Viewing posts from: November 2000

Portuguese capital gains tax – changes from Budget 2022

By Mark Quinn
This article is published on: 27th June 2022

27.06.22

If shares, investments or Portuguese property were acquired before January 1989 there is no capital gains tax on sale for Portuguese tax residents. In any other instances, capital gains tax is applied at 28% to any profits made.

Indexation relief is also available if they were held for more than 2 years and is applied on a sliding scale.

For example, if you decided to surrender a UK Stocks & Shares ISA or share portfolio, the gain made on sale would be taxed at 28% in Portugal. If no gain has been made, there is no tax to pay. There is no exemption for NHRs.

However, the Portuguese Budget for 2022 which was approved on 27 May 2022 introduces a change with effect from 1st January 2023 regarding the taxation of ‘short-term capital gains’ i.e. gains realised on assets that have been held for less than 365 days.

For investors whose taxable income (including the short-term realised gain) is €75,009 or more, the taxation will be increased from the flat rate of 28% (or 35% for investments held in blacklisted jurisdictions) to progressive rates, which can be as high as 48% (or even 53% if your total income exceeds €250,000.)

Investors can mitigate ongoing capital gains tax on their investments by using one of several “tax wrappers” available to Portuguese tax residents. Each wrapper will differ in terms of its features and benefits and the most appropriate structure will be different for each individual.

However, the purpose of such tax wrappers is to essentially act as a ‘trap’ on any gains. This means that you can be in control of the timing of any taxable events and potentially create a much lower overall tax figure. Equally important is that the underlying fund manager is not constrained in any investment decisions by punitive tax charges that could apply to short-term transactions.

Please talk to us to assess the different range of investment options and wrappers, and what the most appropriate may be for you and your family.

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Investment Property in Portugal

By Mark Quinn
This article is published on: 21st June 2022

21.06.22

I’m often asked for my opinion on property as an investment, either in Portugal or elsewhere and I must admit it doesn’t tick many boxes as an investment.

For example, it is generally subject to income tax, capital gains tax and succession tax, as well as ongoing local rates. It cannot be converted into cash quickly or easily (illiquid) and it is expensive and time-consuming to maintain. It can also come with administrative issues such as unruly tenants, rental void periods and due to its static nature, it is difficult to plan around.

Having said this, property continues to be a popular investment choice as it is easy to understand and you can touch it, giving investors a sense of security and reduced risk. Additionally, we probably all know a few ‘property millionaires’. So, what are the planning angles and how can you ‘get out’ and enjoy your spoils tax efficiently?

Capital gains tax (CGT)
Portuguese residents are subject to capital gains tax (CGT) on their worldwide property gains, unless the property was purchased before 1st January 1989, in which case CGT does not apply.

For Non-Habitual Residents (NHR) selling Portuguese property and non-NHRs, CGT is due on 50% of the gain and is added to your other income in that tax year and taxed at scale rates. In addition to this, if the property is located overseas, tax may also be due in the country the property is located. However, if there is a double taxation agreement between the two countries e.g. Portugal and the UK, you should not pay tax twice on the same gain.

Portuguese property
NHR status does not have an impact on the taxation of Portuguese property. The tax treatment is the same for NHR and normal residents, but despite the potential for eye-watering levels of tax, there are some reliefs available if the property you are selling is your main home – it does not apply to rental property sold in Portugal. The two reliefs mentioned can be used in isolation or conjunction.

Main residence relief: You can mitigate all – or a portion of – the CGT by reinvesting the proceeds into another property in the EU or EEA. Any amount not reinvested is taxed
Reinvestment into a qualifying pension or long-term savings structure: This is a relatively recent relief and is particularly advantageous for those wishing to downsize (and therefore will not fully reinvest the sale proceeds), or for those moving back to the UK or elsewhere outside of the EU/EEA. There are strict criteria for qualification and we can advise on this area but most notably, you or your spouse must be retired or above 65 and the gain must be reinvested in a qualifying structure

Non-Habitual Residence (NHR)
NHR gives those selling foreign property an advantage as gains are exempt from CGT in Portugal. But what about the tax due in the country the property is located? Let’s look at UK property as an example. The UK only applies CGT to gains accumulated since 6th April 2015 and you will also have your annual CGT allowance to deduct of £12,300 per person. Additional reliefs may also apply, further reducing any gains, but this will depend on whether the property sold was your home or an investment property.

For example, if you bought an investment property in Portugal in 1992 for £100,000 and it was sold today at £1m, ordinarily tax would be due on the £900k gain. But selling this as a non-UK resident, you only pay tax on the gain since April 2015. Using the straight-line method, the gain is £212,000 from which you can deduct your annual CGT allowance, leaving a taxable gain of £199,700. Assuming you had no UK income in that tax year, the tax due to HMRC would be £52,146 which is an effective rate of 5.7%.

Are you domicile or non-domicile?

By Mark Quinn
This article is published on: 16th June 2022

16.06.22

Domicile is often confused with residence, but it is quite distinct

The law of domicile is highly complex and has wide-ranging consequences on an individual’s tax position, as the recent furore surrounding Akshata Murty illustrates, but for most British nationals here in Portugal, domicile is a key factor for UK Inheritance Tax (IHT).

Individuals only have one domicile at a time and a very loose definition is ‘where you have a permanent home’. In my experience, this is often misunderstood and individuals who thought they were ‘definitely non-UK domiciled’ after living in Portugal for several years learn that in fact, they are very much still UK domiciled.

The are several types of domicile, namely ‘Origin’, ‘Choice’, ‘Dependence’ and ‘Deemed’ but here I will focus on the first two. Firstly, ‘Origin’. This is acquired at birth, usually from your father (or your mother if they were not married at the time of your birth). This is never fully lost but can be suspended by acquiring a new domicile of choice, but it is adhesive and will revive if the new domicile is lost.

Acquiring a domicile of choice involves forming a clear and fixed intention for a new country to be your permanent home, and therefore actually requires permanent residence.

Being non-UK domiciled is highly advantageous for UK IHT
The worldwide estates of UK domiciles are assessed for IHT in the UK, even if you live elsewhere. For non-UK domiciles, generally only UK based assets are assessed. It is worth noting here, that assets that derive their value from the UK but are held elsewhere e.g. company shares, will be deemed to be UK assets.

Shedding UK domicile is tricky
The burden of proof lies with the person claiming the change and the standard is particularly onerous. There is no checklist and your circumstances are looked at as a whole. Some factors that might be considered are family and business ties, location of friends and social interests, location of assets, acquisition of citizenship or languages spoken.

The adhesive nature of domicile is highlighted by Richard Burton’s failed attempt to change his domicile, which resulted in an IHT bill of £2.4m. Despite him living in Switzerland for 26 years, structuring his assets appropriately and subsequently dying there, the revenue was successful in arguing that his ‘mind and heart’ still remained in Wales. Their evidence being his choice to have the Welsh flag draped over his coffin and being buried with a book of Dylan Thomas poems. As you can see, what can be considered is very broad.

Traps
Non-domiciles by choice with a UK domicile of origin must be very careful with return visits to the UK, especially if they have a second home there. If they die as UK tax resident (by exceeding their day count) and were also deemed UK tax resident in one of the two preceding tax years, they are automatically deemed UK domiciled and their worldwide estate is subject to IHT.

A new domicile is retained until the new country is permanently abandoned, but unless another one is acquired immediately, your UK domicile of origin will revert automatically – even if you never set foot in the UK again.

Mixed domiciled couples must be careful. Normally assets passing between spouses are IHT exempt, but assets passing from a UK- domicile to a non-UK domiciled spouse are only exempt up to £325,000 unless they elect to be treated as UK domiciled for IHT purposes. This has a knock-on effect on their subsequent death. Usually, any challenge will come after your death, and it is up to your personal representatives to prove your intentions in life and gather evidence – which may not be possible, so you must ensure your record-keeping and evidence is strong.

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Falling investment markets

By Mark Quinn
This article is published on: 9th June 2022

09.06.22

Markets have fallen recently with concerns over rising inflation and interest rates and the war in Ukraine. In this uncertain environment, clients are asking me: “should I sell?”, and those with cash to invest are uncertain if now is the right time to commit to investing.

Why do falling investment markets cause concern?
Rather than seeing movements in markets as being completely normal and part of the regular cycle in markets, I believe the media instills fear among investors. I follow the financial news every day and read headlines dominated by talk of slumps, crashes, stagnations, recessions etc. but rarely see positive news stories about investments and markets such as how many global stock markets reached all-time highs in 2021.

This is getting worse with internet-based news as “click bait” headlines are used to prompt us to click through to read these apparently disturbing events.

Humans are bad investors
Our brains are not designed to make sound investment decisions as we are subject to biases and cognitive distortions and our emotions, rather than fact and logic, overly influence our decisions. One of our biggest weaknesses is our loss aversion which can lead to not taking advantage of investing at low prices during market falls.

Professionals versus amateurs
We often see professional investors reacting in an opposite manner to the general public/retail investors. Many retail investors will sell and are fearful when markets fall but professionals will be taking advantage of lower prices and be purchasing investments.

Context for investing
It is important to reassess exactly why you should invest. Most people do so to protect their lifestyle as they want to ensure their investment and pensions maintain their real value after inflation over time – this isn’t possible in cash.

If you are investing for the long term, then you increase your chances of generating longer term growth and we know that, even though markets may go lower in the short term, over the longer term you are “stacking the odds” in your favour.

Time is on your side with investing
Data shows that the risk of stock market investment reduces with the time you spend in the market as you have the ability to weather the short term ‘blips’ in market. For this reason there is a popular stock market adage that time in the market is more important than timing the market.

Holding through downturn
The benefits of holding though short-term falls in the market were highlighted to me recently by Terry Smith, manager of the Fundsmith fund. He gave an example of a share he purchased at the end of 2007 for $7.07 and by 26th February 2008 it had lost almost 40% of its value at $4.28 – this promoted a lot of investor anger at his decision. However, this short term blip is dwarfed by the enormous increase the share price subsequently enjoyed, increasing in value to $172.39 by 4th February 2022. The company was Apple, until just last week the most valuable company in the world.

Tips for investors in this climate

Invest as early as possible and remain invested – act against ‘herd’ instinct
Remove the psychology from investment – draw up an investment plan and stick with it
Minimise tax – one of the biggest eroders of investment returns
Minimize fees on your investments and pensions – another big eroder of returns
Asset allocation – predicting which parts of the market will weather the storm better is difficult, so ensure you have a correctly constructed portfolio which is widely diversified and importantly, has corelation benefits

Buying property in Portugal

By Mark Quinn
This article is published on: 28th May 2022

28.05.22

At the start of the buying process it is essential to sort out your residency status, financials and tax planning before you can buy a property in Portugal.

Our Portugal Manager recently spoke to Rebecca Thomson, Co-founder and Real Estate Consultant at Liberty Real Estate about the simple steps one must take before making the move.

Mark expertly explains how to apply for residency in Portugal, various visas and how to benefit from the NHR scheme.

Non-EU citizens, including the British post-Brexit, who wish to permanently settle in Portugal, must apply for a visa for the right to stay. EU citizens on the other hand have the right to freedom of movement and therefore have an automatic right to stay, so do not need to apply for a visa.

There are several visa options available in Portugal and the most common are the Golden Visa and the D7 visa.

Both visas allow access to the Schengen area, ultimate permanent residence or Portuguese citizenship, and a gateway into the Non Habitual Residence (NHR) tax scheme.

The key difference between the two programs comes down to one of cost versus flexibility. The D7 visa is clearly a lower cost route to Portuguese residency, both in terms of the fees and that there is no investment requirement as for the Golden Visa. However, the D7 route does have substantially longer minimum stay requirements.

So, if you are thinking of making a move to Portugal, or would like to benefit from the available tax incentives, watch the full interview in our informative video below.

Investment management styles

By Mark Quinn
This article is published on: 27th May 2022

27.05.22

There are several different investment management styles to consider and each will have benefits and drawbacks. The key difference are between a managed/active/discretionary route, and a passive/tracker approach, and this can be a divisive area within the investment industry.

In order to put into context the differences between these styles and which approach may be right for you, let’s first look at what a stock market index is.

An index simply measures the performance of a group/basket of shares. For example, the S&P 500 index tracks the performance of the shares in the largest 500 companies in America. As the US market is the largest stock market in the world, and the US is the world’s largest economy, it is often seen as a barometer for the health of global markets in general. The equivalent index in the UK is the FTSE 100 index.

Managed/active management/discretionary
Historically, most private investors would invest through a fund manager. In this way, you would pay an annual percentage fee to an investment institution to actively manage your investment i.e. make the buying and selling decision on your behalf.

The aim of investing in managed investments is to generate better investment returns than the stock market index as a whole, or another appropriate benchmark.

Discretionary investment is a specialist branch of managed investment whereby the manager has a greater range of investment powers and freedoms to make buying and selling decisions without your consent (although always within with the remit and investment powers that you grant at outset).

Over recent years there have been numerous studies to suggest that many fund managers do not achieve their aims of beating their respective benchmarks, and it has led some investors to favour a “passive” investment approach.

Passive or index trackers
Passive investment does not employ a fund manger to make decisions, and instead of trying to outperform the market, you simply ‘buy’ the market as a whole. For example by investing in an S&P 500 tracker, you would effectively be purchasing the top 500 shares in the US stock market.

The key difference between the managed style is cost i.e. whereas a manager may charge between 1-2% per annum to manage your fund, you can access a tracker fund from as little as 0.1% which can make a huge difference to your fund value cumulatively.

Proponents of this approach accept they will only even achieve the return of the market as a whole (with no outperformance) but because you are spending far less in fees, believe they will do better over the longer term.

Proponents of active management on the other hand highlight the drawbacks of the passive approach viz. in a falling market, you will only ever track a falling market, tracker funds “blindly” sell what may otherwise be high quality investments at inopportune times, and that tracker investments can still be complex to understand, such as the difference between ‘synthetic’ versus ‘physical’ tracking methods.

Summary – balance pays
As my previous two articles have demonstrated, tax and investment planning generally involves shades of grey, rather than black and white solutions and in practice we do not believe either approach is the ‘holy grail’.

Rather each management style can offer benefits within a balanced portfolio. Holding passives can reduce the overall cost of your portfolio (thus increasing your net return) and using managed funds can complement by avoiding “blind” automatic sales and potential downside mitigation.

Whichever route you choose, minimising fund fees is crucial as it is the biggest eroder of returns over time.

When to keep ‘unsuitable’ investments

By Mark Quinn
This article is published on: 20th May 2022

20.05.22

A lot of people contact me believing they cannot keep certain investments. As I said in my article last week, it’s all about the subtleties, so let’s look at some examples.

Individual Savings Account
For Non Habitual Residents (NHRs), interest and dividends are tax exempt during the 10-year period but realised gains are taxed at 28%. For non-NHRs, interest, dividends and gains are taxed at 28%.

If your move to Portugal is short-term, or if you are not certain that it will be your long-term home, then there is a case for retaining your ISAs. Although you cannot add to them whilst non-UK resident, you can continue to hold them, and once you return to the UK they resume their tax-efficiency.

A planning point you may wish to consider if you have a stocks and shares ISA is to ‘rebase’ by selling and then immediately repurchasing the same funds within your ISA prior to leaving the UK to ‘wash out’ any taxable gains accrued to the point of your departure. This way, if you did decide to restructure, encash, or withdraw from the ISA as a Portuguese tax resident in the future, there would be litle or no tax to pay in Portugal.

As a general guideline, if you believe your move to Portugal is long-term (as a rule of thumb, 5 years or more) then restructuring and starting an investment vehicle that is suitable for residency in Portugal would make sense for greater tax efficiency, amongst other reasons. If this is the case, planning well in advance is advantageous, as there is no tax on ISA closure for UK residents.

Investment bonds
‘Non-compliant’ bonds are those that are not officially recognised by the Portuguese authorities. Usually all premiums paid into ‘compliant’ bonds are taxed, albeit at a very small amount. This effectively registers their tax favoured status and guarantees the tax breaks, assuming all conditions are met.

There may be a case to retain a non-compliant structure if you do not intend to make withdrawals because there is no tax to pay if nothing is taken out. However, you should still review the plan as there may be lower cost or newer options out there. If you do withdraw funds, we have seen some non-compliant bonds benefit from the same tax treatment as compliant bonds, but there is no guarantee.

Encashment would be a good idea if the policy originates from a blacklisted jurisdiction as tax on gains is punitive at 35%, rather than 28% or less depending on how long the policy is held. Also, if you want to guarantee the tax advantages and policy qualification, you will want to ensure you are holding a Portuguese compliant product. Other points that might affect the decision are how succession laws are affected, policy flexibility, currency and fund choice, and the consumer protection offered.

UK pensions
Pensions are a more complex area of planning and if you get it wrong, it could have consequences for your future lifestyle or ability to support yourself in retirement.

You should always seek personalised qualified advice when addressing your retirement planning, but as some food for thought:

You may wish to retain your UK pension if you have no lifetime allowance issues or do not plan to take withdrawals during your lifetime. Again, you should still review the pension regularly. You might look transfer to an EU based scheme if your total pension benefits are close to, or more than, the UK lifetime allowance (currently £1,073,100), or you are concerned about currency fluctuations and want certainty. You might even withdraw completely if you have NHR, no UK Inheritance Tax or succession planning considerations and want tax-efficiency post-NHR in Portugal.

There are of course many other investments or structures out there such as premium bonds, EIS, VCTs, trusts, QNUPS etc. that may or may not work for you in Portugal and I suggest you discuss your options with a qualified and experienced professional.

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When Non-Habitual Residence does NOT work

By Mark Quinn
This article is published on: 20th May 2022

20.05.22

The nuances of advice part 1

Applying for the Non-Habitual Residence (NHR) scheme is generally considered a ‘no brainer’ but as these three cases studies in particular highlight, you must be careful as it can lead to an unexpected and worse outcome.

Case 1 – tax saved £280k
Paul contacted us as he was looking to apply for the NHR program once he moved to Portugal because he was aware of the 10% flat rate of tax applying to pensions.

After analysing the nature of Paul’s pension, and taking into account his other income sources, it transpired that he would actually be worse off by applying for NHR. This was because with the type of pension income he would receive, he would be able to report on the ‘85/15%’ basis in Portugal – this meant that, even if his income fell into the highest income tax bracket of 48%, the highest possible tax rate payable would have been 7.2%. Although 2.8% seems like a small amount to save, because he had a large pension in excess of £1m, this amounted to a significant saving.

In addition, Paul was also unaware that the 25% pension commencement lump sum (previously called tax free cash) that was available to him as a UK tax resident would be lost when he became a tax resident here. By highlighting this to Paul, and by mapping out a timeline for planning, we saved Paul additional tax.

Case 2 – tax saved $700k
George is originally from Australia but currently living in the UK and was looking to relocate to Portugal. His main driver was the ability to draw down his large final salary pension scheme at the flat 10% rate compared with the highest rate of 45% that he would pay as a UK tax resident.

After providing him with an actuarial comparison of the pros and cons of retaining the final salary scheme compared with extracting as a lump sum, George felt transferring the scheme suited his family position better.

On the surface, taking advantage of the 10% flat rate appeared to be sensible planning but we highlighted to George that his non-domicile status in the UK meant that, using the remittance basis of taxation, he could extract the fund in full at less than 3% tax in the UK.

We will continue the planning for George as he transitions from the UK and establish a suitable structure for him when he eventually establishes residency in Portugal.

Case 3 – taxed saved £400k+
Roger and Sue are the beneficiaries of a trust that was established by Sue’s late father many years ago, and this constitutes their main source of income.

As NHR does not benefit trust income, they would have faced a tax rate of 28% on all withdrawals from the trust.

After analysing options, we arranged for the trust to be wound up and distributed to Sue, saving the couple over £400,000 in potential income tax, and arranged a lower cost and lower risk structure that is tax efficient for residents of Portugal. In addition, they managed to maintain an appropriate level of control in terms of how their children benefited from the asset on their death without creating tax issues for them as beneficiaries in their country of residence.

The above cases highlight the importance of speaking with an experienced and regulated cross-border tax adviser. Contact on the form below.

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Investment portfolios | The Principles of Success

By Mark Quinn
This article is published on: 18th May 2022

18.05.22

The world of investments can be intimidating, even for the most seasoned investor. Here, we will put aside the jargon and push past the hype of ‘the next big thing’, and instead focus on the key principles that every investor should know when building a portfolio of investments; irrespective of how engaged or involved you wish to be.

Ideally, you should look at your assets as a whole – your pensions, property, savings and investments, rather than at each area or structure in isolation. This way you can apply the principles to your wealth as a whole and be in the best position to potentially meet your financial objectives.

Asset allocation is key to investment success
Asset allocation is the percentage of each type of asset class making up your overall investment portfolio. In turn, asset classes are groupings of similar types of investments such as cash, equities, commodities, fixed income, or real estate.

The key principle behind asset allocation is to include asset classes that behave differently from each other in different market conditions to reduce risk and generate potential returns. For example, if equities are falling in value, certain fixed income assets may be rising.

The goal here is not solely to maximise returns but to blend your holdings to meet your goals, whilst taking the least amount of investment risk. The right allocation for you will depend on several factors such as your willingness and ability to accept losses, your investment time frame, and your future needs for capital – unfortunately, there is no one size fits all.

Many studies have shown that asset allocation is the most important driver of portfolio returns, so getting this first step right is critical.

Diversification to reduce risk
Once you have decided on the right asset allocation for you, you must then pick the individual types of holdings or investments within each asset class. Each asset class is broken down into subclasses, for example, fixed income includes holdings such as fixed deposits, gilts and government or corporate bonds.

It is not enough to simply own each type of asset class; you must also diversify within each asset subclass. For example, taking corporate bonds which is a type of fixed income asset class, you can hold them in many different types of companies, industries, currencies, countries, or long or short term.

Rebalancing
As assets perform differently over time, the initial percentage asset allocation will deviate over time. A typical example is the huge increase in the US stock market over the last couple of years which, whilst good for investors’ returns, will have increased the level of share exposure. This increase in the value of equity holdings because of the sustained rise will lead to increased risk across the portfolio as a whole.

This can be solved by regular rebalancing to ‘reset’ the portfolio to your original asset allocation. This involves selling holdings that are overweight and buying ones that are undervalued.

Rebalancing also provides the ideal opportunity to revisit your financial goals and risk tolerance, and to tweak your asset allocation accordingly.

Long term perspective and discipline
As humans, our emotions can lead to poor decision making when it comes to investing. Decisions that seem logical in daily life can result in poor investment returns, with many retail investors selling through fear at the very point they should be buying at lower prices, and conversely, buying at much higher prices during a gold rush.

It is vital for most investors to keep a disciplined approach as it is easy to get caught up in the daily noise of the markets.

Minimise costs and maximise tax efficiency
Einstein described compounding as the 8th wonder of the world and the effect of compounding applies to fees. A charge that might seem small at the beginning can turn into a significant cost over time and research has shown that lower-cost funds tend to outperform in the longer term.

As a simple example, assume a €100 investment and no growth. After 10 years, an annual charge of 2% will result in €82, a 0.2% charge would result in €98.

Focus on minimising fund, structure and adviser fees. In the world of investing, more expensive does not necessarily mean better.

Tax is an often-overlooked cost, which if minimised can lead to the same positive compounding effects over time. This is done by ensuring that your investment portfolio is structured correctly for your resident status, and it might be different planning for normal residents, Non-Habitual Residents, or depending on if your move to Europe is for the rest of your life or if you intend to return to your home country in the future.

Withdrawal strategies
If you are taking income from your investments, you should consider the way in which you do this and the order. Not only will this affect the type of investments you hold within your portfolio, but it could also affect how you hold your portfolio and provide tax planning opportunities or pitfalls.

Focus on total return
With interest rates at historically low levels, it is difficult to rely solely on income returns in this investment environment. The total return is a truer picture of performance and takes into account the capital appreciation as well as the income received.

Be boring!
To quote Warrant Buffet, one of the world’s most successful investors: “Lethargy, bordering on sloth should remain the cornerstone of an investment style”.

Do not try to chase returns or the trends in investments – stick to tried and tested assets. At Spectrum, we only use investments that have worked over the long term, are easy to understand, daily tradable and transparent.

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5 reasons cash might not be king

By Mark Quinn
This article is published on: 16th May 2022

16.05.22

In the words of Warren Buffett, “The one thing I will tell you is the worst investment you can have is cash”.

If one of the world’s most successful investors believes this, let’s look at some of the reasons why holding large amounts of cash is bad for long-term financial planning.

Inflation
We all need access to cash for daily spending and emergencies, so it is important that you hold enough cash on deposit for if the boiler breaks! But holding large amounts of cash over long periods is damaging when the interest rates are well below the rate of inflation.

To illustrate this in real terms, if your annual spending was £10,000 in 2011, you would need £12,968 in 2021 to make the same purchases as inflation averaged 2.6% p.a. However, during that same period, the average savings account interest rate was 1.6% p.a. so the same £10,000 in a bank account would only have grown to £ 10,160.

Low-interest rates
Interest rates offered by banks to customers rarely beat inflation, so using this as a long-term savings strategy is not ideal.

According to the most recent data available provided by the Bank of England and Portugal, the average UK deposit interest rate offered in December 2021 was 0.3% and the average rate in Portugal was 0.06% as at December 2020.

With inflation currently sitting at 5.4% and 3.3% for the UK and Portugal respectively, we can see that inflation will rapidly erode the value of your savings.

Taxation
One of the commonly overlooked factors when making any investment is the tax consequence. In the UK there are great tax-free savings vehicles such as ISAs, but here in Portugal, the choice is much more limited but that does not mean that tax-efficient savings are not available.

For those with NHR, there is not so much of a concern as foreign earned interest is tax-free. However, for normal residents, all interest paid is taxable at 28%. Please note, interest from bank accounts held in blacklisted jurisdictions such as Guernsey, Jersey and the Isle of Man is always taxable at 35%.

Investments usually outperform cash in the long-term
Most people feel more comfortable holding cash, maybe because they do not understand the stock market or they are reluctant to seek financial advice.

It is true, investing in the stock market does carry some risk and you will experience volatility which can be unnerving, but over the long-term markets have outperformed cash.

The Barclays Equity Gilt Study 2019 analysed cash, equity and gilt performance from 1899 to 2019 and it found that £100 invested in cash in 1899 would be worth £20,000 in 2019; a stark contrast to the £2.7m it would worth if invested in equities over the same period.

We might not all live to see returns over 120 years, but even with the global health and economic crisis today, many global stock markets finished the year higher than they started. For example, Morningstar’s Global Markets index was up nearly 15% by mid-Dec 2021, whilst banks were offering returns below 1%.

Dividends
Stocks and shares pay dividends in addition to the expectation that their price will increase. Cash only pays interest, and with inflation, there is a near-certain expectation our cash value will erode in real terms over time.

Lastly, what are the alternatives? Simply put, investing. What you should be investing in and where will be dependent on several factors such as your goals and the risk you can, and are prepared to, take. If you would like to discuss your options, please get in touch.

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