Decorative & Fine Arts Society event
By Charles Hutchinson
This article is published on: 18th December 2015
The Spectrum IFA Group co-sponsored an excellent DFAS (Decorative & Fine Arts Society) lecture on 9th December at the San Roque Golf & Country Club on the Costa del Sol. The Spectrum Group was represented by two of our local advisers, Jonathan Goodman and Charles Hutchinson, who attended along with our co-sponsors Richard Brown and Lewis Cohen from Tilney Bestinvest.
DFAS is an overseas branch of The National Association of Decorative & Fine Arts Societies which is a leading arts charity which opens up the world of the arts through a network of local societies and national events.
With inspiring monthly lectures given by some of the country’s top experts, together with days of special interest, educational visits and cultural holidays, DFAS is a great way to learn, have fun and make new and lasting friendships.
At this event, over 150 attendees were entertained by a talk on Art Deco by Eric Knowles of Antiques Roadshow fame, who was simply brilliant and kept the audience gripped with his knowledge and humour.
The talk was followed by a drinks reception which included a free raffle for prizes including CH produced Champagne, a presentation wine box and a coffee table glossy book on Art Deco. Tilney Bestinvest also supplied an art deco style money box designed and crafted by Viscount Linley, the Queen’s nephew, which caused quite a stir!
All in all, a fantastic turnout and a very successful event at a wonderful venue. The Spectrum Group were very proud to be involved with such a fantastic organisation and we hope to have the opportunity to do so again.
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Why a Pension audit is vital for your wealth. (Part 2)
By David Hattersley
This article is published on: 2nd December 2015
In the previous article, I referred primarily to Pre-Retirement Planning. This article is devoted to Post-Retirement Planning ie. when you are already drawing your pension and are tax resident in Spain. For those that are lucky enough to be in receipt of a Defined Benefits Scheme (ie Civil Service / Company Final Salary Pension) most of this article will not apply to you. The same applies to those taking income from a SIPP/ Drawdown plan. This will be covered in a future article.
Primarily this article deals with “Money Purchase Arrangements” ie. Group or Personal Pensions, Stakeholder Pensions and Contracting Out of SERPs, where benefits are being taken and the tax free lump sum has been paid.
It is important to understand the taxation of income in Spain. Unlike the UK, “Earned Income” and “Capital Gains and Investment Income” are not added together to determine the highest rate of tax payable. They are kept separate with “Earned Income” taxed at the highest marginal rate, and “Capital Gains and Investment Income” capped at rates of between 20%, 22% and 24% for the tax year 2015. When one considers a person that has a State Basic Pension of £8,000 p.a. and Earned Pension Income of £12,000 (with the current rate of exchange of 1.4) it is quite easy to slip into the next highest rate of marginal tax of 31% for “Earned Income”.
One also needs to consider the rules for Lifetime Annuities by the Spanish Law “Renta Vitalicia” and its subsequent tax treatment of said income.
So why the need for a Pension audit when one is already receiving it and declaring it to the Hacienda? Are you paying too much tax as a result of the word Pension?
So does this apply to you? Possibly, and the likely reason why, is that your pension provider at retirement converted your pension to an annuity. You may have taken all the pension pots, used an open market option and transferred this to another annuity provider that offered better rates?
It is also vital to understand both the documentation sent by the UK provider on an annual basis and the treatment of pensions and annuities by the UK HMRC. Unlike the Spanish, the UK HMRC treats both pensions and annuities as one, and they are taxed under income tax rules. It is vital that this is understood. Even if you have previously informed the provider that you are living in Spain and are receiving your pension gross, due to UK HMRC rules, you will still receive a “P60 End of Year Certificate” from the provider. This clearly states under the heading “Pension and Income Tax details”.
In these cases you could be paying too much tax without realising it! As an honest citizen, one presents the P60, without having the original policy document translated into Spanish, to your local Abagado / Gestor, who in turn presents the documentation to the Hacienda. It is hard enough for them to fully understand English, let alone the tax laws relating to the UK re. pensions and how they differ to Spain. The same could be said if one is receiving advice from a UK based adviser or an “Offshore Adviser”, who are very unlikely to understand or be able to assist with the complexities of Spanish Tax law.
And the reason for this is that Spain’s tax rules treat the purchase of a Lifetime Annuity as “Investment Income” even when a “Pension Pot” is used. The full income tax law is LEY35/2006 de 28 de noviembre, del Impuesto sobre la Renta de las Personas Físicas (LEY IRPF) The specific part relating to the taxation of Annuities is found in Articulo 23 as follows:
- The taxation of lifetime annuities– Articulo 25.3 a) 2º LEY IRPF
- The taxation of temporary annuities – Articulo 25.3 a). 3º LEY IRPF
Instead of being taxed on the full income amount, a discount is applied based on the age of the recipient when the original annuity was purchased. So for someone between the ages of 60 to 65 at the time of purchase, this represents 76%. Therefore referring to the above example the taxable “Investment Income” is only £12,000 x 24% = £2,800. The £2,800 will then be subject to the lowest “Investment Income” rate of 20% (assuming no other income) ie. tax payable of £576 p.a. A very substantial saving when compared against being taxed under “Earned Income” rules. For ease, I have not calculated the rate applied if one moves into the next highest rates of marginal tax!
I have come across a number of clients in this exact situation and I am in the process of correcting this error. Already one client has had a rebate, backdated 4 years (due to the statute of limitations) and now pays substantially less tax as a result. But it is both time consuming and hard work having to track down the likes of Pearl, Equity and Law, Equitable Life, Commercial Union, Scottish Equitable, Sun Life, Clerical Medical and Eagle Star (to name but a few) who were the major providers of pensions in the 80’s and 90’s, and then confirm it was a Lifetime Annuity that was purchased.
This is further complicated by those in Final Salary Schemes like the Teachers Superannuation Scheme, who at the same time contributed to the Group AVC, and considers that the pension income comes from one source. There is the possibility that the AVC under a default process purchased an Annuity offered by the same provider.
This is a service provided for existing clients, although at some stage they will need an official translator to translate the documents into Spanish if the UK provider will not do so.
In some instances though, either because of a lack of understanding by 3rd parties ie. the Hacienda or a Gestor, some people are claiming their pension income from a QROP/ SIPP as a temporary annuity whilst still retaining control over the investment and have not actually used cash to purchase an annuity ie it is still a pension in drawdown.
This is incorrect and will be explained why in a later article. Further articles will also include “The Treatment of Small Pension Pots”, “Pensions Flexibility” and “Pensions in Drawdown”. What I have learned time and time again over the course of many years experience in the pensions industry is that the “Devil is always in the detail” and why a pensions audit is vital.
As Financial Advisers we are not professional tax advisers, but we work closely with said professionals, and in this instance the tax advice has been provided by HCS Accounting of Denia
How much have your savings increased in the last 12 months?
By John Hayward
This article is published on: 26th November 2015
How much have your savings increased in the last 12 months?
Which of the following reflects where your money has been?
Savings account +0.5% to 2% (before tax)*
FTSE100 -3.17% (before charges and after dividends)*
Cautious fund +4.3% to 5.5% (after charges)*
With interest rates predicted to stay low for some time to come, many in Spain are finding it difficult to grow their savings, or increase their income, without having to take risks they would not normally do, risking their capital.
So what are the options?
Deposit account
There are Spanish savings accounts offering around 2% although in reality this could be the rate for the first few months which will then reduce to a much lower rate. There are often restrictions on how much you can invest in these accounts. Inflation is running at a higher rate than most savings accounts and so, in real terms, most people are losing money in what they see as a risk free account.
Stockmarket
Over the long term, through growth and dividends, it is possible to make significant gains. However, first-hand knowledge, or a lot of luck, is required to make the most of stocks and shares. Most people tend to have neither. In addition, most people are not prepared to take the rollercoaster ride that stocks and shares tend to produce.
Structured Notes
These are, generally, complicated and inflexible products which are really only suitable for experienced investors. The gains can be based on a variety of things but often requiring 5 to 6 years before seeing any return.
Property
Over time, property has proven itself to be a winner. However, it has also proven that it can suffer massive reductions. It is also probably the most illiquid asset you can hold as well as potentially, the most costly to hold in terms of upfront costs, taxes and maintenance. There can also be emotional risk.
Under the mattress
This is often mooted as a home for money in times of uncertainty but then there is the risk that it could go up in flames or end up in a burglar’s swag bag.
The solution?
As financial planning advisers, we are in a position to offer the best of all worlds; the potential for growth in a low risk environment. By Investing in a Spanish compliant insurance bond, with a company that is one of the strongest in Europe, holding a variety of assets, including shares, bonds, cash and property (but not the mattress), one can achieve steady growth. There is also the facility to take regular income. Your money can grow tax free within the bond until money is withdrawn. Even withdrawals are taxed favourably. Two potential advantages; higher growth and lower taxes. Perfect!
* Source: Financial Express (12 months to 23/11/15)
The Law of Esterovestizione
By Gareth Horsfall
This article is published on: 19th November 2015
The Law of Esterovestizione.
You are probably wondering with such an elaborate title then what on earth the topic could be about? Well, this topic came about because in the last few years I have met people who are operating Ltd companies in the UK or in Ireland, but who are living as a tax resident in Italy. This could present some issues and so I thought I would explain the law of Esterovestizione to highlight the problems of registering a business in one European state but operating from Italy. (There may be other legitimate reasons for operating a Ltd company in this way, but I am aiming to explore the main issue for smaller businesses).
How does it all work?
If you own 100% of the shares in a Ltd company and your are the sole director of the same Ltd company then there could be issues if you are an Italian tax resident. The risk being that if the Italian authorities were to interest themselves in your business then they may consider that the business should fall within the Italian rules on ‘esterovestizione’.
What is Esterovestizione?
This is the Italian rule which finds that where an overseas company is controlled by an Italian tax resident it is treated as an extension of their personal assets and therefore becomes subject to the Italian fiscal system and is re-taxed in Italy in accordance with Italian tax laws for corporation tax purposes. What constitutes control is a matter of fact in each case but the authorities look in particular at the board of directors and the shareholdings. What they are looking for is the “place of effective management” of the company, where the decision-making of the company is carried out and if it is by an Italian tax resident it is likely that the rules of esterovestizione would apply.
The authorities look to the substance rather than the appearance, so that the fact that the registered office is outside Italy will not be considered relevant where it is clear that the decisions are in actual fact taken by a person who is resident in Italy.
If you own 100% of the shares and are the sole director of a Ltd company, then this has all the makings of a classic case for the authorities to argue that the Ltd company should be treated as if it were Italian.
If the company is deemed, through your control of it, to be an Italian entity, then the company would effectively be regarded as having failed to meet, for several years, all the usual obligations binding Italian companies, including registering for IVA, filing corporation tax and IVA returns, registering and filing accounts etc.
The fact that you had complied with all these obligations in the UK or Ireland would not be considered relevant.
As the basis on which esterovestizione is applied is the effective control of the company in the hands of an Italian resident you can try and avoid these provisions by appointing trusted non-Italian residents as shareholders/directors – family members, for example – or alternatively to have nominee arrangements whereby a company or individual acts as nominee shareholder on your behalf. Family members and nominee shareholder arrangements of this type are still common, but the situation has become considerably more problematic in relation to both of these arrangements and it is now difficult (and very expensive) to find a professional prepared to accept the responsibility.
However, with the general tightening of the law in relation to nominee arrangements, this kind of structure is no longer effective. The current requirement is to be completely transparent – you need to declare any structure under which you are the beneficial owner – so even if there is a third party who nominally appears to be in charge, but in actual fact they merely operate on your behalf then you are under an obligation to declare your interests in the company in exactly the same way. Failure to do this amounts to making a false statement to the Agenzia.
What is the chance of being found out?
This surely represents a much more complicated area of information exchange than we have seen in recent years for a physical person. Individuals are for all intents and purposes already under the spotlight and financial information is being shared across European and other borders. Obviously, sharing information on underlying shareholders in a Ltd company is much more complicated. However, it is a plan for the EU to action in the very near future.
The EU have been very vocal about transparency of Ltd companies and I have also seen a number of documentaries on Italian TV in the last year, on exactly this subject. One that springs to mind was ‘Presa Diretta’ which focused mainly on Italian residents who set up Ltd companies in the UK and also Panama. If you would like to see the programme, you can watch it HERE (It is 1hr 27 mins long)
It is anyone’s guess how long a free flowing exchange of information on Ltd companies will take place, but planning to ensure you are not one of the people who are made an example of is probably a sensible long term business decision. That might be as easy as setting up an Italian Srl.
Le Tour de Finance – 100th event in Dinard
By Spectrum IFA
This article is published on: 15th November 2015
Our 100th financial seminar was quite rightly our biggest yet with approximately 90 attendees out of the 106 who had RSVP’d.
Guest speakers from Rathbones, SEB, Tilney Best Invest, Prudential International and Standard Bank all flew in specially for this event alongside the organisers and founders, Pippa Maile from Currencies Direct and Michael Lodhi from The Spectrum IFA Group.
The venue, Le Grand Hotel Dinard, was a fabulous location with first-class service and an excellent buffet lunch to finish.
There were plenty of prized to mark the event – five lucky attendees went home with 100euros in cash each, everyone received a goodie bag plus there was a prize draw for other prizes including champagne, signed British rugby shirts and autographed books.
Thank you to everyone who came along and made this such a great success. If you are one of the people who unfortunately had to cancel at the last minute, please feel free to drop us a line at seminars@ltdf.eu if you would like copies of the presentations or have a specific topic that you would like advice on.
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Automatic Exchange of Information (AEI)
By John Hayward
This article is published on: 11th November 2015
Did you know that recently, approximately 100 countries have signed up to a new initiative by the OECD’s updated Common Reporting Standard (CRS) whereby a global information-sharing system is to be put in place amongst individual tax authorities. This means that information on taxpayers with offshore assets will be shared between the participating countries.
This transparency is meant to be a deterrent to taxpayers’ using offshore accounts and assets as a means of avoiding domestic tax. The participating countries are committed to applying this procedure in order to tackle tax evasion.
This “automatic exchange of financial account information” (AEI) will commence from 2017 on an annual basis between participating countries and is set to become the most comprehensive and powerful tool to date used by worldwide tax authorities.
The first AEI of 2017 will relate to all account information of 1st January 2016 and reporting will involve individuals who own or control accounts either directly or via financial institutions, be it banks, brokers, investment vehicles, insurance companies or other financial organisations.
The Automatic Exchange of Information (AEI) is facilitated by having financial institutions in each participating country reporting relevant information regarding clients, who are resident in another participating country, to their local tax authorities. Local tax authorities will then automatically exchange this information with their counterparts in other participating countries on an annual basis.
The account information generally includes account number, balance and gross earnings in respect of any payments through the account including any investment income, income earned from assets etc. The information on each person generally includes name, address, country of residence, nationality, national insurance and tax identification numbers, place and date of birth.
So if you live in Spain and have overseas assets and/or investments that you previously thought were non-declarable to the Spanish authorities, then this may be something that you need to address.