Tax time in Italy – when our commercialisti wake up from their winter ‘letargo’ (aka – well-earned down) and start asking us to send our financial information for tax payment, if you haven’t done it already of course.
Tax time in Italy
By Gareth Horsfall
This article is published on: 17th March 2023
17.03.23
On top of the information regarding our taxable assets and income there is the list of allowable deductions /detractions to assist in lowering your tax bill.
In this article, I review that list for fiscal tax year 2022.
SPESE FAMIGLIARI – family expenses. These attract a detraction of 19% of the value of the expense.
- The abbonamento (pass) for local, regional and inter-regional public transport, up to a maximum of €250 for the cost of the pass
- A maximum expense of €530 or €1219.14 for life insurance, polizze infortuni (accident) or permanent disability policies
- All costs for deceased family members, i.e. funeral
- €632 per child for kindergarten cost (public or private)
- The costs of infant, (scuola d’infanzia), junior (primarie) and secondary (secondaria) schools. Also University, Conservatorio and AFAM (Instituto Alta Forma Artistica, Musicale e Coreutica)
- Costs for students diagnosed with DSA (disturbo specifico dell’apprendimento) – a category of ADHD
- A maximum of €210 for the costs of sport for children until 18 years old
- A maximum of €2633 for the costs of rent for students who are living away from their home/region, including abroad
SPESE PER LE CASE –
- A 19% detraction on mortgage interest, where it has been used for the purchase or construction of the ‘Prima Casa’
SPESE MEDICHE – medical expenses. These all attract a 19% detraction:
- When spending more than €129.11 for pharmaceuticals, ticket, hospital costs, specialist services and surgery costs. Tests, thermal cures (when prescribed), medical equipment, glasses and/ or contact lenses that meet the CE standard
- Vets costs from €129.11 to €500
- Costs to assist with maintaining personal independence e.g. the purchase of a vehicle necessary to get to and from hospital. (Limited to a maximum spend of €2100 for those on incomes lower than €40000pa)
- A maximum spend of €750 for the cost of life insurance where the benefit is for someone with a serious disability
- Other general medical expenses attract the 19% detraction on the cost, which can then be detracted from your or your family income, where they are being supported you (a carico)
LIBERE DONAZIONI – the full cost of donations to:
- Cultural and artistic
- Cooperative entities in the cultural /artistic sector
- Scholastic institutions of every
- Funds donated to the Italian state
BONUS EDILIZIE – restructuring and renovation costs
For the tax year 2022, the following detractions are available:
- 60% on the full expenses of repair to the outside of your property – specific criteria apply! BONUS FACCIATA
- 50% on the cost of restructuring with a max spend of €90000 or 80% of the total cost where it was used to restructure for seismic risks. BONUS SISMA
- 65% of the cost for interventions for energy savings measures around the
- 50% of the cost of furniture and big household appliances (where they meet certain criteria) BONUS MOBILI
- 36% on a max spend of €5000 for landscape work in the garden (reimbursed over 5 years) BONUS VERDE
- 50% for ordinary maintenance
- 75% for interventions for energy saving measures for condomini (apartment blocks)
- 110% SUPERBONUS for specific work
(** the superbonus has been suspended by the Meloni government because they found a hole of €38 billion in the public finances due to fraudulent activity related to the Superbonus. It is unknown when and if any applications made in 2022 will be reimbursed).
- From 2023 the 110% SUPERBONUS falls to 90% (but is likely to be fraught with the same issues as the 110% bonus, in my opinion)
- 50% of the cost of installing an electric car recharging
Where you have an income up to €120,000 pa the expenses, as described in this article, will be fully allowed. Where you income is over €120,000pa then the detractions will be reduced according to a formula based on your total income.
And that’s it. Everything that you can detract from your income in 2022 to try and reduce your tax bill in Italy. If that doesn’t make a difference, then you may need to have a look at your overall finances to try and plan in different ways.
It should also be noted that the Meloni government is currently debating how they can simplify this whole system by reducing the tax bands from four to three in the coming year, and then hopefully moving to a two tax band system. If they manage to pass this, then they will likely reduce/remove this system of detractions/deductions by lowering the bottom rate of tax, or maybe introducing a starting rate tax allowance for everyone (unlikely). However, they are in first stage negotiations and it may be some time before things come to pass.
I’ve left the UK – why am I still paying tax there?
By Portugal team
This article is published on: 17th March 2023
17.03.23
One of the most confusing aspects for expats is establishing where they should be paying tax after they have left the UK. Many just assume that there is no UK liability after they have left.
UK property
Tax on income and gains from UK property is always taxed in the UK, even if you live in Portugal with or without NHR status. You do still have your UK annual personal allowance and capital gains tax allowance to offset against any taxable income or gains as a non-UK resident.
You must also declare this in Portugal and will receive a tax credit for the tax paid in the UK to offset any Portuguese tax liability.
UK government pension income
The taxing right remains with the UK in respect of former government service pension income, and you have your UK personal allowance to offset against this.
Government service pension schemes are not the same as the UK State Pension. The State Pension is not taxable in the UK, can be paid out to you gross and is taxable in Portugal.
UK private pension schemes
Private pension schemes are taxable in Portugal. Again, the income can be paid out to you gross by your pension provider. However, in practice, some people still find themselves having tax deducted at source on UK pension income and must reclaim it. If you complete a DT/individual form, available from HMRC’s website, and follow the submission process you will be able to receive your pension free from UK tax at source.
UK dividend & interest trap!
The UK has the right to tax UK-sourced dividends and interest under the treaty rules between the UK and Portugal but an interesting quirk of the rules is that when you submit your UK tax return HMRC will automatically calculate the best outcome for you; either to not tax your UK dividends and interest and in turn, you lose your UK personal allowance (this is called disregarded income treatment) or to tax them and preserve your personal allowance to offset against other income e.g. rental.
Special care must be taken if claiming split-year treatment – this is when you leave the UK partway through the tax year and you are only taxed in the UK from 6th April to the date you leave. A real-life example: an individual who left the UK in July subsequently took a large dividend in the same UK tax year. As a result, the dividend was taxed in the UK (even though they were no longer UK resident) and this resulted in a hefty tax bill. Had they waited until after the following 6th April, HMRC would not have taxed this.
Exceeding your UK day count
Another scenario where you could find yourself a UK tax resident, even though you have moved abroad, is when the relevant day count allowance is exceeded. The UK Statutory Residence test clearly sets out the rules and the allowable number of days to avoid getting yourself into this grey area. The day count can be as little as 16 days and as much as 182 days depending on the number of ties and connections you have.
UK Inheritance Tax
Another context when you can still have a UK liability is in respect of succession and inheritance tax. This is a complicated area, and we will dedicate next week’s article to exploring this topic.
Can you sell your UK business and pay 0% tax?
By Portugal team
This article is published on: 14th March 2023
14.03.23
Many British business owners may not have considered selling their UK business as a Portuguese tax resident, and whilst the UK rules for selling business are generous, we have seen several business owners enjoy better outcomes here in Portugal.
Opportunity
Non-Habitual Residence (NHR) status allows those in receipt of foreign-sourced dividends to receive them free of tax. This has proven to be a great opportunity for UK business owners who can enjoy the luxury of running their businesses at arm’s length.
But most owners do not want to run their businesses forever, and what many may not have realised is that selling their business whilst Portuguese tax resident could be highly tax efficient and, in some cases, provide a better result than the UK.
Real-life example
We recently worked with a business owner who had agreed to sell their UK-based business, but the sale would take some time to complete.
They knew what their tax liability on the sale would be in the UK but were keen to move to Portugal quickly, rather than wait for the sale to complete whilst they were resident in the UK. They were understandably disappointed to learn that the potential tax liability in Portugal would be markedly higher, at 28%.
However, on reviewing the structure of the business and how the sale was arranged, we were able to advise on a position where the couple could move to Portugal immediately with a resulting zero tax liability. Additionally, working with a local accountant, it was possible to create an accounting loss for them to use against future gains in Portugal.
In addition, we presented a highly diversified and managed risk solution to preserve and grow their wealth, whilst also future-proofing them for the end of their NHR status and a possible return to the UK.
The position turned out to be better for them selling as Portuguese tax residents, rather than UK tax residents, and they got to get on with their new life in the sun sooner than originally planned.
Replacing business income
The most important step following a sale or after drawing large dividends is finding an appropriate new home for the cash – you do not want it sitting in the bank being eroded by inflation, invested in inappropriate structures, or held tax-inefficiently going forward.
Whether you want to replace the income you once enjoyed, or preserve wealth for future generations, the key is structuring correctly for your goals. This must take into account several factors, such as where you and your ultimate beneficiaries are resident and the associated tax implications, flexibility in access and appropriate investment strategies, to name just a few.
Explore your options
We regularly work with business owners’ UK accountants, tax advisers and other trusted parties to explore restructuring and selling options. We are also on hand for clients to ensure that the advice is coherent, viable and implemented correctly from a cross-border perspective.
We also work with clients to put longer-term plans in place to ensure ongoing tax efficiency, compliance, and wealth preservation here in Portugal. If you would like to explore your options, please contact us for an initial discussion.
Cash flow planning
By Jozef Spiteri
This article is published on: 13th March 2023
13.03.23
Cash flow planning is an exercise which could benefit individuals of any age, be it people just starting out their independent lives or others approaching retirement. Understanding how much money you have and the best way for you to use it is vital, and many seem to underestimate the power of good, constructive planning.
It is important to consider how surplus money can be used more efficiently. Surplus money refers to reserves of cash over and above any emergency fund held in a bank account. How can one use these resources more efficiently? What difference will it make?
Keeping excess funds in cash will result in the value of that money being eroded, as no meaningful growth will be achieved. Therefore, one must find a way to grow this money and protect it against inflation by generating positive real returns.
For many, investing might seem unnecessary, complicated, or risky. Such a mentality is usually the result of misconceptions. The reality is that the current environment is not what our parents or grandparents experienced when growing up; what worked 20 or 30 years ago might not work as well today.
We will now compare three scenarios for the same person. These examples will indicate the level of savings this individual would have at retirement if keeping all savings in cash, investing in a balanced risk portfolio or investing in a more adventurous portfolio.
In this example we have John, an average working man who went to university until age 25 and then worked until age 68. John started off with an average wage at the beginning of his career, with limited income and unable to buy a property or secure a sizeable mortgage. In his late 20’s he then managed to take out a mortgage for his own place. He only started to earn a decent level of income in his early 30’s, and this is the point at which he had to choose between investing this income or saving in cash. Therefore, John had the ability to save and invest for around 35 years prior to retirement. Let us now see what the differences are if he chose to invest or not.
If John left all surplus income in cash, he would reach retirement with a savings pot of €911,186. This means that he will have to plan his cost of living based this amount, together with the lowly public pension he will earn, until he passes away. If John were to spend around €40,000 a year (in today’s money) from his savings in retirement, the money would last him around 22 years. This is assuming that John is only maintaining his lifestyle and not accounting for eventual medical costs which could arise, or other unforeseen expenses. Therefore, what might seem to be a substantial amount of cash does not really give John a lot of ‘wiggle room’.
Let us now consider a balanced risk portfolio for John, starting contributions at age 32. If John were to invest around €20,000 a year until retirement, growing at an average rate of 4% per year, he would accumulate a savings pot of €1,375,757. This would give John an additional €464,571 compared to the scenario where he saved in cash, with the added advantage that the money invested will offer further growth potential during retirement, allowing him to maintain a buffer, further extending the longevity of his funds.
Alternatively, if John were to consider a more adventurous portfolio, with the same level of contributions and years of investment, his eventual savings pot would achieve a value of €1,845,763 – nearly a million euros more than if he chose not to invest at all.
This example highlights the power of compounding returns, and the importance of good financial planning. This is a service we offer all clients and together we can identify the best way to meet your goals. If you would like to discuss your financial future, feel free to get in touch.
The above are simplified examples and for illustrative purposes only. For a more detailed outline of how we implement successful investment strategies, please contact us to arrange an introductory discussion.
Why is now a good time to invest?
By Michael Doyle
This article is published on: 9th March 2023
09.03.23
I have been working with a few clients over the past couple of years who were very nervous about investing for the longer term as the markets had been volatile. Recently they decided to ‘push the button’ after we reviewed their situation together.
So, here are ten reasons why now could be a good time to invest:
1. Economic recovery: The global economy is recovering from the impact of the COVID-19 pandemic, and this presents opportunities for investors to take advantage of growth opportunities in various sectors.
2. Low-interest rates: Interest rates are currently low, which can make borrowing cheaper and provide investors with a chance to invest in assets that are likely to yield higher returns.
3. Inflation protection: Investing in stocks, bonds, and other assets can provide protection against inflation, which can erode the purchasing power of your money over time.
4. Increased savings: Many people have saved more money during the pandemic due to reduced spending on things like travel and entertainment. This has led to an increase in the amount of money available for investment.
5. Technological innovation: The pandemic has accelerated the adoption of new technologies in many industries, and investors can potentially benefit from investing in companies that are at the forefront of innovation.
6. Diversification: A well-diversified portfolio can help investors spread their risk and potentially minimize losses if one sector or asset class underperforms.
7. Long-term focus: Investing is a long-term strategy, and the current market volatility should not deter investors from thinking about the long-term potential of their investments.
8. Behavioural finance: Understanding how emotions and biases can impact investment decisions can help investors avoid making costly mistakes.
9. Education and access: There are many resources available to investors to help them learn about different investment opportunities and strategies, and technology has made it easier than ever to invest from the comfort of your own home.
10. Social responsibility: More investors are looking to make investments that align with their personal values and beliefs, and there are now many options for socially responsible investing that can potentially provide both financial returns and social impact.
Now would be a great time to review your own situation. Either speak with your financial consultant or feel free to contact me for a no obligation review.
Financial updates March 2023
By Katriona Murray-Platon
This article is published on: 8th March 2023
08.03.23
March is always a busy month for me and this month is already looking to be the same thing. Whilst all is quiet on the tax front, for now, I am enjoying the calm before the tax storm to do client reviews and meet new people.
One of the questions that came up this month was to do with wills and power of attorney. I have already written about wills in previous articles and whilst I do not undertake to help people write their will many people find it helpful to have a conversation with me before speaking to a notaire just to fully understand the implications for expats in France. So if you haven’t written a will and have any questions please do get in touch.
When you have assets in the UK and in France it is important to have a UK will and a French will and these should refer to and not repeal or revoke each other. Equally, if you have money paid into a UK account, over which you would need someone to have power of attorney, it is a good idea to have a UK power of attorney for your UK accounts and a French power of attorney for French accounts. Whilst a UK power of attorney is, under The Hague Convention, valid in France, and a French power of attorney is, if properly drafted, legalised and translated, valid in the UK, it would be easier for those close to you, whom you have appointed as your attorney, to have a registered power of attorney in France and in the UK. This will avoid lengthy administration and translation costs. It is best to consult a notaire to make sure that your French power of attorney is properly drafted and will, come the day, be accepted by French banks.
Hopefully you have already had a look at your tax page and declared your property, if not you have until 1st July 2023 to do this. Just to add to the information in last month’s Ezine, if you rent a property you will have to declare the amount of rent. This information will be used to calculate the rental value of the properties in your area and therefore the Taxe Foncière. However you don’t have to declare the rent just yet, you have until July 30 June 2025 until this becomes mandatory.
Finally, as 8th March is International Women’s Day, I wanted to share with you a photo of the lovely ladies who work for or with The Spectrum IFA Group. This photo was taken at our Gala event in Gleneagles. Before officially joining Spectrum I was encouraged to speak to some of the female advisers to find out their experience and it is because of their experience working in Spectrum that I decided to become a financial adviser.
Today I have the great privilege to work with this amazing group of women! In addition to this I have a large and growing number of female clients who I am pleased and proud to advise. Happy Women’s Day to all my female clients! If no one else is spoiling you, please do take the time to do something nice for yourself to celebrate International Women’s Day.
French Tax Returns
By Michael Doyle
This article is published on: 7th March 2023
07.03.23
It’s that time of year again where we all must start thinking about submitting our French tax returns.
Here are my 5 top tips for completing your tax return.
1. Gather all necessary documents: Before you start preparing your tax return, make sure you have all the necessary documents, such as your income statements, receipts for deductible expenses, and proof of any tax credits you may be eligible for, the figures taken from your bank account(s) and the relevant exchange rate(s).
2. Choose the right form: France has different tax forms for different types of taxpayers, so make sure you choose the right one. In general most people will need to declare their income on the main form (2042) and its related forms (2042C and 2042 pro), the 2047 for all foreign income and the 3916 for foreign bank accounts and investments.
3. Fill out the form accurately: Take your time to fill out the form accurately and completely. Make sure you provide all the required information, including your income, expenses, and any tax credits or deductions you may be eligible for. Remember to declare all bank and investment accounts as any omissions can lead to high penalties.
4. Submit the form on time: The deadline for submitting your tax return in France typically falls in May each year. Make sure you submit your form before the deadline to avoid any penalties.
5. Consider getting professional help: If you are unsure about how to fill out your tax return, consider getting help from a tax professional. This can help ensure that your return is accurate and that you are not missing out on any tax benefits.
This is also a great time to review your own financial planning needs.
Due to recent uncertainty in the markets many people are keeping their money in the banks.
Purely for illustrative purposes (as inflationary pressures are currently decreasing), if inflation did persist at say 7% for 10 years your spending power would halve over this period. Inflation across Europe has been higher than this throughout 2022.
Now is a good time to speak with your financial advisor.
End of the Golden Visa in Portugal
By Portugal team
This article is published on: 3rd March 2023
03.03.23
The Golden Visa scheme (est. 2011) was a residency-by-investment scheme, and whilst very attractive to individuals, has always been considered controversial by some Portuguese politicians as well as various EU governmental authorities.
It allowed non-EU nationals to obtain residency rights in Portugal (and therefore access to the Schengen area) by making relatively low capital investments into real estate or Portuguese-based investments. It also had very loose minimum stay requirements of only seven days per year.
What happened?
As a result of the influx of foreign investment, mainly into the housing market, Portugal’s real estate sector exploded.
The increased demand for property has not only driven up property prices but also affected the rental market. Many of these properties have been made available for short-term lets e.g. AirBnB, because of the lucrative returns in comparison to long-term lets. In one of the poorest countries in Europe, where the minimum wage is just €760 per month (2023), it has led to a housing market crisis, pricing out many Portuguese nationals.
There have been efforts over the years to try and reduce the negative effect on the real estate market by restricting the qualifying investment locations, excluding the more popular coastal and city areas. But under increasing pressure, the Golden Visa scheme was terminated with immediate effect in February 2023. Premier Costa stated that it was, “no longer justified” and that it has served its purpose to inject much-needed investment into Portugal over the last decade.
What about those with the Golden Visa?
The Golden Visa is valid for five years. Those already in the scheme will only be able to renew their visa if they use the property as their own home or if they make it available for long-term lets.
No new Golden Visa applications will be accepted.
Other visa options
Despite the end of the Golden Visa scheme, many other options are available to prospective ex-pats. The most appropriate one for you will depend on your circumstances and intentions.
For example, a D7 visa requires applicants to have a minimum level of passive income and does not allow the individual to work in Portugal. The D2 visa is aimed at attracting entrepreneurs who wish to establish an economic activity in Portugal and will allow the individual to work. There are also visas aimed at digital nomads.
What’s Your Plan for 2023?
By Peter Brooke
This article is published on: 3rd March 2023
03.03.23
I have started 2023 with a new mission – to get myself, my clients and my future clients even more financially organised. We have some cool tech, a new booking system, an online secure portal for financial modelling and a new communications plan.
My aim is to help you to become more financially confident throughout 2023 and beyond. I will endeavour to make everything as clear, concise and as interesting as possible – we are in this together!
What is Financial Planning?
Everyone will need some form of financial plan at some point in their lives – but WHY do you need it? And HOW do you do it?
WHY do you need a financial plan?
“people don’t plan to fail, but often fail to plan”
Budgeting for living costs, building up savings, planning for retirement or education, saving for future large expenses, buying property, protecting your family, leaving something for future generations… all of these are considered in a financial plan.
Then do all of this in a new country with a different language, different tax system and different rules and regulations and we can see that having a well thought-out plan in a language you fully understand could be worth its weight in gold!
In addition, for Brits living in Europe there are the added complexities of Brexit since you will now lose access to UK based advice and financial products.
HOW do you create a financial plan?
Fundamentally there are two easy questions to answer which give us the skeleton of the financial plan:
1. What do you earn, spend, owe and own? This is an audit of where you are today, financially.
2. What do you want? This is a list of your hopes and aspirations, let’s call them goals, for the future.
Common ‘goals’ include:
- Can we retire early?
- How much do we need to have to retire?
- Can we pay for our kids private or university education?
- Can we buy that house we want?
- Can we take that trip?
- Can we leave money for the family?
Combining these considerations allows us to create a ‘road map’ for the coming months, years and decades and helps you understand what compromises you might need to make today to achieve the things you want for the future.
You can then feel more confident that you are on the right path to future happiness and security totally aligned to your own personal hopes and aspirations.
HOW do I help you create your financial plan?
Here is a summary of the Spectrum process and how I, as your professional adviser, can help you through the journey of establishing a plan.
Your Spectrum Adviser – Peter Brooke
I have been in the personal finance industry since 1999 and based in France helping people like you since 2004.
I am a proud family man and love living in France; our two children, both now teenagers, were born in France and will soon be completing their schooling and will be off to university before we know it!
I am a partner and senior adviser in Europe’s largest expatriate financial advisory group; Spectrum have more than 50 advisers across Western Europe and due to our size have terms of business with some of the largest and strongest insurance and investment providers in the world; though we are independent of them.
I have a strong background in investment management and as such sit on the Spectrum Investment Management Committee which provides resources to all of our advisers, and their clients, across Europe.
I have a healthy passion for ethical & sustainable investing as a vital area of focus for the future of investing, our planet and society.
Are the stars aligning for investors?
By Portugal team
This article is published on: 27th February 2023
27.02.23
It’s been a rough time recently for financial markets with many falling in 2022.
We’ve experienced a once in a hundred-year combination of events, with the global pandemic, recession fears, rising inflation and interest rates, the war in Ukraine and the farcical situation of five changes of British Prime Minister in just six years!
With that backdrop, it is no wonder markets have struggled, but there are several interesting statistics to show that now may in fact be a good time to invest if you are holding excess cash.
1. Falling markets mean the growth outlook has improved
The first point is counterintuitive, but the 2022 market declines have actually improved growth expectations.
For example, Vanguard, the second largest fund manager in the world, has recently revised its growth forecasts upwards and believes that investors will now be better off over the next decade than if 2022 had not occurred.
Vanguard’s growth forecasts for global equities are now 7.4%-9.4% over the longer term.
The fall in bond prices in 2022 has similarly resulted in better growth expectations, as lower prices mean new investors are now enjoying higher levels of income yield.
2. 2022 was very rare in investment terms
Bonds and shares/equities tend to move in different cycles i.e. if shares are falling in value, investors seek the relative safety and income of bond investments and this causes bond prices to increase in value.
However, this relationship broke down in 2022, being one of only three years in the last 45 where shares and bonds were down at the same time – the chance of this happening going forward is low.
3. Two consecutive years of stock market falls is rare
Data from NYU shows that the chance of having two consecutive years of stock market declines (as measured by the US S&P 500 index) is low. The chance of 2023 being negative is just 9% based on this data.
4. Short periods to recover losses
Figures from Gugenheim have examined previous market falls of between 20 and 40% and found that the average time to recover the losses is just 14 months.
With global markets starting their declines in late 2021, based on this statistic we would be nearing the end of the downturn in markets.
5. Equities outperform cash over different time periods
Some investors perceive cash as more secure than shares. However, data from Blackrock shows that shares (S&P 500) outperform cash (Treasury bills) over many different time periods, even short time horizons.
The statistics I found particularly interesting are that, even on a short-term basis, shares would outperform cash holdings, for example 64% of the time over one month and 81% over one year.
6. Time is on your side
Data from Macrobond covering the 1971 to 2022 period shows that time is on your side with investments.
Over any one-year period, the chance of generating a positive return is 72.8%, but if you extend the period to 10 years the chance of a positive return increases to 94.2%.
These statistics of course are not a guarantee that markets will recover in 2023, but the convergence of all these factors is, for some investors, a positive indicator for the direction of equity returns for the year or two ahead.
More important though is that short-term market events should not be a distraction when implementing a long-term investment strategy.
We can guide you on how and where to structure your investments efficiently as a Portuguese tax resident, whether or not you are a Non-Habitual Resident, and how to futureproof these investments from changes in your personal circumstances.