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Life assurance investment policies and Brexit

By John Lansley
This article is published on: 15th August 2018

15.08.18

Is the uncertainty over Brexit causing you uncertainty over whether to stay in France or not? Whichever side of the Brexit divide you are on, and in the knowledge that “nothing is agreed until everything is agreed”, there are some important issues to be aware of concerning life assurance-based investments and indeed insurance policies in general.

It is possible that ‘equivalence’ rules will apply, and UK insurers will continue to be treated after Brexit as they are currently. But bear in mind that some of the comments in this article are made against a background of a possible ‘no-deal’ scenario, where financial services would be hit hard, so it’s important to look objectively at some of the likely implications when considering your future options.

Firstly, in order to set the scene, Brexit is set to take effect at the end of next March, following which there may be a transitional period of 15 months, during which much will continue as at present. For many of us the most important question is whether we are able to remain in France (or other EU27 country) or whether we will have to, or simply wish to, return to the UK.

With such a move comes the question of if and when you cease to be tax resident in France and instead become UK tax resident again. This is a complex area, and of course many will have been spending large parts of each year in both countries, perhaps technically risking UK residence already, and clearly this is an issue that many will need to address in detail.

For those who have investments held via life policies, and who enjoy all the benefits these offer, a change in tax residence is an event that necessitates an early review of such investments in order to determine whether they can continue as they are or whether any changes need to be considered, and this is a matter you should discuss with your financial adviser at the earliest opportunity.

French Assurances Vie
These are offered by insurance companies in France, Ireland and Luxembourg, and provide considerable tax and succession planning benefits. They also provide access to diverse investment possibilities in different currencies, and French law even allows you to hold individual listed company shares, so certain assurance vie contracts provide this facility, which can be very useful.

However, it’s important to realise that such flexibility will be punished by the UK’s HMRC if you become UK tax resident – this is because such a policy would be regarded as ‘highly personalised’ (see also below) and would be deemed to generate profits of 15% pa, which would be subject to your highest income tax rate. This would be the case even if losses were made during the year, and is clearly something to be avoided if at all possible.

You may not even use the facility to hold shares, and hold only funds, unit trusts or similar, but fortunately this treatment can be avoided by converting the policy to a ‘collectives only’ version before moving to the UK. SEB Life International, a major provider of such policies, offers an easy conversion process for existing policyholders and, if you hold one of their policies, it would be worth asking yourself whether requesting this conversion is appropriate – if you don’t ever intend to hold shares, and there is a vague possibility of becoming UK resident in future, it might be worth acting now.

Other assurance vie providers don’t always offer such investment flexibility, and so are unlikely to be affected, but if you are unsure you should check with your financial adviser.

UK Single Premium Policies
Many people in the UK own these as they provide significant UK tax advantages, and operate in a similar way to assurances vie (although the precise treatment is different). As is the case with French assurances vie and similar local policies in other countries, these allow the (relatively) tax-free roll up of income and gains inside the policy, and much less onerous taxation of withdrawals than is the case with income and gains from conventional investment holdings.

For those who have moved to France and who still hold such policies, the tax treatment can vary. There is no means by which profits can be taxed as long as these remain within the policy; however, withdrawals and encashment proceeds need to be declared to the tax authorities and, since tax treatment can vary from area to area, it is as well to assume that any such profits will be fully taxable.

In the past, there has perhaps been some inconsistency in how the rules are applied, but it is extremely likely that British people living in France after Brexit will find their affairs subjected to greater scrutiny, and such policies will face a much more certain and consistent treatment.

An important additional point is that UK policies suffer a form of UK corporation tax on the profits generated by the insurance company (and which therefore reduces the investment reward), which can’t be reclaimed or set against a French income tax liability, so they therefore suffer a form of double taxation that cannot be avoided.

Returning to the UK will mean that the tax benefits will continue to be available, but for those who remain in France it is important to review such policies as soon as possible – indeed, the best way forward might be to surrender the policies before Brexit and reinvest the proceeds via an assurance vie, so that all future profits will enjoy the favourable assurance vie tax regime. However, again, this is a complex area and is deserving of proper professional advice, depending on your own personal circumstances.

Offshore Policies
These are policies issued by insurance companies in the Isle of Man, Guernsey and elsewhere. These jurisdictions are not part of the UK, and hence currently not part of the EU either, but which have over many years seen a large number of policies sold to people resident in the UK and in various expatriate locations around the world.

There are two types – highly personalised (often referred to as personal portfolio bonds) and ‘collectives-only’, similar of course to the two types of assurances vie as described above.

For the UK resident, the highly personalised version is deemed to generate a gain of 15% pa, as described above, but the collectives version is treated in a similar way to the UK Single Premium Policy, with the ability to take up to 5% pa (cumulative) on a tax-deferred basis and excesses being subject to your highest income tax rate. UK policies enjoy a tax credit, which reduces the actual tax paid, but offshore policies see their excess withdrawals fully exposed because there is no tax credit given.

There are a number of ways in which tax can be mitigated, and which are beyond the scope of this article. However, returning to the UK will involve a careful review of all such policies to ensure that unnecessary tax bills are avoided, and fortunately most providers will allow you to convert the highly personalised policy to a collectives version before becoming UK resident, as long as you accept certain investment restrictions.

Anyone resident in France who holds such a policy and who intends to remain in France after Brexit should give careful consideration to whether the policy should be retained or whether it might be best to surrender it, pay whatever French tax is due, and then reinvest using, for example, an assurance vie in order to ensure ongoing tax-efficiency in France. For some, this might be a costly exercise, but it would be a one-off event and would ensure full future compliance in France at a time when many aspects of people’s affairs are subject to higher levels of scrutiny.

Policies Held In Trust
In some cases, UK and offshore life policies were set up in a simple trust, provided by the insurance company. Trusts have enjoyed a less than favourable treatment in France in recent years, but can still provide tax advantages in the UK. So, if by chance you have such a policy, whether you intend to return to the UK or remain in France will determine what action should be taken.

Other UK Insurance Policies
On moving to France, many continue to hold UK insurance policies of different types – perhaps an ongoing endowment policy, other life insurance, medical cover, car insurance and so on. It has always been important to advise your insurer of your change of residence in such a situation – simply providing a change of address on its own is not good enough, because a change of residence often means a change in the risk and hence a change in the premium. Only providing change of address details can effectively result in the insurer having a reason to reject any future claim.

However, the post-Brexit situation will mean that such continuing policies may not be effective at all, even if your insurer knows you are resident outside the UK. This is because, as with Single Premium Policies, the provider will be based outside the EU and, unless the equivalence provisions or similar are confirmed, the policies may cease to provide cover.

Other Brexit Issues
Brexit has affected, and will continue to affect, exchange rates and investments. We have seen how Sterling dropped against the Euro immediately after the referendum, as it has on other occasions of course, and this has had an immediate and lasting impact on UK sourced income and pensions for those living in the Eurozone.

What can be done? The use of specialist currency exchange providers can help but it also makes sense to reduce the overall risk by reducing reliance on such Sterling sources, wherever possible. This is not so easy if you rely on UK pensions, or property investments, but a detailed review of your assets would be an important step to take.

As for investment, the fall in Sterling was matched by a rise in the UK stockmarket, and generally the FTSE100 has continued to do well because of the large number of companies that enjoy US Dollar income streams, and which have reaped the benefits of a low Pound. But the trade and other problems Brexit is creating will mean that British businesses are likely to experience many difficulties, and therefore their ability to generate profits for shareholders (such as funds that invest in the UK and UK pension schemes) are likely to be hit.

This could be seen as a contentious issue but reliance on UK investments will exacerbate the problems caused by over-reliance on Sterling, and a more diverse approach would probably be preferable.

One area of particular interest is the decision whether or not to transfer your UK pension to a QROPS provider, as this can help address the issues of currency and investment strategy by bringing your pension capital more directly under your control.

This is another complex area that requires very specific professional involvement, but your ability to use QROPS could be curtailed after Brexit. Already, transfers to non-EEA providers have been hit by a 25% exit charge, and this may be applied across the board after Brexit takes effect.

Conclusions
Change brings threats and opportunities, and can be especially challenging when you have retired and have made great efforts to adapt to what has perhaps been a very significant lifestyle change.

Fortunately, as ever, an awareness of the likely problems means you are better equipped to make suitable preparations. Hopefully this article has shone a light on some areas that could have a very significant impact on your finances and, more importantly, has suggested possible solutions.

UK Investments & ISAs – Tax Treatment in Spain

By Chris Burke
This article is published on: 16th April 2018

16.04.18

With automatic exchange of financial information between most countries now standard practice, most of us already recognise the importance of declaring our assets properly and fully. In the UK, if your accountant or tax adviser declares your assets incorrectly, they are liable; however, that is NOT the case in Spain. I have been contacted by many people with various stories of how their accountants in Spain have reported assets. Sometimes it feels like people are speaking to numerous accountants until they find the one with the answer they want – if the declaration is incorrect though, and leads to an investigation, you are personally liable. Therefore, it is essential to have your assets reported correctly.

It is quite straightforward to understand the Spanish tax treatment of your UK assets. If they are NOT Spanish compliant – that is to say, not EU based and regulated AND the company holding these assets doesn’t have a fiscal representative and authorisation in Spain – then income and investment growth are taxable annually. Note that investment growth on assets such as shares, ISAs and premium bonds is taxable regardless of whether you have taken any income or withdrawals.

Below you will see the main list of investments that need to be declared and the tax rates that apply annually:

Type of Assets/Investment	Tax Payable	Type of Tax
Investment funds/stocks/shares	Yes, on growth	Capital Gains Tax (19-23%)
ISAs	Yes, on growth	Capital Gains Tax (19-23%)
Premium Bonds	Yes, on gain/win	Income Tax (19-45%)
Interest from Banks	Yes, on growth	Capital Gains Tax (19-23%)
Rental Income	Yes	Income Tax (19-45%)
Pension Income	Yes	Income Tax (19-45%)

Expenses may be able to offset some of the tax on gains, and for long term property rentals you can receive up to 60% discount on net rental income. However, tax reliefs and allowances that applied in the UK are not available to you in Spain.

There are ways of reducing these taxes, by having your finances organised correctly, and in many cases there is also scope to defer tax. This means there is no tax to pay if you are not taking an income or withdrawals from your investment. In fact, the more your money grows, the greater the potential tax saving.

The first thing you should do, and any financial adviser or tax adviser should do, is consider ways of mitigating your tax, both now and in the future. Otherwise you could end up with a ‘leaking bucket’. Many accountants are starting to increase charges for declaring UK assets, which need to be listed individually and where there is often lack of familiarity with the assets held. By the time you have paid the tax for NOT drawing your money, paid your accountant and lost any tax relief that applied in the UK, in most cases there are more cost effective, tax efficient, Spanish compliant options available. Furthermore, for those returning to the UK, there is still generous tax relief which applies to certain Spanish compliant investments.

For an initial discussion regarding your finances and practical guidance on planning opportunities, please get in touch – my advice and recommendations are provided free of charge without obligation – chris.burke@spectrum-ifa.com

Emotional Challenge

By Chris Webb
This article is published on: 28th February 2018

28.02.18

THE RATIONAL, IRRATIONAL AND EMOTIONAL STRUGGLE
In such challenging times, emotions may play a significant role in investment decisions. Investors feel the variances in their portfolios’ performance much more than the average return over the life of their investments. Rationally, investors know that markets cannot keep going up indefinitely. Irrationally, we are surprised when markets decline.

IN VOLATILE MARKETS STAYING INVESTED MAY BE CHALLENGING
It is a challenge to look beyond the short-term variances and focus on the long-term averages. The greatest challenge may be in deciding to stay invested during a volatile market and a time of low consumer confidence. History has shown us that it is important to stay invested in good and bad market environments. During periods of high consumer confidence stock prices peak and during periods of low consumer confidence stock prices can come under pressure. Historically, returns trended in the opposite direction of past consumer confidence data. When confidence is low it has been the time to buy or hold.
Of course, no one can predict the bottom or guarantee future returns. But as history has shown, the best decision may be to stay invested even during volatile markets.

DECLINES MAY PRESENT OPPORTUNITIES
An emotional roller coaster ride is especially nerve-racking during a decline. However, the best opportunity to make money may be when stock prices are low. Buying low and selling high has always been one of the basic rules of investing and building wealth. Yet during these emotional and challenging times it is easy to be fearful and/or negative so let’s turn to the wise advice of one of the world’s best investors, the late Sir John Templeton:

“Don’t be fearful or negative too often. For 100 years optimists have carried the day in U.S. stocks. Even in the dark ’70s, many professional money managers—and many individual investors too—made money in stocks, especially those of smaller companies…There will, of course, be corrections, perhaps even crashes. But, over time, our studies indicate stocks do go up…and up…and up…Chances are that certain other
indexes will have grown even more. Despite all the current gloom about the economy, and about the future, more people will have more money than ever before in history. And much of it will be invested in stocks. And throughout this wonderful time, the basic rules of building wealth by investing in stocks will hold true. In this century or the next it’s still ‘Buy low, sell high’.”

Watching from the Sidelines May Cost You
When markets become volatile, a lot of people try to guess when stocks will bottom out. In the meantime, they often park their investments in cash. But just as many investors are slow to recognize a retreating stock market, many also fail to see an upward trend in the market until after they have missed opportunities for gains. Missing out on these opportunities can take a big bite out of your returns.

Euro / Dollar Cost Averaging Makes It Easier to Cope with Volatility
Most people are quick to agree that volatile markets present buying opportunities for investors with a long-term horizon. But mustering the discipline to make purchases during a volatile market can be difficult. You can’t help wondering, “Is this really the right time to buy?” Euro / Dollar cost averaging can help reduce anxiety about the investment process. Simply put, Euro / dollar cost averaging is committing a fixed amount of money at regular intervals to an investment. You buy more shares when prices are low and fewer shares when prices are high, and over time, your average cost per share may be less than the average price per share.

Euro / Dollar cost averaging involves a continuous, disciplined investment in fund shares, regardless of fluctuating price levels. Investors should consider their financial ability to continue purchases through periods of low price levels or changing economic conditions. Such a plan does not assure a profit and does not protect against loss in a declining market.

Now May Be a Great Time for a Portfolio Checkup
Is your portfolio as diversified as you think it is? Meet with me to find out. Your portfolio’s weightings in different asset classes may shift over time as one investment performs better or worse than another. Together we can re-examine your portfolio to see if you are properly diversified. You can also determine whether your current portfolio mix is still a suitable match with your goals and risk tolerance.

Tune Out the Noise and Gain a Longer-Term Perspective
Numerous television stations and websites are dedicated to reporting investment news 24 hours a day, seven days a week. What’s more, there are almost too many financial publications and websites to count. While the media provide a valuable service, they typically offer a very short-term outlook. To put your own investment plan in a longer-term perspective and bolster your confidence, you may want to look at how different types of portfolios have performed over time. Interestingly, while stocks may be more volatile, they’ve still outperformed income-oriented investments (such as bonds) over longer time periods.

Believe Your Beliefs and Doubt Your Doubts
There are no real secrets to managing volatility. Most investors already know that the best way to navigate a choppy market is to have a good long-term plan and a well-diversified portfolio. But sticking to these fundamental beliefs is sometimes easier said than done. When put to the test, you sometimes begin doubting your beliefs and believing your doubts, which can lead to short-term moves that divert you from your long-term goals. To keep from falling into this trap, call me before making any changes to your portfolio

Saving tax is a good policy

By John Hayward
This article is published on: 9th October 2017

09.10.17

Having recently written about the benefits of using a well-established investment or insurance company to manage your savings, within a Spanish compliant insurance bond, with the benefit of your money growing by more than inflation and far more than any bank has offered in recent years, I want now to explain how brilliantly tax efficient a Spanish compliant insurance bond is. I will do this by telling stories of two married couples. Mr and Mrs Justgetby and Mr and Mrs Happywithlife. Both couples are retired and tax resident in Spain. Also, both couples have two adult children in the UK.

Story 1 – Mr and Mrs Justgetby
Mr and Mrs Justgetby have lived in Spain for 10 years. They had sold up in the UK in 2007 and bought a property on the Costa Blanca (Valencian Community). This is valued at €300,000 and owned jointly. They each receive pensions from the UK in the form of State pensions and both have small company pensions. These cover their expenses but do not allow them to do much more. From the sale of their property in the UK, they were left with £200,000. They exchanged £50,000 before moving to Spain when the exchange rate was 1.45 euros to the pound. This gave them €72,500. They have had to eat into this because they needed a new car, they have done a bit of work on their house, and they have had to supplement their pension income. The exchange rate has also gone against them by about 20%. They are now left with €50,000 in their joint Spanish bank account. This does not pay any interest. The remaining £150,000 is in the UK in a variety of investments made up of premium bonds, ISAs, and fixed term savings accounts. The accounts have been split so that each holds exactly the same in individual accounts so that they each hold £75,000.

INCOME/SAVINGS TAX
“ISAs and premium bonds are…..not tax free for Spanish residents”!
Whilst no interest is being paid on their Spanish bank account, at least there is not a tax concern there. However, some of the money in the UK is in tax free accounts. ISAs and premium bonds are tax free for UK tax residents but are not tax free for Spanish residents. Therefore, any income or gains from these investments should be declared to Spain. Mr and Mrs Justgetby have not been declaring any of the prizes they have received from neither the premium bonds nor the interest from the ISAs believing this not to be necessary. With automatic exchange of information that has come into force, Mr and Mrs Justgetby may be in for a nasty shock for unintentionally evading tax.

INHERITANCE TAX
On the death of either Mr or Mrs Justgetby, there are some significant tax issues. As they are tax resident in Spain, the surviving spouse will be liable to Spanish inheritance tax (known as succession tax in Spain) on 50% of both the property value and the bank account as well as 100% of the assets owned by the deceased in the UK. The inherited amount in euro terms, based on an exchange rate of 1.13 euros to the pound, is €150,000 (property), €25,000 (bank account), and €84.750 (UK investments). This totals €259,750. The Spanish inheritance tax on this, after allowances, could be around €11,500.

On the death of the other spouse, the children in the UK would have a liability of around €5,000 each based on current rules and on the assumption that their pre-existing wealth is not over certain limits.

Story 2 – Mr and Mrs Happywithlife
By coincidence, Mr and Mrs Happywithlife were in the exactly same position as Mr and Mrs Justgetby in terms of when they sold their UK property and they had exactly the same amount of money as Mr and Mrs Justgetby in cash. They also have a property in Spain worth €300,000. Instead of investing in ISAs, premium bonds, and deposit accounts in the UK, from the £200,000 property sale proceeds, they put £175,000 into a Spanish compliant insurance bond in joint names. The policy will pay out on the request of Mr and Mrs Happywithlife or when the second of them dies. They felt that it would not be necessary to hold so many euros in a low or no interest bank account in Spain. They kept £5,000 in a UK bank account to cover the times that they pop back to the UK to see their children and the remaining £20,000 they exchanged into euros and deposited almost €30,000 with their local bank.

INCOME/SAVINGS TAX
“……tax is only due when withdrawals are made.”
Once again, the interest in the bank account in Spain has paid little interest and so has not created a tax problem. However, the Spanish compliant insurance bond has increased in value but has not created a tax liability to date. This is because tax is only due when withdrawals are made and then only on the gain part of the withdrawal. This has allowed the plan to increase on a compound basis as tax has not been chipping away at the growth. They have decided to take regular amounts from the bond now. Each time the money is paid out, the insurance company deducts the appropriate amount of tax and pays this to Spain. As mentioned, the amount of the tax will be determined by the gain portion. In the early years, this is generally little or nothing due to the special tax treatment afforded to these types of savings plans. Longer term, the tax payable is likely to be a fraction of that payable by those who own non-compliant investments.

“….tax that they saved has gone towards a cruise….”!

Unlike Mr & Mrs Justgetby who would have had to pay €1,980 on the €10,000 gains they made, Mr and Mrs Happywithlife would not have had to pay anything. Instead, the €1,980 tax that they saved has gone towards a cruise they are going on next year.

Contact me now

INHERITANCE TAX
On the death of either Mr or Mrs Happywithlife, using the same assumptions as with Mr and Mrs Justgetby, the surviving spouse will inherit 50% of the property value (€150,000), 50% of the Spanish bank account (€15,000) and 50% of the UK bank account (€2,825). This totals £167,825. The Spanish inheritance tax on this, after allowances, could be around €3,500, €8,000 less than Mr and Mrs Justgetby´s position.

On the death of the other spouse, the children in the UK would have a tax liability of closer to €4,500 each as their parents had less money in the Spanish bank than Mr and Mrs Justgetby.

The difference the Spanish compliant bond makes
As the bond was set up on a joint-life, last survivor (second death) basis, there is no “chargeable event”, as it is known, on the death of the first spouse. Nothing is paid out on the first death as the insurance bond was taken out to pay out when the second party dies. This will have saved either Mr or Mrs Happywithlife thousands of euros in tax.

Words of warning
Tax rules change regularly and the figures quoted are estimates based on our knowledge at this time. The allowances assumed are those applying to the Valencian Community at the time of writing.

Brexit could have an effect on the benefits received by the children in the above cases. Allowances apply currently to the children as they live in the UK and are part of the EU. The allowances may not be there after Brexit.

There are a number of other ways to reduce taxes by distributing wealth appropriately. Everyone is an individual and we all have different needs. Therefore, a financial review is the first part of the solution.

It is vital, from a compliance point of view, to take a look at all our financial arrangements and more importantly to review them on a regular basis. What we may have once bought many years ago, and which complied then, may now have become obsolete and could cause tax questions later.

Reviewing existing contracts and investment arrangements has become much more important with the open border tax sharing arrangement, the Common Reporting Standard’ which has now been fully implemented.

It might just be the right time to start looking at your existing arrangements to ensure they comply before anyone starts looking.

Fun Financial Fact
The Latin for head is caput. In ancient times, cattle were used as a form of money and each head of cattle was a caput. Therefore, someone with a lot of cattle had lots of caput or capital

Potential Catalan Issues

By Chris Burke
This article is published on: 5th October 2017

05.10.17

It seems Catalonia and Spain are continuing their loggerheads and head jutting, but what most people are starting to consider are their OWN assets and issues being a resident here, particularly if you are not Catalan. I have received many emails this week from worried clients and contacts, about having their money here and what they can/shouldn’t do.

See below my 5 TOP FINANCE TIPS for the current predicament and indeed some of the areas we help people with.

Spain’s stock market has taken a severe hit this week, with two of the Catalan banks, Banco Sabadell and Caixabank down 6.3% and 6.7% respectively. Indeed today Banco Sabadell is holding an emergency meeting, Thursday the 5th October, to approve relocating their headquarters out of Catalonia.

Therefore, as an emergency communication to my clients and contacts I thought it would be useful to know what you should be thinking about and the main questions that have arisen this week:

1. Personal Money in banks
Any money in a bank, unless used to live on a day by day, is devaluing in real terms. If Spain reacts to Catalonia declaring independence, we have no idea what might happen. In the last crisis, banks made it difficult to move and even limited the money you could take from your bank account. If you have ‘excess funds’ in accounts in banks, you may want to consider other options so you still have full control of your money and no worries.

2. Business Bank Accounts
If your business account is with a Catalan bank, but you have a personal one that is not, you CAN move money into this. However, you have to be careful and follow these guidelines:

‘In order to avoid problems with the consideration of dividends it would be preferable to do a loan agreement between you and your company and to file a form through la Generalitat, in order to demonstrate the date of the loan and the content of the agreement. There is no stamp duty to be applied and it is not necessary to go to a Notary, but it is better to have this document done, just in case, if in the future somebody asks about this amount.
Source: Silvia Gabarro, GM Tax.

3. Currency
Anyone with sterling Money will have felt the pain of the currency weakening since the Brexit vote. Analysts have been saying for months that this is very undervalued, and built on worries about the UK leaving the EU. However, there are still fundamental issues within the EU, including the real major problems of the Italian banks, the fragile Spanish economy and a few members who are heavily in debt and unlikely to ever be able to repay this. Now we also have the Catalan Independence problems coming to a head within Spain, this could be compounded. Then in May next year we have the Italian elections which could be interesting to say the least.

Therefore, it could be argued before the Euro weakens any further, a good time to transfer money into sterling from Euros.

4. Existing/Investments
Many Catalan/Spanish banks whose client’s money is invested have more of an emphasis on their own funds or Spanish funds, than a non Spanish bank/investment would. We call this being more ‘Spanish Centric’. If the Spanish stocks are booming then this is fine, however if not the case this could be very dangerous to your investments, whether personal or corporate.

The larger the stock market, the closer correlation (it does the same as) to other large stock markets. Therefore, if your money is invested with a truly global bank/investment firm you will not put your money so much at risk to this.

5. Relocation
Believe or not, some businesses and people are relocating due to the current predicament, and some companies share prices have even gone up by 20% on revealing this news to the press!

You may or may not want to consider this, or be in a position to, but your personal and corporate finances do not need to worry if you have them set up correctly. Companies’ savings and your personal money can be with a ‘Portable bank/institution’ that acts like a balloon. Wherever you go, you pull your balloon along with you happily. Then, when you want to access some of the money, you let some ‘air’ (money) out and adhere to the local rules of where you are. No need to open up bank accounts in different countries, or go through the extensive administration. Just tell us you want your money and after some due diligence you shall receive it, wherever you are and knowing the process is legal and compliant.

How to be compliant…..

By Gareth Horsfall
This article is published on: 3rd October 2017

03.10.17

What an interesting couple of weeks. Organising a protest in Firenze to fight for the protection of citizens’ rights in the EU, to being interviewed across multiple news channels around the world and being joined by about 100 people who turned up on the day and got an equal amount of press attention. And now, to slip back into normal life again and a work/life pattern. It all seems a little surreal.

But whilst the amazing memories are still clear in my mind, the ever present obligations of financial life continue and in this article I am going to elaborate on one which is an extremely useful financial planning tool in Italy.

I haven’t written about the benefits of the Italian compliant Investment Bond for some time and the details have moved on a little since my last musings on this topic. In this article I just want to take a look at the Investment Bond contract, the things that make it compliant for Italian tax purposes and why they can help with long term tax planning in Italy.

WHAT IS AN INVESTMENT BOND?
In short, an Investment Bond is a life assurance contract, but the life assurance part is stripped to a minimum and your money is allocated exclusively to investments. Its other name is an Investment Bond. The life assurance part is normally offered by a company as an additional 1% of the value paid out by the company on death or a minimum protection of the original investment, determined by you. Under these terms the contract qualifies as an Investment Bond and therefore is treated preferentially for tax in Italy.

Typically these companies are based in Dublin, Ireland, and due to its place in Europe and standing as a financial centre, can design products exclusively for different EU markets. In this way the money is not located in Italy but complies with local laws.

WHAT IS THE TAX TREATMENT?
Any invested monies, whilst held in an Italian compliant Investment Bond will NOT be immediately liable to capital gains tax or income tax on distributions/dividends etc.

This means that for the larger portfolios, where active management of a portfolio is taking place, the money can be moved around and invested in any way possible without incurring an immediate tax liability. Administratively, this has huge advantages as each taxable event (income or gains) do NOT have to be reported and taxed in the year in which they occur, and neither does the arduous task of calculating everything, pro rata, from the UK tax year to the Italian tax year or vice versa, for example, and/or converting all those events to EUR from other currencies on the day in which they occurred at the official Banca D’Italia EUR exchange rate. A large task even for the more monetary minded.

The monies are only taxed when a withdrawal is made and ONLY on the capital gain element of the withdrawal, not the whole amount.

This can be a highly effective tax planning tool for those seeking growth and/or income from investments. It can literally mean an income stream with very little liability to tax in the early years.

COMPLIANCY IN RECENT YEARS
In recent years the Italian authorities have been looking into the higher value arrangements that qualify under the definition of Polizza Assicurativa Unit Linked / Investment Bond to ensure that they comply. If not, tax penalties and redefinitions of the policies can arise (more on that below).

The more recent developments are as follows:
1. The policy must have the opportunity to insure a certain level of the principal investment. (But this option does not necessarily have to be taken up).

The theory here is that these vehicles are clearly being used for investment purposes as the main driver and the life assurance element is secondary. The Italian authorities now expect to see that the option to protect a specified amount of the investment, on death, is included in the policy, rather than just the historic additional 1% paid out on death.

2. ‘Self investment’ and ‘advised’ investment options are NOT unlimited.

In the past it has typically been the case that you could invest in any traded investment funds in the world. However, the Italian authorities started to look at this more closely, and rightly in my opinion.

Their argument is that monies in an Investment Bond should be invested in the ‘approved funds’ of the company OR the money should be managed by a professional asset manager (our preferred partners are Rathbones, Tilney Investment group and Prudential). In this way the investor, you and I, are at arm’s length from the investment decisions. That is, it should not be managed exclusively by ourselves when the money is in the hands of the Assurance company. In reality, the investor has quite a lot of power to restrict and allow investment decisions, but they must be within the parameters laid down above.

And lastly on this point, the ability for rogue advisers to recommend investing in offshore registered funds, unregulated investments or merely investments that pay the adviser extra commissions for finding more subscribers, are much more restricted with the Italian authority decision. This has to be viewed as a good thing, in my opinion.

3. One size does not fit all

The last point is one that affects many British holders of these investment vehicles where they may have been advised to take out an investment because an adviser in the UK, for example, recognises the tax effectiveness of the assurance structure but does not understand the details required for full compliancy under each EU member state.

The typical type of policy issued under these terms is one which is located in the Isle of Man, Luxembourg, or Switzerland. A lot of these contracts, although generically correct in structure, lack the detail for it to fully comply with the requirements for an Italian Investment Bond.

If you are a holder of a contract in one of these jurisdictions, it is worth checking the terms and conditions.

WHAT HAPPENS IF MINE DOESN’T MEET THE CRITERIA?
Of course, the big question is what happens if you own or are thinking of starting an investment contract of this type without the necessary conditions mentioned above.

In recent years there have been some notable cases where the Italian authorities have looked through the structure and ruled that the portfolio was nothing but a classical investment portfolio and that the preferential tax treatment never applied. As a result, all historical taxable liabilities; capital gains and income payments, have had to be calculated and paid immediately to the authorities.

The ruling was made on the basis of one or more of the elements mentioned above not being complied with, from too much control over investments to too little life assurance protection being offered to the client.

Therefore, it is vital, from a compliance point of view, to take a look at all our financial arrangements and more importantly to review them on a regular basis. What we may have once bought many years ago, and which complied then, may now have become obsolete and could cause tax questions later.

It might just be the right time to start looking at your existing arrangements to ensure they comply before anyone starts looking.

If you hold assets directly or through historic contracts of this type and would like to review them, you can contact me below or call me on +39 333 6492356.

Has your bank in Spain paid you over 3% p.a. interest on your savings recently?

By John Hayward
This article is published on: 19th September 2017

The probability is that it hasn´t. However, you could have made more than 3% a year in a low risk savings plan with one of the biggest insurance companies in the world. We have many happy savers who have seen steady growth of over 3% a year for the last few years. How? Read on…

Saving money in a low interest world

Losing spending power to inflation
With special offers currently being offered by banks of 0.10% APR interest and inflation in Spain running at 1.6%, there is a guaranteed loss of the real value of money at the rate of 1.5% a year. There are some who would be disappointed, if not angry, if their money in an investment had lost 7.5% over 5 years yet this is exactly what has been happening to people over the last few years without them really appreciating it. 3% a year is not only an attractive rate of return but it is necessary to cope with inflation and provide real growth.

Spanish compliant insurance bonds
ISAs, Premium Bonds, and some other investments in the UK are tax free for UK residents. They are not tax free for Spanish residents. We are licensed to promote insurance bonds in Spain which are provided by insurance companies outside Spain but still in the EU. In fact, even after Brexit, these companies will still be EU based and so Brexit will not have the impact on these plans that it could have on UK investments. As the bonds are with EU companies, and the companies themselves disclose information to Spain on the amount invested, as well as any tax detail, the bonds are Spanish compliant which makes them extremely tax efficient. We do not deal with companies based outside the EU as we are satisfied that the regulation within the EU is for the benefit of the investor. We do not have the same confidence in some other financial jurisdictions and neither do Spain.

What investment decisions do you have to make?
Although we have the facility to personalise an investment portfolio within the parameters laid down by the EU regulators, offering discretionary fund management with some of the largest and best known investment management companies, we can also use a more simple approach for those who do not require any input into the day to day investment decisions.

So what has happened over the last 5 years?
The chart below illustrates the performance of one of fund’s available to you compared to the FTSE100 and the UK Consumer Price index. The argument to stay invested when markets fall is valid when one looks at the FTSE100 roller coaster line with the increase we have seen over the last year or so since the Brexit vote. However, anyone accessing their money around the time of the vote could have seen a 25% drop in the investment values. Not so with the fund in the insurance bond.

Real cases

Real case 1 – £40,000 invested 24/07/12. £50,770 as at 14/09/17. Up 26.92% in 5 years

Real case 2 – £356,669 invested 10/09/14. £431,177 as at 14/09/17. Up 20.88% in 3 years

Real case 3 – £316,000 invested 05/04/16. £334,422 as at 14/09/17. Up 5.82% in 18 months

Real case 4 – £80,000 invested 13/07/16. £86,160 as at 14/09/17. Up 7.70% in 15 months

Real case 5 – £20,000 invested 27/01/17. £20,712 as at 14/09/17. Up 3.56% in 8 months

These growth rates are not guaranteed but are published to illustrate what has actually happened and that the percentage returns on the fund are irrespective of the amount invested.

How can they produce such consistency?
Each quarter, the insurance company estimates what the growth rate will be for the following 12 months. This rate is reviewed based on the views of the underlying management company with people situated in all parts of the globe specialising in their own particular area. In good times, the company will hold back money that it has made so that, when things are not so good, they are still able to pay a steady rate of growth to their savers.

I don´t want to take any risk
It is difficult to avoid risk. In fact it´s practically impossible. A risky investment is seen by many as something which has a good chance of failure, either in part or completely. Stocks and shares are seen as risky whilst putting money into a bank deposit account is not. It is generally known that stocks and shares can go down as well as up but some people are unaware, or simply ignore, the risk of keeping money in a perceived “safe” bank deposit. Bank accounts have limited protection against the bank going bust. Then, if it came to the situation where a bank had to be bailed out by the government, it could take months, if not years, to access your money. As already mentioned, if the account is making less than inflation, you are losing money in real terms. So a bank account is far from risk free. The fund illustrated above is rated by Financial Express as having a risk rating of 22% of that applicable to FTSE100, much further down the risk scale and in an area that many people feel comfortable with.

What are the charges?
We explain in detail the underlying costs. In my experience, far too many people commit to a contract without understanding what they have, having received little explanation of the terms and conditions. This is where we differ to most. Different companies have different ways of charging and we run through all of the charges so that you are happy with what you have. The real examples above have had charges deducted and so these are the real values. Your bank may not charge you for the 0.10% interest (less tax) they are paying you but they are making money through investment but not passing anything on to you even though you supplied the money they invest.

What do I need to do next?
Contact me and I can review your savings, investments, and pension funds. I can then explain how you could arrange these in a tax efficient way whilst giving you the opportunity to access the growth that is available, for an improved lifestyle and to cope with rising costs.

Is lending money to a government still low risk?

By Peter Brooke
This article is published on: 26th July 2017

26.07.17

If you buy a government bond, sometimes called GILTS (UK), BUNDS (Germany) or T-Bills (US), as an investment, then you are effectively lending that government money. Most portfolio managers say investors should have some bond exposure in their investment portfolios as they diversify away from other assets like shares.

How do Bonds work?
You start by buying a bond on ‘issue’ for a set issue price with a ‘promise’ to pay you back the same amount in a date in the future. In the meantime, the bond pays you a ‘coupon’ or interest in payment for you lending your money. The bonds are also traded on a ‘secondary bond market’ where the price fluctuates according to supply and demand but the coupon remains the same… this means that your interest rate changes depending on what price you pay for the bond.

You can also invest in ‘funds’ of government bonds which are managed by professional managers using new issue and secondary market bonds around the world to build a diversified portfolio… but are they as low risk as they are made out to be?

Traditionally these forms of investment have always been viewed as low risk, as governments, unlike companies or individuals can always ‘print money’ and so can always pay you back. This also means that the interest rate you receive (the coupon) will be lower than company bonds.

If we consider that RISK is the chance of loss then I would argue that these investments are no longer low risk. Right now, we are in an environment where interest rates are at all-time lows around the world, inflation is starting to bite and so the chance of an interest rate increase by central banks is high; even though the rate increases may be low.

If you are holding any bond and interest rates go up, then bond values will drop, therefore I would argue that at some point you are risking a capital loss by holding government bonds. Some analysts believe that a 1% increase in interest rates could lead to a 10% capital loss on most bonds. If this is the case are you now being compensated for this risk of loss? Well, no… interest rates on government bonds are around 1% now and so with inflation higher than 1% in most countries you are losing money on an annual basis too.

So, what can you do about it? The first option is to take a little more risk and swap your government bonds for high quality corporate bonds… the coupon will be greater and as long as the companies are in good health then they should be able to repay you at the end of the term… there are also funds of corporate bonds which diversify risk.

The corporate bond market is segmented by credit rating so be aware of the level of risk this can bring to your savings… “high yield” (Europe) or “junk bonds” (US) tend to behave more like shares.

Another option would be to diversify away from western government bonds into emerging market government bond funds… there is some extra currency risk, though this can help performance too. Finally, you can outsource the choice of the bonds you buy by using a Strategic Bond fund… this will invest in corporate, government and emerging markets bonds on a strategic basis and would be very diversified.

This article is for information only and should not be considered as advice.

Investing in turbulent times – presentation, Costa del Sol

By Spectrum IFA
This article is published on: 15th June 2017

15.06.17

The Spectrum IFA Group and Tilney Investment Management co-sponsored an excellent presentation and lunch on 13th June at the exclusive Finca Cortesin Hotel & Spa on the Costa del Sol. The Spectrum IFA Group was represented by our local adviser, Charles Hutchinson, assisted by his wife Rhona and Jonathan Goodman who attended along with Richard Brown, Lewis Cohen and Harriette Collings from Tilney.

For this event, around 25 attendees were invited and selected for this exclusive venue. They were given a very interesting interactive talk by Richard and Lewis on investing in these turbulent times, followed by a mingling lunch and refreshments in the Moroccan Room where everyone was able to personally discuss their questions with staff from both companies in a glorious and relaxing setting with gardens and fountains close by. The feedback from the attendees has been most impressive.

Spectrum was very proud to be involved with Tilney in this superb event. It is hoped this will be repeated again in the future.

Smoothing out the bumps of market volatility

By Sue Regan
This article is published on: 9th June 2017

09.06.17

In today’s environment of very low interest rates, is it wise to leave more than “your rainy day fund” sitting in the bank, probably earning way less in interest than the current rate of inflation, particularly after the taxman has had his cut…..?

In the above scenario, the real value of your capital is reducing, due to the depreciating effect on your capital of inflation. So, if you are relying on your capital to grow sufficiently to help fund your retirement or meet a specific financial goal, then you should be looking for an alternative home for your cash that will, at the very least, keep pace with inflation and thus protect the real value of your capital.

In order to achieve a better return than a cash deposit, by necessity, there is a need to take some risk. The big question is – how much risk should be taken? In reality, this can only be decided as part of a detailed discussion with the investor, which takes into account their time horizon for investment, their requirement for income and/or capital growth, as well as how comfortable they feel about short-term volatility over the period of investment.

Although inevitable, and perhaps arguably a necessity for successful investment management, it is often the volatility of an investment portfolio that can cause some people the most discomfort. Volatility often creates anxiety particularly for investors who need a regular income from their portfolio, and for this reason some people would choose to leave capital in the bank, depreciating in value, rather than have the worry of market volatility. However, this is very unlikely to meet your needs.

There is an alternative, which is to have a well-diversified investment portfolio that provides a smoothed return by ironing out the peaks and troughs of the short-term market volatility. Many of our clients find that this is a very attractive proposition.

What is a smoothed fund?

A smoothed fund aims to grow your money over the medium to long term, whilst protecting you from the short-term ups and downs of investment markets.

There are a number of funds available with differing risk profiles, to suit all investors. The funds are invested in very diversified multi-asset portfolios made up of international shares, property, fixed interest and other investments.

The smoothed funds are available in different of currencies, including Sterling, Euro and USD. Thus, if exchanging from Sterling to Euros at this time is a concern for you, an investment can be made initially in Sterling and then exchanged to Euros when you are more comfortable with the exchange rate. All of this is done within the investment and so does not create any French tax issues for you.

As a client of the Spectrum IFA Group, this type of fund can be invested within a French compliant international life assurance bond and thus is eligible for the same very attractive personal tax benefits associated with Assurance Vie, as well as French inheritance tax mitigation.

Stop Press!!! Since writing this article the UK Election has taken place resulting in a hung parliament that brings with it more political uncertainty, but also the possibility of a softer Brexit or even a second election. This makes for a testing time for investment managers and the option of a smoothed investment ever more attractive.