Viewing posts categorised under: Residency
Should I stay or should I go?
By Spectrum IFA
This article is published on: 25th November 2014
Quite frankly I’ve been struggling to think of what to write about this week, but then it suddenly struck me that there has been a recurring theme in a number of my client meetings recently. That theme put simply is, ‘Where will I end my days; in France, or in England?’ This isn’t a popular topic of conversation amongst vibrant, exuberant, middle aged expatriates, but we’re not the only people here. We are in the company of many seasoned expats who’ve been here longer than we have; seen it all; done it before we did, and are feeling a bit tired. Many of them are ‘going home’.
We should pay a lot of attention to this group, because we are going to inherit their shoes. We need to learn from their experiences, and take the opportunity to plan for the time when we will experience what they are going through.
Five years ago, when writing on a similar theme, I think I proffered the theory of the three ‘D’s as the principal reason to return to the UK: death, divorce and debt. I still think that they are valid causes, but I now think that there are many subtle variations to be taken into account, and the biggest addition to the equation is age. Age changes your perceptions; often for the better, but age often also brings insecurity and loneliness. Add to that illness, and maybe bereavement, and you have a powerful reason to examine your reasons to continue to live hundreds of miles away from a family that (hopefully) continually worries about you. In short, no matter how much we pooh-pooh the idea now, the chances are that we may eventually end up being cared for in our final years in the UK rather than in France.
OK, that’s enough tugging at the heartstrings. Why is a financial adviser (yours truly) concerned about where you live, and where you may live in future? The answer is currency, specifically Sterling and Euro. In a previous existence, I was responsible for giving advice to corporate and personal clients of a major High St bank regarding exposure to foreign exchange risk. The basic advice was simple – identify and eliminate F/X risk wherever you can. F/X risk is for foreign exchange dealers; it is gambling. Don’t do it unless you know what you’re doing, and even if you do, prepare to lose money.
On a basic level, eliminating exchange rate risk is easy. Faced with a couple in their 50’s relocating to France with a healthy investment pot behind them and good pensions to support them in the future, I will always ask ‘Where do you intend to spend the rest of your days?’ The answer is usually an enthusiastic ‘France, of course. We have no intention of going back to the UK. In fact wild horses wouldn’t drag us back.’ I know this for a fact – I’ve said it myself.
The foreign exchange solution is simple. Eliminate your risk. Convert your investment funds to Euro (invest in a Euro assurance vie). Convert your pension funds to Euro (QROPS your pension and invest in Euro). Job done! Client happy, for now! But what happens 25 years later, when god knows what economic and political shenanigans have transpired, and the exchange rate is now three Euro to the pound and the surviving spouse wants to ‘go home’?
As it happens, I will no longer be his or her financial adviser. The chances are that I will have popped my clogs years ago, but If not, I will most likely be supping half a pint of mild in a warm corner of a pub somewhere in the cheapest part of the UK to live in. (In fact that is poetic licence, as I know full well that I’d probably be being spoiled rotten in my granddad flat in one of my sons’ houses). To draw this melancholy tale to a close, I’d just like to round up by saying that things are rarely as simple and straightforward as they seem. My job is not always to take what you tell me at face value. I know people who’ve been here longer than you. My advice may well be ‘hedge your bets, spread your risk’. I will give you the best possible investment tools for your money and pensions, but I might just surprise you with my recommendation as to what currency those funds should be invested in.
EU SUCCESSION REGULATIONS – the perfect solution?
By Spectrum IFA
This article is published on: 10th November 2014
10.11.14
The EU Succession Regulations (also known as Brussels IV) were adopted on 4th July 2012. The UK, Ireland and Denmark opted out of the Brussels IV, but residents of these countries are still affected, particularly if they have cross-border succession interests.
The default position is that the law of “habitual residence at the time of death” will apply to the succession of the entire estate of persons who die on or after 17th August 2015. However, a person may choose the law of the country of his “nationality” to apply by specifying this in a will. If the person has more than one nationality, he can choose whichever he wishes.
Therefore, except for residents of the UK, Ireland and Denmark, a foreigner (not necessarily an EU national) living in any of the other 25 EU States can elect the country of his nationality to apply to the succession of his estate. Interim measures are already in place to make such a ‘nationality election’ now in a will, but it will not be effective until 17th August 2015.
There is considerable misunderstanding about the Regulations and whilst it is true that people will be able to choose the succession rules of their country of nationality this will not change the inheritance tax rules that apply. Therefore, if at the time of your death you are French resident or you own property in France, even if you have chosen the succession rules of another country, it is still the French inheritance tax rates that will apply. This means that the amount of French inheritance tax that your beneficiaries will have to pay will depend upon their relationship to you.
Unfortunately, I am finding that people who are purchasing property now and are planning to live in France may not be seeking adequate inheritance planning solutions. They believe that they can rely on the EU Succession Regulations to protect the survivor, but sadly they are not aware of the potential inheritance tax issues that can exist.
For example, the most common scenario that we come across is one that involves there being children from a previous marriage. Currently, unless the couple buy the property ‘en tontine’ or the children enter into a family pact with their natural parent, the surviving step-parent will not have full control over the property. The EU Succession Rules achieve the same effect as these techniques, if the couple elect for the succession rules of their country of nationality to apply and that country does not have any concept of children being ‘protected heirs’.
A perfect solution? Maybe, if the only objective is to protect the surviving step-parent, but if the step-parent wishes to leave the property to the step-children, then there will still be a 60% inheritance tax bill, so perhaps not quite the perfect solution!
Actually, I have greater concern about some expatriates who are resident in France now, who are already making new French wills, choosing the law of nationality to apply to their succession. This may be fine if there is a ‘stable family relationship’ and the couple only have children of their marriage, particularly as it is likely to cost less in legal fees than the alternative of changing their marriage regime to one of “Communauté Universelle avec une clause d’attribution intégrale de la communauté au conjoint survivant”, which would achieve the same effect.
However, many people have already undertaken inheritance planning (and paid for this), which has achieved the objective of protecting the survivor and mitigating the potential inheritance tax bills of their heirs, as far as possible. Depending on the situation (value of estates, stable family relationship or not), it is highly likely that the planning already undertaken will be better for the majority of cases and making a new will now might turn out to be a costly mistake for the potential beneficiaries.
Like all aspects of financial planning, every case should be looked at on its own merits and what seems clear is that there will be some cases where the ‘French way’ may still be best. For example, take my own situation where as a British citizen who is in a French civil partnership (PACS) with someone who has dual US and British citizenship, as well as him having two daughters and two grandchildren living outside of the EU, we will not be rushing ahead to request that English succession rules apply to our estates. Instead, we will definitely continue to depend upon our French family pact and assurance vie because in that way, we know that when the time comes, the survivor will be fully protected and the potential inheritance tax bills of our heirs have been mitigated.
Hence, as can be seen, tried and tested solutions already exist for dealing with property, plus assurance vie will continue to be an effective succession planning tool for financial assets. You can find out more about the ‘French way’ by reading my article on ‘Inheritance Planning in France’ on our website at https://spectrum-ifa.com/inheritance-planning-in-france/ or by contacting me directly for a copy.
Brussels IV aims to harmonise the approach to succession across the EU with the intention that the civil rules of only one jurisdiction apply to the succession of a person’s estate, i.e. habitual residence or nationality. However, due to the opt-out of the three Member States, this has already created uncertainty. In addition, it is not clear how the Regulations will work at a practical level, in particular, how the courts in one country will administer the succession of both moveable and immoveable assets in another country. Hence, even some international legal experts are not yet drafting transitional provisions into wills that involved a cross-border succession, as there is still too much uncertainty. We can only hope that there is further clarification before August 2015.
The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action on the subject of investment of financial assets or on the mitigation of taxes.
How my Spectrum IFA Group Financial Adviser in Spain saved me 82,947euro in tax!!
By Barry Davys
This article is published on: 5th November 2014
05.11.14
Mr Blood had lived in Spain for eight years. However, as a result of a pension mis-selling review in the UK by a large UK bank he received compensation to cover a pension shortfall. The client was extremely satisfied with the amount of the compensation. Advice was requested from his Financial Adviser (IFA), Barry Davys of The Spectrum IFA Group, on how to invest this compensation to ensure that his pension fund returned to its true value.
Whilst this payment of compensation is tax free in the UK, Mr Blood is resident in Spain. In Spain these types of payment are taxable. Fortunately, the IFA knew the differences in the tax regimes. Barry had a tax lawyer calculate the amount of tax due on the compensation payment and Mr Blood was, not surprisingly, horrified to find that the tax to be paid was 82.947,91€.
Despite the client having signed a letter of acceptance with the bank and the compensation having been paid, Barry reviewed the case and found that the letter of acceptance did not sufficiently identify the issue of Spanish tax, having only emphasised the UK tax situation. Barry opened negotiations with the bank. As the regulatory requirements in the UK required the bank to put the client in a “no loss” position, the payment of tax resulted in a loss. To be fair to the UK bank they accepted this principle and agreed to pay a further compensation to cover the loss from having to pay tax.
The payment of a further 82,947€ could have seemed like a satisfactory outcome. However, any payment to cover the client’s loss as a result of the tax payment would be subject to taxation on the additional payment too. Our adviser again instructed a tax lawyer for the calculation of the gross amount required to ensure the client was put back in a no loss situation. Further negotiation by the IFA resulted in a grossed up additional payment to the client of 178,000€. This resulted in Mr Blood being recompensed in full for the loss.
Case Study Key Points
The key points in this case study show that a knowledge of UK and Spanish tax law was required to identify the problem. Secondly, knowledge of regulatory requirements helped ensure a successful negotiation between the bank and the IFA. Using specialist tax lawyers to calculate liabilities strengthened the client’s position. Finally the IFA’s knowledge of UK and Spanish pension law helped to identify what options were available for reimbursement.
On payment of the additional compensation Mr Blood commented;
“I was frankly shocked to learn that the Spanish Hacienda doesn’t recognize compensation for a loss as exactly that; a compensation. My initial dealings with the bank quickly highlighted my lack of experience with financial matters, and I was relieved that Barry agreed to negotiate on my behalf. His in-depth knowledge of the financial services industry and his negotiation style delivered for me the best possible outcome I could have wished for me and my family. I sincerely believe this outcome was only possible with his support.”
Barry Davys was also pleased. “It is extremely gratifying to be able to help someone in this way. The years of studying taxation, pensions, regulations etc. feel worthwhile in situations such as these. It is an extremely interesting time in Spain with many changes in taxation. I look forward to the challenge of continually helping international people with their financial planning to put them in the best possible position”.
At a time that is convenient for you
Tax Residency in Italy
By Gareth Horsfall
This article is published on: 22nd September 2014
Tax Residency is always one of those issues that raises it head in batches, from time to time.
So, I thought I should clarify the matter again.
Residency determines where you may or may not be located for tax purposes.
The notion that you can be resident in Italy but pay tax elsewhere is an outdated notion and one that should be forgotten.
RESIDENCY IS A MATTER OF FACT AND NOT ONE OF CHOICE.
Here are the facts as determined by Section 2 of the Italian Income Tax Code:
An individual is considered resident for tax purposes in Italy if, for most of the calendar year (183 days), you are:
* registered with the Registry of the Resident Population (Anagrafe).
* resident or domiciled in the territory of the Italian state, as defined by Section 43 of the Italian Civil code.
And, according to Section 43 of the Italian Civil code:
* Your place of residence is the place where you, the individual, have your habitual abode.
* your place of domicile is your principal place of business and social/family interests.
Employment income is considered ‘produced’ in Italy if the work activity (i.e. business) is performed on Italian territory (this also means internet activity that is carried out in Italy, even if the focus of the internet activity is in another country).
Italy has been quite vocal about trying to clamp down on people who are claiming residency in Italy (and using public services) but not submitting tax returns, and also those who are operating business activities in Italy but claiming residency for themselves, or the business, elsewhere.
In reality it would be hard for the authorities to track them down, but with the open exchange of information agreements between Italy, UK, Germany, France, Spain and now the USA, it is hard to imagine how computers will not, before long, be merely churning out lists of wrongdoers every week.
The better way is to plan your way around your residency and your respective tax authorities.
Make sure you get your residency options right first time. By this, I mean talk to the people who understand these issues, plan carefully in advance of taking residency in Italy or elsewhere and, ensure that you take advantage of the tax breaks available to you. Failing to do so can create burdensome Italian administrative headaches after the event.
In any case, we should remember the words of Benjamin Franklin who once said
“An ounce of prevention is worth a pound of cure”.
If you have any questions regarding your own residency or if you would like to try and plan your way around your residency in a more tax efficient manner then you can contact me.
CGT and social charges applied to rental income and investments in France
By Amanda Johnson
This article is published on: 14th September 2014
I often get asked to explain how French Capital Gains Tax is applied and when & if they can expect social charges to be levied on their investments. These are two very interesting areas for expats:
Capital Gains tax
A capital gain arises when an asset has been sold for more than it was originally bought for. For example if you originally invested £50,000 in a unit trust and now sell it for £75,000. Your gain is £25,000 and therefore has a potential liability for Capital Gains Tax. Different levels of relief apply depending on how long you have held this investment, so not all of the gain is subject to tax.
Capital Gains Tax is also due is when a house is sold for profit which isn’t your primary residence. You may live in France permanently in rental property however, if you have sold your UK home and made a profit, this profit is subject to Capital Gains Tax in France. This applies even if it is the only property you own. Again there are different levels of tax relief depending on how long you have owned the property.
There are tax efficient investments and savings for expats that shelter your liability to capital gains and now you are living in France you should be taking advantage of them.
Social Charges
Social Charges are applied to all income, irrespective of where it is earned. There are as several exceptions to this, namely Government & UK State Pensions. If you rent out property in the UK, although you may pay your income tax in the UK you will have to pay Social Charges on the income in France. Social Charges also apply if you receive an income from savings, investments or a private pension.
There is a double taxation treaty in place which means you won’t pay income tax twice when you complete your tax return here in France but income tax should not be confused with Social Charges.
Social Charges can also be charged on certain Assurance Vies’ and this depends on the type of fund that you are invested in. If your Assurance Vie is invested in a Fonds en Euros, where growth is physically applied periodically, social charges will be due. This is not the case on several other Assurance Vie options, where social charges are only levied once a withdrawal is made & only apply to the gain proportion of the withdrawn amount.
If you have existing investments whether in France or in the UK it is worth contacting me to chat about the most tax efficient way to hold your savings and keep the tax you pay to a minimum.
Whether you want to register for our newsletter, attend one of our road shows or speak to me directly, please contact me below and & I will be glad to help you. We do not charge for reviews, reports or recommendations we provide.
Do you know which country you are resident in?
By Spectrum IFA
This article is published on: 25th August 2014
In my travels I meet lots of people who claim not to know where they live. This isn’t an age or an alcohol problem, and to be fair it would be better to describe them as not knowing where they reside, or are resident. In many cases a few minutes explanation, or a paragraph in a report, does the trick. There are a number of die-hards however who really don’t want to recognise the obvious. And then sometimes it isn’t really all that obvious at all.
The problem is that the central argument is so convoluted that it is far too long to cover completely in this article, and of course we also need to look at what the French regard as the deciding factors in French residence. So what I’m going to do here is dip into both pools and see if I can point you in the right direction, with the clear risk that I might confuse you completely.
The French side of the equation is quite easy to understand (if you want to, that is).
You are resident in France if:
a) Your home is in France, which includes where your main home is or where your family lives.
b) Your principal place of residence is in France. This applies if you spend more than 183 days in France per year. Even if you spend less than 183 days per annum in France but have a permanent home available in France, you’re ‘in’.
c) Your business activities in France, whether salaried or otherwise, are managed from France unless you can show that this business activity is incidental to your main employment.
d) The centre of your economic interests is France, meaning that you have your main investments in France or they are managed from France or that you derive the majority of your income from French sources.
So many times I hear ‘but I have a UK address and no-one can tell how much time I spend in France’. A dead give-away in anyone’s language that. It’s nearly subtle, but really it’s the same as the difference between tax avoidance and tax evasion, and it’s the wrong side of the coin. In the modern days of passport scanning it is also plainly incorrect. If you really want to ignore all of the points above and claim to be non French resident, you must really be claiming to be UK resident, mustn’t you? So let’s look at how HMR&C have ‘clarified’ UK residence. Please note we are ignoring UK domicile here, That’s another can of worms altogether.
Here’s what it takes to be a guaranteed UK resident.
You need any of these factors:
a) You spend 183 days or more in the UK.
b) You have only one home and that is in the UK (or more than one home and all are in the UK).
c) You work full time in the UK, ie, a continuous period of 9 months and at least 75% of your duties are carried out in the UK.
Now for most of the people I meet this presents a bit of a problem. Ever helpful though, HMR&C do recognise that there can be people who qualify for UK residence that can’t claim any of the above, so to help them they have come up with a list of ‘connecting factors’. I call them ‘back door passes’.
Connecting factors
- If you have family in the UK – spouse/civil partner and/or minor children.
- Whether there is available accommodation in the UK.
- Substantive employment in the UK (40 or more days).
- UK presence in previous years – if you have been UK resident for more than 90 days in either of the previous two UK tax years.
- More time spent in the UK in the tax year than any other single country.
Pay attention here, – it’s getting complicated! To be counted as UK resident, and therefore not French resident, you need to combine days spent in the UK with the connecting factors as shown below:
Number of days that make you UK resident
|
Connecting Factors
|
| 16 – 45 |
4 factors |
| 46 – 90 |
3 factors |
| 91 – 120 |
2 factors |
| 121 – 182 |
1 factor |
| 183 or more |
Always resident |
There, easy isn’t it? Alternatively of course, one could take one’s head out of the sand and go legal as a French resident…
If you have any questions on this, or any other subject, please don’t hesitate to contact me.
The Spectrum IFA Group advisers do not charge any fees for their time or for advice given, as can be seen from our Client Charter.
Rental Income from properties overseas and how to declare it in Italy
By Gareth Horsfall
This article is published on: 25th January 2014
One of the questions I am asked regularly is how income from property held overseas is taxed in Italy. Is it exempt from Italian tax because tax has been paid on it overseas first and is it subject to the same taxes as Italian rental income?
I would like to dispel any myth and confirm that you do have to pay Italian tax on the profit from any rental income on properties held overseas as a resident in Italy. (if it was really ever in doubt. Out of interest the arrangement is reciprocal, and any if you were resident in another country with rental property in Italy then it need to be declared as well).
The best way to organise your rental income
The law for Italian tax residents states clearly that the net profit (after expenses) from property overseas, must be declared in the Italian end of year tax return. The net profit is then assessed as income, added to the rest of your income for the year and tax paid at your highest rate of income tax (that could be as high as 43%).
Let’s not forget the IVIE tax as well which is 0.76% of the property council/cadastrale/rateable income (whatever you choose to call it) value of the property.
If tax has been applied in the country of origin, it is the law in Italy to declare the funds here as well and so annual declarations need to be made.
As an aside, it is relevant to note that in 2012 I received a deluge of enquiries from people who had been contacted by the Guardia di Finanza who had obtained information from HMRC (UK tax authorities) about people who have/had rental properties in the UK, were legitimately declaring tax in the UK, but who had failed to then declare that income in Italy. In some cases they were fined substantial amounts for merely this simple mistake.
However, all is not lost because there is a way to limit your Italian tax liabilties. If the property income is declared in the country of origin and all the costs are deducted from the income, still within the country of origin, then ONLY the net profit needs to be declared in Italy. In some cases it might also be necessary to declare the rental income in the country of origin even when that country no longer requires you to, for example the UK. If you have rental income under the basic allowance of approx the first GBP 10500 of income and therefore the UK no longer requires a declaration, it may still be wise to insist on making a declaration because the UK allow for multiple expense offsets for tax purposes. By following this process you are showing the Italian authorities your expense declarations and therefore it is acceptable for Italian tax purposes.
You may in some cases be able to reduce your net profit to zero.
To clarify, any rental income from properties held overseas must be declared in Italy, for Italian tax residents. This is the NET income (after expenses). And this net figure is added to your other income to determine at which rate of income tax it is assessed in Italy.
Depending on why you are investing in property overseas the advantages/disadvantages can work in 2 ways: .
- If you have high expenses for the property then it can work in your favour as a capital appreciation investment. (assuming the value of the property goes up). Less income means less tax.
- The downside of this arrangement is that someone with low expenses and high net income (maybe living from the income in retirement) will be assesed at their income tax rates in Italy (IRPEF) which could go as high as 43%
If you are concerned about your tax situation in Italy and would like an initial meeting to assess your liability then we are here to help. In addition, there might be other more tax efficient and less costly ways to produce income and grow your money. If you are interested in exploring these then you can contact me on gareth.horsfall@spectrum-ifa.com or on cell 333 6492356
