taxes to zero (for non-US residents).
The logical answer, may be to simple sell the shares, if taxes aren’t punitive, and diversify your portfolio immediately.
But moving your shares into an offshore investment bond can often be a consideration, if you’re looking to diversify your holding over time – selling over a few years – instead of all at once.
Is it just American companies with tax issues for expat shareholders?
US stocks are one of the most common problems, but certainly not the only one.
Now the UK has moved to a residence-based Inheritance Tax regime, shares in UK companies can be an issue for expats too.
For long term expats living outside of the UK for over 10 years, only their UK assets will be subject to 40% IHT. This includes direct holdings of UK shares.
Selling these, and reinvesting in a diversified portfolio, can mitigate this issue entirely.
Or, as for the example above, holding these through a tax efficient structure like an offshore bond can mitigate this.
What should you consider when diversifying your shares?
The right starting point for most investors is a globally diversified portfolio of stocks and bonds.
With over 7,000 easily investible companies around the world, it seems short-sighted to hold your wealth in just 1 company.
Owning the whole market, positions you to capture gains wherever they occur. Instead of looking for the needle in the haystack.
And with multi-decade track records for these asset classes, we can expect reliable long-term returns to support your future life.
Expats often benefit from holding these in a low-cost offshore investment account, as these remain suitable as your move around the world, rather than local investment products.
I believe the best investment portfolios are built around funding your future life, so the specifics require a deeper conversation. Fill out the form below, and let’s talk more…
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