Real estate in Malta

By Jozef Spiteri
This article is published on: 2nd March 2022

02.03.22

One asset class which the Maltese are very fond of is real estate. This love has been passed down from previous generations, which saw the value of their properties rise and rise as the years went by. Even though real estate remains a solid asset, individuals who are looking to start their investment journey must understand that the market today is far removed from where it was 50 years ago. Let me explain.

In the mid to late 20th century, Malta was still very underdeveloped, slowly recouping from the devastation suffered in the second world war. As the baby boomers grew up and became young adults, and expats, particularly from southern Italy, made their way to the Maltese islands, demand for property started to grow. Many Maltese realised that an opportunity was on the horizon and several local entrepreneurs began to buy land and develop it. The initial outlay was relatively affordable, even for those days, with sales or rents practically guaranteed for the newly erected properties. Realising how lucrative this market was, more inhabitants started investing in property and for most individuals this became the perfect investment which would see them, at the very least, retire comfortably.

Fast forward to 2022 and property in Malta has become very expensive and relatively scarce. Prices continued to soar, partly due to the constant increase in demand, but also the lack of regulation which encouraged property sales at high prices, contributing to the inflated valuations we see today.

What does this mean for young adults who are looking to buy their first piece of land/property? Coupled with the high interest rates being charged by Maltese banks for mortgages, and below average salaries earned in Malta, this market has become very difficult to access, and those who do manage to strike a deal will still see themselves paying very expensive loans for many years, hindering further investment for quite some time.

Is there an alternative investment solution?
This is where a suitably experienced professional adviser can help, by thoroughly analysing your current financial situation together with short and longer term intentions, and then proposing appropriate, flexible planning solutions. At The Spectrum IFA Group, we provide our clients with easy access to a wide range of investment options matched to individual circumstances.

If you are interested in further understanding what we do, feel free to contact us. Initial consultations are free of charge and there is no obligation to proceed with our suggestions.

The importance of retirement planning

By Jozef Spiteri
This article is published on: 1st March 2022

01.03.22

We are living in a world characterised by innovation in all fields, especially in medicine and healthcare. This vast improvement, the fruit of research and technological development which is ongoing, has contributed to a substantial increase in our life expectancy.

Since people are living longer, it is vital that the funds they build up throughout their working lives will be sufficient for them to live comfortably long into retirement.

Life expectancy for women currently stands between 80 and 83 years, whilst that for men is between 75 and 78 years, far greater than even 10 to 20 years ago, and this will continue to increase as developments in the medical sector continue. With the current retirement age standing at 65, this means that individuals must have enough savings to last for 10 to 15 years, and most likely these funds have to last even longer.

Another point to take into consideration is the lifestyle one wishes to lead when retiring and the other costs which come along with old age, such as medical and care costs. Taking these points into consideration, you may be wondering about the the best course of action to create enough wealth to cover your needs and desires in retirement.

The best way to start is to ensure that you do not keep funds in a bank account . Whilst having a cash reserve set aside is important for any emergencies which could arise, having excess funds sitting idle is a killer to the real value of that money (as in our previous article about protecting your wealth). As inflation continues to increase, the value of money earning low interest rates in savings accounts is declining, and this is why something should be done to counteract this issue.

One possible solution is investing these funds in a diversified portfolio of assets which, in the long run, will produce a return higher than inflation rates (read our article on investment performance here). This will not only protect your hard-earned cash, but it will add value to it, with the aim of providing financial security later in life and to allow, if you’re so inclined, numerous holidays around the world (or to other planets, who knows) after you retire.

Our advisers will be able to give you personalised, informed advice, to find the best possible solution for your circumstances. The service will be ongoing and adjustments can be made as your situation changes. This is something we are proud of, making sure that we are there for all our clients throughout their investment journey. All initial consultations are free of charge and carry no obligation to proceed.

Investing as a resident of Portugal

By Mark Quinn
This article is published on: 23rd February 2022

23.02.22

If you are relocating to Portugal (or if you are already resident here) it is important to carry out a review of your investments to make sure they will be tax-efficient in your new county of residence.

Just because your investments are tax-efficient in one country does not mean that the tax advantages will transfer to another county. There are various ways of investing as a Portuguese tax resident, including directly held stocks and shares, collective investments, trust and pension structures. One structure that is beneficial to use in Portugal, and which is used widely across Europe as a whole, is the investment bond.

The benefits of investment bonds

There are several benefits to using investment bonds:

Tax deferral during accumulation phase – gains within an investment bond grow free of tax, known as ‘gross roll up’. This means you can benefit from compounding and tax is only payable when withdrawals are made i.e. the gains are realised
Low effective tax rates when withdrawing funds from the policy – Only the growth element of any withdrawal is taxable, and further tax savings are available after 5 and 8 years. It is important to note that this preferential tax treatment is enjoyed if you are a Non-Habitual Resident or a standard Portuguese taxpayer
Control of the timing of tax events – the bondholder can control the timing of any withdrawal which creates the taxable event. This can be done to coincide with low-income periods, for example
Investment flexibility and diversification – as income and gains roll up free of tax within the structure, you are free to pursue any investment strategy without being constrained by the potential tax consequences of re-balancing or switching between strategies. Additionally, these structures can accommodate a wide range of currencies, asset classes and fund management styles, such as discretionary fund management, index trackers and self-management
Simplification of tax reporting – You are only required to report and declare any income and gains when withdrawals are made. This makes local tax reporting very simple
Portability – the investment bond structure is widely recognised in other jurisdictions so you do not necessarily have to surrender your investment if you relocate from Portugal
Succession planning – investment bonds allow flexible and certain transfer of wealth to beneficiaries. This may not be possible with other investment types and the default “forced heirship” provisions under Portuguese law
Inheritance tax savings – with the correct planning, holding wealth in an insurance bond could mitigate or even completely avoid UK inheritance for British domiciles
Estate administration – in the event of death, the proceeds of the structure can be distributed seamlessly to your beneficiaries without the need for any formal probate process

Interested in learning more? Contact me now for a free financial review

At Spectrum, we can help analyse your options and if appropriate for you, advise on how to set up the optimum bond structure for you and your family, including:

How to set up the structure for maximum control and flexibility
Selection of a suitable provider and jurisdiction to hold your investment in, being cognizant of the relevant double tax treaty with Portugal
Which currency to hold the investment in and advise on the underlying fund choice
Consideration of trust options
Regular reviews of the structure and investment strategy on an ongoing basis in light of ongoing changes in taxation and investment markets

You can contact me using the form below to find out more on the services we offer and to arrange a free financial consultation.

*Mark Quinn is a Chartered Financial Planner with the Chartered Insurance Institute and Tax Adviser qualifying with the Association of Tax Technicians.

How do I make my cash work harder?

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

16.02.22

This is a question I am asked almost daily, especially by those with cash on deposit in banks earning historically low levels of interest.

The problem
With inflation at elevated levels, the poor returns on offer by the banks are not just disappointing – they can be very damaging to the purchasing power of your money.

To illustrate just how damaging the effects of inflation can be, imagine we have a pot of £2m. If inflation is 2%, the pot would be worth £1,135,000 in 20 years’ time. With inflation at 5% over the same period, the pot is worth £717,000.

These levels of inflation might seem a distant concern, but the Bank of England expects inflation to reach 7% by spring 2022, and inflation remains at high levels across many developed countries.

What is the purpose of holding cash?
The main purpose of holding cash is for daily spending and as an emergency reserve that you can dip into at little or no notice. As such, there is not much else you can do but just accept the frustratingly low returns.

A financial planning rule of thumb is to hold at least 6 months of expenses in cash and this is in addition to any planned purchases. However, with the current uncertainty around Covid, there is an argument of increasing this to 12 months. Of course, this has to be determined on an individual basis but it is a good place to start planning.

For the cash that you do retain on deposit in the bank, give thought to:

where it is held – avoid blacklisted jurisdictions where any interest might be taxed at a punitive rate
level of protection – for example, the compensation scheme in Jersey, Guernsey and the Isle of Man is £55,000 compared with £85,000 in the UK and €100,000 in the EU. This is per person and per institution, so ensure you are spreading your cash amongst unconnected banks
currency – if possible, try and match the currency of deposit with your expenditure to minimise currency conversion risk

How to protect against inflation
With any cash in excess of your set spending period and emergency fund, you should consider purchasing or holding assets that have demonstrated the ability to act as a hedge against inflation. These tend to be equities and commodities, specifically gold.

Equities are traditionally seen as an inflation hedge because they represent ownership of physical capital whose value is assumed to be independent of inflation i.e. a company can offset rising input costs by simply charging more for their product or service.

Commodities are basic goods or raw materials that are treated equally, irrespective of who produced them, for example, sugar, copper, coal, gold. Commodity prices usually rise when inflation does, so they are seen as good protection against inflation.

Gold, a commodity itself, has been a shelter during times of crisis for centuries as it is physical and has generally held its value. As such, it is often considered a hedge against inflation and can even be seen as an ‘alternative currency’, particularly in countries where the native currency is losing value.

Having said the above, investing raises a related issue which is that assets that protect against inflation typically come with more volatility. This means that you must ensure you carefully consider and monitor risk, are properly diversified and are investing in an appropriate manner for your circumstances. If you are not an experienced investor, it is best to seek qualified advice.

How we structure investment portfolios?
We can help clients create well-diversified investment portfolios to meet their financial goals that are appropriate for their circumstances.

Simply put, we can assist with advising on:

Where to invest – choosing the right jurisdiction to hold your wealth for tax efficiency and security
How to structure your investment – selecting the right investment vehicle for your needs
Who to invest with – choosing the right financial institution(s) to entrust with your money
What you should be investing in – building an investment portfolio to meet your needs and preferences e.g. income, growth, ethical considerations, currency choices, risk mitigation, proper diversification

If you would like to talk about any of the points mentioned above, please complete the form below or call us +351 289 355 316

What is a good investment return?

By Mark Quinn
This article is published on: 11th February 2022

11.02.22

This was a question posed to me by a client recently. I was taken aback by the question as most clients (rightly or wrongly) tend to have fixed expectations about what a ‘good’ and ‘bad’ return is. It was an excellent question and I answered by saying that ‘good’ isn’t absolute; it is relative to the economic and financial environment in which we live.

For example, I remember walking into Cheltenham & Gloucester, Manchester in 1997 and opening a savings account and earning 7.5% per annum! Back then, the Bank of England base rate was 7.25%. If at the same time you were achieving a 7.5% pa return by investing in say, shares or gold, this would not be a ‘good’ rate of return because you would be taking much more risk to achieve the same return as that offered by the bank and only a few basis points above the base rate.

So, with the Bank of England interest rate currently sitting at 0.50% and the ECB base rate at a negative figure of -0.50%, a 4% or 5% pa return looks very attractive today, even though it would not have done in 1997.

Another factor we need to consider when assessing what a ‘good’ return means is the level of risk we take to achieve the return.

In constructing our portfolios at Spectrum, we always consider performance in the context of risk taken to achieve that return. For example, two funds can both achieve a 5% pa return but one fund may have fallen in value by 20% whereas another fund may be down just 5%. Clearly, the latter is a better fund.

We can analyse this in more detail by considering “scatter diagrams” which is an interesting way of looking beyond headline performance figures.

CLICK ON THE IMAGE ABOVE FOR A LARGER VIEW

This type of chart shows performance on the vertical axis and compares this with volatility on the horizontal axis, which is a measure of risk.

Ideally, we want a fund that is in the top left of the chart i.e. it has very low risk and a very high return. Unfortunately, we know that we cannot have our cake and eat it and in the real world we have to take risk to achieve return, but the important thing that these types of charts highlight is if you are taking risk and not being rewarded for it.

For example in the above chart, fund B (purple square on the far right) is taking a high level of risk relative to the other funds as it is the furthest right on the horizontal axis and it is achieving a high level of performance as it sits high up on the vertical axis. Now, looking at fund A (aqua square second from the right), it has achieved a higher level of performance than fund B but has experienced much less volatility. It is clearly a superior fund, achieving higher performance with less risk.

The other factors we must also take into account when considering what a ‘good’ return means are the cost of running the investment and the impact of taxation.

Ensure you consider all costs when assessing whether you are getting a good return or not. Each fund manager will charge a percentage ongoing fee, but do not forget to factor in transaction costs on buying and selling investments.

Often more damaging is the taxation. Are you paying capital gains tax on each transaction as it occurs? Could you roll this up instead and benefit from compounding? Or are the tax implications impacting the decisions you make as an investor?

For example, a buy-to-let property that offers an attractive gross yield of 6% per annum looks like a good return on the surface, but once ongoing costs and tax are factored in, your net yield could be much lower, at around 2-3%.

Lastly, when comparing investments, you must always do a like-for-like comparison. So when you are benchmarking your investment ensure it is against its peers, for example, there is no point in comparing the gross return of your buy-to-let property against a BP stock you hold.

Download our guide to Investment Risk

ESG funds and green gardening

By David Hattersley
This article is published on: 10th February 2022

10.02.22

I love maintaining the grounds of our home. It keeps me fit, is rewarding when a job is well done, and gets me off the computer into the fresh air.

We live on the edge of the National Park that is the Montgo, surrounded by pine trees and other natural vegetation. We decided to keep an area that many would describe as wild and unkempt as a “nature reserve”.

The joy of a variety of animals and bird life gathering at dawn and dusk at the pool as their “watering hole” has provided many an hour of entertainment. So many bird species and colours nest here, and visit us year after year with their offspring. In the summer even the occasional Parakeet/ Cockatiel fly in, Hawks circle above on the thermals looking for their prey, and Swallows “dive bomb” the pool for flying insects.

Perhaps the most amusing are the squirrels that use the balustrade surrounding the pool as their personal M25, rather than the death defying leaps from tree to tree. They drink from the deep end hanging on for dear life with their front paws in the pool, and suspended by their rear haunches.

It’s the animals’ natural habitat, and source of food. Pigeons eat the dry seed pods from the yellow Mimosa, the other birds attracted by brightly coloured berries from bushes. They drop the seeds or deposit them via “natural wastage” through their system. Bird’s beaks pollinate flowers as they move from plant to plant. Squirrels store their nuts and then forget where they left them, ie lost their nuts. All of this leads to natural germination of new plant growth.

Of course there are drawbacks, fire being our biggest fear with the latest in January this year that was only 500 metres away. A round of applause for the skill of the pilots in their helicopters and planes dispensing their water drops on steep slopes and the “ ground Fire-fighters “ that camped out overnight on the mountain slopes to ensure the fire did not restart.
Our grab bags were ready for immediate evacuation.

Like everything in life there is a balance, yin and yan. De-forestation also has other issues that impact our very lives. I ‘ll refer to this in part 2, and its quite a surprise. But we have to consider the fire risk of our natural area, man’s need vs environment. It is a compromise that needs “Forest Management “rather than total destruction. This takes time, effort, planning and thought.

On a minor basis this is no different to company investment funds that are moving to a strict code pertaining to ESG. As a company The Spectrum IFA Group continue to add new additional ESG funds to the portfolio of fund managers that are truly supportive of this vital part of investing. The most recent one is the Liontrust ESG fund and we welcome its inclusion.

As this is becoming a vital component to any individual’s portfolio, feel free to contact me as detailed below, or download our guide to responsible investing and ESG funds here

How are my savings and investments taxed as a Portuguese resident?

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

09.02.22

You are probably quite au fait with your home country’s investment structures, options, and practices, but what happens when you move abroad?

The first step in ensuring you are doing the right thing is getting a good understanding of the basic principles in your new country. Here I briefly run through the tax treatment of the most common income sources, and this should help you make a decision as to whether you should look more seriously at restructuring your wealth.

Bank accounts
Any interest must be declared in Portugal, irrespective of where the account is located or if you use it or not.

If you have Non Habitual Residence (NHR) status, interest earned on foreign accounts is generally tax-exempt in Portugal, unless the account is held in a blacklisted jurisdiction such as Guernsey, Jersey, or the Isle of Man, in which case it is taxed at 35%. So, if you are still holding large sums in these ‘tax-havens’ you should certainly be looking to restructure this.

If you are a non-NHR, all bank interest earned on foreign accounts is taxed at 28% or 35% for blacklisted jurisdictions. It is possible to opt for this to be taxed at scale rates instead, but this will have an impact on the taxation of other assets, so it is best to discuss this with your accountant when making your annual return.

Interest from Portuguese bank accounts is always taxed at 28%%, irrespective of your NHR status.

Dividends
We usually see individuals with dividends paid from their own companies, directly held shares, or investment portfolios. This is a great source of income if you are a NHR as these are generally tax-free in Portugal during the 10-year period.

It is worth thinking about what you are doing with the income once received. If you are not spending it all and it is accumulating in a bank account earning little or no interest, you should consider investing this in a tax-efficient manner to get your money working for you.

For normal residents, dividends are taxed at 28% (or 35% if from a blacklisted jurisdiction) but there is potential for tax savings if you can restructure.

Rental income
For NHRs, rental income from non-Portuguese property is possibly exempt with progression. This means that although it is not taxed, the income is added to your other income sources for the year and counted when running through the tax bands.

It is also likely that this type of income will be taxable in the country that the property is located and in Portugal. Taking UK property as an example, you will declare and pay the relevant tax in the UK and also declare this income in Portugal. Whilst with NHR, there is no further tax to pay in Portugal, you could be paying tax in the UK if the income exceeds your annual allowance.

For those with large property portfolios, it might be worth restructuring during the NHR period to take advantage of the capital gains tax break and reinvest the proceeds in a more tax-efficient way, because post NHR this income is taxable at scale rates in Portugal.

Rent from Portuguese property is fully taxable at scale rates, so is not a very tax-efficient source of income and you could generate a more tax-efficient income from other sources.

Pension income
Those with pre-April 2020 NHR have tax-free pension income and those who applied later still enjoy a flat 10% rate.

How your pension is taxed as a normal resident is dependent on the type of pension and its source. Generally, they can either be taxed at the scale rates of income tax, treated as long-term savings or an annuity. This taxation can eat heavily into your spending power, so it might be worth rearranging your pensions for better tax efficiency.

Feel free to contact us if you would like to better understand how you can position yourself for your new life in Portugal.

Italian financial update

By Gareth Horsfall
This article is published on: 1st February 2022

01.02.22

Well, well, what a start to the year – it feels like a repeat of winter 2021. As I write I am actually down with Covid again. I first got it in March 2020, right at the start of the pandemic and I have it again now. It is nothing more than a dry throat, cold like symptoms and feeling quite tired, but still it’s a bit annoying to have caught it again, although I think that given the transmissibility of Omicron it was a question of ‘when’ rather than ‘if’ I would get it. Anyway, I am now on day six and feel much better. However, I have just learned that since I only tested positive on day three of my illness, I now have to do another seven days quarantine before I will get the green pass……aaahhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhh.

Anyway, I wasn’t writing to update you on my health, but actually to update you on the health of the financial markets at the moment and provide you with some tax updates.

For anyone who has been brave enough to look at their investment portfolio account balance in the last few weeks, you will have noticed that it has probably taken a turn for the worse. I am not talking crash-like turn for the worse, (remember March/April 2020!) but merely correction territory.

In short, equity markets have started to pull back from their highs in 2020 and 2021. I can’t say for sure when the correction will end, but from the information that I have been reading from various asset managers in the last few days there is confidence that markets will rebound in the first half of this year.

It is important to remember that corrections of this magnitude happen in more years than they don’t and rarely prevent equity markets from delivering positive returns during the year!

So what is going on?
Covid related supply problems for goods and services are the biggest concern right now, which is feeding into consumer prices: inflation (microchips, freight and energy are the biggest contributors). I have written about this in a previous E-zine and so won’t delve into too much detail here, but inflation is likely to play a big part in discussions around financial markets in the first half of this year, even though most economic indicators are predicting a quick return to form for the second half of the year.

One of the most important points is that with rising inflation, the central banks (mainly the Fed in the USA) do not start tightening monetary policy too quickly or harshly. There is no indication that they will take extreme measures in this regard and so companies will still have access to capital and will be able to invest. As long as company profits continue to grow and inflation does not start to spiral out of control then there should be a rebound, probably in the first half of the year.

Of course various themes will also continue to play out during the course of the year, namely: cloud computing, green buildings and construction and digital health and wellbeing. This provides us with well needed diversification in our portfolios. Big tech and smaller disrupting companies across many more sectors will play a big part in returns.

Inflation will likely cause some collateral damage along the way. Depending on how fast and high it moves, the biggest sector to be affected could be the residential housing market. It might cause a cooling down of the price rises we have seen in recent years, or may have a more long term and severe impact. A lot of that depends on whether this bout of inflation is ‘temporary’, and caused merely by Covid issues, or is ‘structural’ which means that it will be more bedded in for a long time.

Most of the information I am getting from money managers is that it will be temporary and that things will return to normal much quicker than we expect (think a couple of years!), but I am not so sure. I think it may run a little longer. But regardless of who is right, we need to protect the money that we have. There are plenty of excellent investment opportunities out there whether we are living in an inflationary or non-inflationary environment. The money managers we work with are on top of these and we can rely on them to seek out those returns where possible.

If you are a client then all you need to know is that we have been planning for inflationary rises for some time and so despite the current correction in investment markets, you really have nothing to worry about.  

Tax matters – ‘residenza‘
During my Covid days sat at home in front of the computer, I receive a lot of pop-ups from various fiscal websites and from Sole24Ore (the Italian version of the Financial Times).

One that caught my eye the other day was an amendment to decreto Dl 146/2021, which clarified the fiscal treatment of the ‘family nucleus’ (nucleo familiare) who have established their residence (residenza) in two separate comuni.

The crux of this is that the courts ruled that two family members ‘cannot’ establish their residenze and claim 2 x prima case in the same nor different comuni.

This would seem to be a simple case of trying to avoid paying IMU on second (or third etc) properties. But the new law decreed that it would no longer be possible where members of the same family are living under the same roof. Apparently the law had not been clear enough…. until now.

I am mentioning this change in the law because it also has implications for people who may be registered in Italy as resident but may have a spouse who is claiming residency in another country. In my experience, the main reason for this is to try to save tax and whilst there may be some logic to it, where one member of the couple is working for a foreign company and maybe travelling to and from Italy rather than being permanently based here, it does still raise the question of how the fiscal authorities view the idea of the ‘nucleo familiare’ and what impact this has on our tax liabilities and where they lie. If spouses are registered as living in different places then there is some legal implication of separation and to benefit from any tax breaks, separation must be legally registered somewhere! If not, then the tax authorities will generally consider you as one family living under the same roof, hence both resident in Italy.

It raises some interesting questions, but might be a useful discussion point with your commercialista if you think you might fall into that net.

Contact me with your questions about 'residenza'

Fiscal treatment of Bitcoin
More and more people I meet are starting to dabble with the idea of buying some Bitcoin to add to their portfolio. I have been an investor for a few years, but my experience is not particularly a great one. It tends to go through phases of stratospheric prices rises and then complete collapse. As things currently stand I don’t see much value in the application of the buy and hold investment philosophy in relation to Bitcoin. It would appear to be something for the active trader, and then we are getting into speculative territory!

Anyway, the point of this article is to help you understand the fiscal treatment of Bitcoin in Italy, and to remind you that you will need to declare it in your tax return.

To understand the correct application for tax purposes, we need to remember that it is actually a currency and can be traded in much the same way as any other currency. In fact, since it is a registered currency (through the blockchain) then the Italian tax authorities treat it like any other bank account you might have. Hence, the tax treatment falls into that very simple law of €34.20 ‘bollo’ on any account that has an average annual balance of more than €5,000 in any tax year (less than €5,000, it does not need to be declared).

However, living in Italy would not be the same without some complications. This brings us back to the article that I wrote back in April 2021 on the same issue. Where you hold the value of Bitcoin (or any other currency) of more than €51,645.69 for a period of more than 7 days, any transfers of that currency into another from the 8th day would be considered speculative and capital gains tax would have to be calculated.

I wrote a long article on this subject, which you can read about here: spectrum-ifa.com/do-you-have-non-euro-based-cash-deposits/

For other questions, please contact me via the form below:

Trusts and their treatment in Portugal

By Mark Quinn
This article is published on: 31st January 2022

31.01.22

Trusts in the eyes of the Portuguese authorities

Trusts are a legal arrangement for managing assets and there are many types of trusts. They are a construct of the common law system and have been used for centuries. Portugal, like much of Europe, has a code-based civil law system; conversely, the UK has a common law system. As such, Portuguese law does not recognise the status of trusts but this does not stop them from applying tax on any distributions received by a Portuguese resident beneficiary of a trust.

Trusts are a very common planning tool; however, they have increasingly become under scrutiny by tax authorities around the world because of their lack of transparency and use in abusive tax planning.

The area of trusts is huge, and we will focus here only on their treatment in Portugal. If you are considering a trust for any reason, you must seek advice from a suitably qualified person to ensure you achieve your objectives and fully understand any financial implications for you and/or your beneficiaries.

What are trusts used for?
There are many reasons why someone might set up a trust, such as:

Tax planning – settling assets into a trust can reduce or in some cases, remove an inheritance tax liability, assuming certain conditions are met
To control and protect family assets – the trust controls who can receive benefits, when and in what proportion. This can be valuable for beneficiaries who may not be able to responsibly manage large sums of money or need help in managing complex structures, or to say, protect wealth in the event of divorce
To protect minor beneficiaries or incapacitated beneficiaries – the protection of a trust can ensure minors or vulnerable beneficiaries are looked after, and the funds are used for their sole benefit
To pass assets to beneficiaries during or after your lifetime – you can settle assets into trust during your lifetime or on death, and importantly maintain a level of control over the gift. When assets are passed on via a will, there are no controls in place and the beneficiary can do as they wish with the gift
Avoid probate, allowing family members to access funds to pay inheritances taxes, or help with expenses before probate is granted
Unlike probate which is public record, trusts are private

The type of assets that can be put in trust are cash, property, shares and land.

How it is structured and who is involved?
The settlor(s) is the person settling the asset into trust. They can either be a beneficiary of the trust or excluded from benefiting from the trust.

The beneficiary(s) is who the settlor wishes to benefit from the assets held by the trust.

The trustees can be individual laypersons or professional trustees. There are pros and cons of each, but in both cases they must only act in the best interest of the beneficiary, responsibly manage the trust assets and cannot personally benefit from the trust. This is a legal obligation, and they are liable if they do not fulfil their duties.

The settlor decides how the assets in the trust can be used and how they should be managed, and this is recorded in the ‘trust deed’. It also details the powers of the trustees and how the trust might be changed or closed, in certain conditions.

You may also have a ‘letter of wishes’. This will have additional information that the settlor wishes the trustees to consider in administering the trust. This is not binding on the trustees, but they can be guided by this when making decisions.

I want to set up a trust and I am living in Portugal
A Portuguese tax resident can set up a trust.

They can choose to do this with any trustee (professional or individual) anywhere in the world. Some common jurisdictions are the UK, Channel Islands, Malta, Cyprus, Hong Kong and Gibraltar.

When choosing a jurisdiction, it is important to consider the robustness and suitability of the legislation in that country as this will impact the laws applicable to the trust.

The potential tax payable on establishing a trust will differ depending on the type of trust, the domicile of the settlor, and in some cases the jurisdiction it is established in.

Whether a trust is the right solution for you is dependent on many things, such as your objectives in setting up the trust, your domicile and residency, the residency of your beneficiaries, the type of gifts you wish to make, the cost and the tax implications for all parties involved.

There may also be better alternative solutions to a trust, for example, there are tax-efficient investment structures that you can use to replicate the benefits of a trust but without the punitive tax treatment.

We will not go into detail here as there are many variables but if you wish to explore this, please contact us.

Yes, I would like to talk to someone about setting up a trust

I am a beneficiary of a trust and I am living in Portugal; how will I be taxed?
Any Portuguese tax resident receiving a distribution from a trust will be taxed at 28% (or 35% if the trust is domiciled in a blacklist jurisdiction).

The whole distribution is taxed, irrespective of whether it is income or capital. This is obviously onerous and highly tax inefficient, therefore it is likely worth reviewing any trust structure you have established or are a beneficiary of.

A trust is not right for me; can I close a trust?
Whether or not a trust can be closed is dependent on the type of trust. Some are closed on the occurrence of a certain event and others can be closed by the trustee or beneficiaries.

There are usually strict rules and procedures that must be followed, but in most cases, it can be done.

If you would like to discuss your personal situation, it would be our pleasure to analyse the options available to you.

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ESG – How to invest ethically

By Chris Burke
This article is published on: 29th January 2022

29.01.22

Positive Ethical Screening

Over the last few months, I’ve noticed a large increase in enquiries relating to ethical investments. It’s brilliant to see so many people looking and willing to make a positive difference to the world, whilst also in many cases seeing an equally positive return on their investments.  However, I often get questioned ‘What exactly makes an ethical fund ethical?’ and ‘What exactly do the companies that are defined as ethical funds do to make themselves ethical?’

Traditionally, ethical investing has focussed on omitting companies which operate in a non-ethical manner (for example, companies that produce arms or alcohol). However, it is just as important that when investing ethically we also consider the positives as opposed to solely filtering out on the negatives. There are many funds and companies out there who actively make amends to be more ethical, sustainable and make the world a better place, which doesn’t always get taken into account when negatively screening. In this article, I will go over positive screening criteria that I look for in an Ethical or Sustainable Fund. What exactly makes an ethical fund (or company), ethical?

Communication, Lobbying and Engagement
Funds that regularly communicate, lobby and engage with the companies in which their funds invest in. Although there is no guarantee that doing this will make a difference, communication is never a bad thing and there is potential for it to result in positive changes. For example, a fund could issue an ultimatum to a company if they do not act to reduce their carbon footprint. If the firm does not act, then the fund may well disinvest.

For example, Blackrock are pushing for more disclosure from companies. Specifically, they are asking companies to disclose how their business model will be compatible with a net-zero economy. By actively communicating and lobbying the companies which they include in their ethical funds, this will make companies take note and, hopefully, change for the better. If all investment management corporations followed suit, the chances of companies in general becoming more ethical and sustainable would increase.

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Climate Change
Funds that contain companies which actively establish policies relating to reducing the impact of climate change. This could mean reducing their carbon footprint by reducing their mileage or switching their vehicle fleet to electric cars, or by utilising sources of renewable energy such as solar panels and wind turbines.

Various investment management companies such as JP Morgan, Schroders and Templeton all have specific climate change funds. The criteria by which each fund selects does vary, however the goal of all of them is to appreciate by investing in companies which adapt to risks posed by climate change and resource depletion. For example, Schroder do not filter based on sector but they select companies which are based on five themes: clean energy, energy efficiency, sustainable transport, environmental resources and low carbon leaders. JP Morgan operates a specialist thematic approach, utilising artificial intelligence and data science to create a portfolio of sustainable companies. Templeton select companies which exhibit superior climate-change practices and favour companies that provide low carbon solutions, companies transitioning to a low carbon economy and companies that are resilient to climate change.

Human Rights
Funds that favour companies who tackle human rights issues. This could mean by actively reviewing and ensuring that they do not break any human rights issues such as child labour, poor labour or generally poor working conditions. For example, if a firm was to use the services of a subcontractor, then they could actively and regularly audit them to ensure that no human rights issues are present.

Abrdn have a strong human rights stance, as demonstrated in a recent report. As they have an ESG friendly approach for their company as a whole, this naturally flows through into the companies that they select for their fund range (although they don’t have a specific human rights fund). The company performs regular human rights assessments to monitor that they are on track. As stated in the report, their human rights status is underpinned by four core beliefs and they are supporters of the ‘Protect, Respect, Remedy’ framework agreed by the UN Human Rights Council in 2008.

Positive Contributions to Society
Funds that generally screen for companies that make a positive contribution to society. For example, funds that look for companies that create products such as medical products that could save lives or industrial machinery that could help make people’s jobs safer. Furthermore, companies that offer good working conditions including pay, hours and the environment could also be screened positively. A positive working environment could see positive human resources policies within an organisation relating to disabilities, assistance with parental care and flexible working. If a company donates a sizable percentage of their profits to charity, then they could also be included here.

There are many examples of investment companies and funds which positively contribute to society. M&G have one of the most extensive ranges of ethical and sustainable funds ranging from funds that invest in long-life, immovable infrastructure assets to funds that invest in companies which companies that contribute towards the Paris Agreement goals. Furthermore, Prudential have been named as one of the World’s Most Ethical Companies by the Ethisphere Institute for the 7th year running. The award is based on five key categories: ethics and compliance program, culture of ethics, corporate citizenship and responsibility, governance, and leadership and reputation. Prudential were one of six financial services companies out of 132 honourees.

Welfare of Animals
Funds that look at companies that show a general interest in the welfare of animals. For example, this could be ensuring that farm animals have quality facilities, enough space to roam and a lasting, regular supply of food and water. It could also focus on funds that include firms who do not facilitate tests on animals. However, it is important to be aware that a lot of firms test on animals in accordance with ‘best practice’. But is this ethical? The more ethical choice would be to not test on animals at all.

Various funds show a clear interest in animal welfare. This is stated in the various fund factsheets and prospectuses. Morningstar conducted an analysis of funds that are against animal testing. The fund which came out on top, The Vegan Climate ETF Index, describes itself as having zero animal exploitation.

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If you would like to find out more about ethical investing, or invest your pension or investments in a more ethical manner, don’t hesitate to get in touch with Chris via the form below.