Tel: +34 93 665 8596 | info@spectrum-ifa.com | LinkedIn Facebook

Is it better to pay off your mortgage early or save for retirement?

By Chris Burke
This article is published on: 10th August 2022

10.08.22

One of the more common and difficult questions to answer for clients, more because emotionally people like to pay off their debts and specifically their mortgage (its most likely the biggest debt you will have in your lifetime, if you exclude children!) is ‘Is it better to pay off my mortgage early or save for retirement?’ Well, I am very analytical, which is great being a financial adviser, so I need facts to make decisions and to look forward for clients planning.

Whether you’ve received a pay rise or you’re just planning for the future in general, it can be a challenge deciding how to employ use your hard-earned cash. From a psychological perspective, in a way it makes sense making clearing your debts a priority. However, will you be better off this way or by doing something else with that money/investing those funds? Which option will provide the better return on investment and generate long term wealth for you?

The first step is to evaluate your personal financial situation with a professional financial adviser if possible. There are many variables to take into consideration here such as:

  • What are your objectives/goals?
  • Do you have surplus cash each month?
  • Do you have an emergency fund in place?
  • What exactly are you looking to achieve?

Choosing to pay off your mortgage early
It can be very enticing to pay off your mortgage early and being debt free whilst owning your home outright. This may be able to save you thousands in the long-run and reduce your monthly outgoings, which could be a solid financial decision. Certainly, in the early years of your mortgage, if you are paying mainly interest on your monthly mortgage payments, then this may be the best option for you. However, have you considered the interest rate you have on your mortgage? Is this favourable when compared to other options? And furthermore, have you looked in to the potential early redemption penalties?

Pros of paying off your mortgage early Cons of paying off your mortgage early
Save on paying off the interest borrowed You may cut into your savings (and emergency fund)
Debt free earlier (psychological) Have you diversified? Is your mortgage your only investment?
More money available to you after Early redemption penalties
  Are you losing an opportunity to increase your wealth, by missing out on doing something more effective with the money?
  Money is historically cheap to borrow

Choosing to invest your money
Even though paying off a mortgage early can have many benefits and lifts the burden of repaying a large debt, in many cases it may be wiser to invest extra cash instead in the form of investments or retirement funds. With regards to investing for the future, the earlier that you do this the better. Interest builds up over time (the power of compound interest!) so the longer you have your funds invested ‘working for you’ the more they will be worth when it’s eventually the time to use them.

Pros of investing (vs paying off your mortgage early) Cons of investing (vs paying off your mortgage early)
Potential to see a higher rate of return and increase your wealth Riskier – returns are not guaranteed
The assets are more liquid – easier to sell if you are in need of cash Still requires that you make payments
Depending on the type of investment, there may be opportunity for tax savings or for your employer to match the amount Doesn’t make your debt ‘go away’

So, as I said earlier, I am analytical and its not for me to decide whether anyone should pay off their mortgage early or not, that’s their decision. However, mathematics doesn’t lie so let’s look at a real-life example. The Mortgage payments, rates of return and end results are real figures obtained from our mortgage department and professional investment calculator:

In the below examples I have used €1,930 as the monthly amount in total as this is what came back as the monthly payment for borrowing €300,000 over 15 years:

Case Study 1

Paying your mortgage off over 25 years and also saving for retirement along the way:

Property Value €600 000
Mortgage of €300 000 EUR (50% Mortgage)
25-year term fixed rate at 2%
€1,271 EUR monthly payment
Mortgage paid in full after 25 years

Meanwhile whilst also saving for retirement:

Investing €659 a month for 25 years (€659 + €1,271 adds up to €1,930, the 15-year monthly payment amount below)
5% compound interest
Value of investment/retirement plan after 25 years: €377,425

Case Study 2

Property Value €600 000
Mortgage of €300 000 EUR (50% Mortgage)
15-year term at 2% fixed rate
€1,930 EUR monthly payment

Mortgage paid off in 15 years

Then (after the 15-year period and mortgage fully paid off)

Investing €1,930 a month for 10 years
5% compound interest
Value after 10 years: €291,000

Comparison Results
After 25 years in case study 1, you will have the value of the property you are living in plus €377,425 towards a retirement fund. After 25 years in case study 2, you will have the value of the property plus a retirement fund of €291,000.

Surmise
The difference is nearly €86,000, which I think most people would consider a decent amount of money. The main reason for this is that investing over a greater period of time will statistically bring you a greater return in your investments than shorter. Emotionally, people may like to pay their mortgage off first and then save for retirement, this will either mean you will have less for retirement in the above example or it will cost you a lot more. You would actually need to save €2,500 per month for the 10 years in case study 2 to achieve the same retirement pot, a whopping €68,400 more for the same outcome.

Should I pay off my mortgage or invest?
Before making a decision, it’s important to do a full-scale financial review (ideally with a financial adviser). For example, do you have an emergency fund in place to cover you in case of any unexpected surprises? Furthermore, take your life situation and goals into account. Do you have any plans to travel which you will need the money for? Or a wedding? Furthermore, how long do you think you will be in your home for? If you are considering moving to another place in the near future, it does not make sense to pay off your mortgage (and potentially paying a penalty).

Both options can be seen as very smart financial decisions, depending on your personal circumstances. But everyone’s financial situation is different. It’s important to take everything into consideration and consult a professional.

If you would like to speak with a Financial Adviser in Spain, I am experienced, qualified and legally able to discuss your financial matters. I am also able to review your current pensions, investments and other assets, with the potential to make them more effective and tax efficient moving forward. If necessary, we can perform in depth financial planning to get you set up/back on the right path/or ready for retirement once I fully understand what you are looking to achieve and your situation.

You can get in touch via the form below – or click the button below to make a direct virtual appointment here.

Book an appointment with me here

Buying a property in Portugal | Webinar

By Mark Quinn
This article is published on: 3rd August 2022

03.08.22
Buying a property in Portugal

Watch the webinar below

At the end of July Mark Quinn from The Spectrum IFA Group joined an expert panel to discuss the whole process of buying a property in Portugal.

The live event hosted Berkshire Hathaway Home Services and moderated by Lumon was attended by over 50 people from around the world interested in relocating to Portugal.

The questions and answers session touched on subjects such as the various visas options, obtaining a mortgage, overseas payments, wealth management and the legal process.

Our panel of experts based in Portugal

Moving to Portugal webinar
  • Joe Pyke – Berkshire Hathaway Home Services for your property questions
  • Steve Eakins – Lumon for all your currency management questions
  • Mark Quinn BA ATT APFS – The Spectrum IFA Group for tax and investment questions
  • André Nunes Melo – Nunes Melo Advogados Law Firm for your legal questions including the golden visa
  • Claudia Schuets – Quinta Finance for all your Portugal mortgage questions
View our guides to living in Portugal

UK investments living in Portugal

By Mark Quinn
This article is published on: 2nd August 2022

02.08.22

Can I keep my UK bank accounts, Individual Savings Accounts (ISAs) and other investments?

Moving to a new country is exciting, although it does present challenges. New processes, bureaucracy and language, but it also may mean you have to reshuffle your finances.

Each person should seek individual advice when it comes to financial planning, but here I touch on commonly held assets, the main points that you should be aware of and what you can do about them.

Bank accounts
Whilst many expats will open a new bank account in their new country, most of us also keep our UK bank accounts, not only for practical reasons but also because we understand and feel comfortable holding them.

However, post-Brexit many UK banks are asking account holders living outside of the UK to close their accounts. This can pose a problem because if you have already moved to Portugal, it is unlikely that you will find an alternative UK bank that will be willing to accept new non-UK customers.

The Channel Islands and the Isle of Man are popular alternatives to the UK when it comes to banking, but you should be aware that these are considered ‘blacklisted jurisdictions’ by Portugal and therefore interest is taxed punitively at 35%, rather than the usual 28% or 0% under NHR (Non-Habitual Residence).

Individual Savings Accounts (ISAs)
Firstly, consider the tax dimension. They do not retain the tax exemptions when held by Portuguese residents. For (NHRs), interest and dividends are tax exempt during the 10-year period but realised gains are taxed at 28%. For non-NHRs, interest, dividends and gains are taxed at 28%.

But whether you decide to retain your UK ISA or restructure it will depend on your longer-term plans, some things you might consider are: how long you will stay in Portugal, do you need to make withdrawals, do you want to top up, can you make changes to the underlying investments if a Stocks & Shares ISA, or what are the returns on Cash ISAs?

If your move to Portugal is short-term, or if you are not certain that it will be your long-term home, then there is a case for retaining your ISAs. Although you cannot add to them whilst non-UK resident, you can continue to hold them, and once you return to the UK they resume their tax efficiency.

A planning point you may wish to consider if you have a Stocks & Shares ISA is to ‘rebase’ by selling and then immediately repurchasing the same funds within your ISA prior to leaving the UK to ‘wash out’ any taxable gains accrued to the point of your departure. This way, if you did decide to restructure, encash, or withdraw from the ISA as a Portuguese tax resident in the future, there would be little or no tax to pay in Portugal.

As a general guideline, if you believe your move to Portugal is long-term (as a rule of thumb, 5 years or more) then restructuring and starting an investment vehicle that is suitable for residency in Portugal would make sense for greater tax efficiency, amongst other reasons. If this is the case, planning well in advance is advantageous, as there is no tax on ISA closure for UK residents.

UK investments living in Portugal

National Savings & Investments (NS&I)
NS&I savings and Premium Bonds are popular products held by many UK nationals and are seen as ‘safe and secure’ as they are backed by the UK Treasury.

Aside from this point, they do require you to hold a UK bank account which could be an issue for some. The interest rates offered are low, well below inflation, so you are losing money in real terms and interest is taxable in Portugal, unless you have NHR.

Premium Bonds on the other hand offer no capital growth or income, only the possibility of winning a sum of money. These winnings in turn are taxable in Portugal, not tax-free as they are for UK tax residents – this could be disappointing if you do win that million!

Investments with UK-based Financial Advisers
Most significantly, Brexit brought an end to the passporting rights that allowed UK-based advisers to advise clients across the EU member states and vice versa. This means that many advisory firms may not have the right permission to continue providing advice to clients living overseas.

Obviously, this can be worrying for those who have worked alongside their trusted adviser for many years, but in reality, good financial planning and structures for UK residents are unlikely to retain the same benefits for those living outside of the UK.

Understandably, many UK advisers do not want to lose their clients, and whilst you can continue your relationship with your UK adviser and pay their fees, without the right permissions, you should be aware that they cannot service your accounts e.g. provide investment advice for portfolio rebalancing or fund switches, and more importantly, you might not have proper recourse if anything were to go wrong. This will not only affect your investments and performance, but you will end up paying for advice that you cannot (legally) take advantage of.

Likewise, if you hold offshore investments provided by EU institutions, they may not be able to accept instructions from a UK-based adviser if they do not have the right licenses.

Lastly, there are practical implications. Does your UK adviser understand the rules in your new country of residence? Are you missing out on tax planning opportunities, paying more tax than you have to because you could be structuring or drawing your income better, or have they fully understood the knock-on effect of their advice in relation to income tax, interaction with NHR, or taxes on death?

Download our finacial guides to living in Portugal

What can you do?
The overarching message is that Brexit has changed the landscape for establishing and maintaining our investments. Reviewing your personal finances is more important than ever to ensure that you are not hindered when managing and making changes to your investments and savings, but that you are fully protected and have recourse should anything ‘go wrong’.

We are UK-qualified Chartered Financial Planners and tax advisers, so have a firm grasp of the planning and issues UK expats face. We have also been living and working in Portugal for a combined period of 15 years, so we not only understand the local rules and regulations but also have vital local experience and knowledge. If you would like an informal, confidential initial chat at no cost to you, please get in touch.

Spain’s Golden and Non-Lucrative Visas

By John Lansley
This article is published on: 29th July 2022

29.07.22

Prior to Brexit, British residents had the freedom to live, work and travel anywhere in the EU, subject to local requirements, but those wishing to move to an EU country since 31.12.20 face a number of hurdles. Fortunately, there are two schemes that make a move to Spain much easier than would otherwise be the case, which is good news for those who have held long-cherished hopes of a retirement in sunnier climes!

Both schemes have similar basic requirements:

  • You must not be a citizen of an EU or EEA state, or of Switzerland, and must be over 18 years of age
  • You cannot have a criminal record (past 5 years)
  • You must have health insurance, either via a state scheme or from a Spanish insurer
  • You must not have entered or stayed in Spain illegally

Golden Visa
Coming from the UK, you will of course not be a citizen of an EU state, but you would need to comply with the other points above and certain others, depending on your situation. The most important aspect is that you must purchase a property in Spain for at least €500,000, without using a mortgage or other loan, and that you can demonstrate you can support yourselves financially. No specific amounts are quoted, but clearly you must be able to prove that the cost of running a property of this value plus general living expenses can be met, the figures mentioned below being a useful guideline.

There are alternatives – rather than investing €500,000 in property, investments of €1million in a Spanish bank deposit or in a Spanish company, or €2million in Spanish bonds, will also qualify you for a Golden Visa.

What are the benefits?

  • The Visa will apply to the main applicant and his/her spouse, plus minor children. Adult children or dependent parents can accompany them, but full details will need to be provided
  • It allows the holder to work in Spain, subject to meeting local requirements
  • The Visa holder does not need to reside in Spain or spend a certain amount of time here in order to renew it
  • The Visa provides a residency permit for one year initially, and can then be renewed for a further two years and then 5 years. After 5 years, you can apply for permanent residency and, after 10 years, Spanish citizenship (if you have actually resided in Spain during that time)
  • The Visa allows travel within the Schengen area for 90 days out of any 180 (the same as the current restrictions for those resident in Spain)
  • The property can be sold once permanent residency is obtained
Spain’s Golden and Non-Lucrative Visas

Non-Lucrative Visa
Again, if you are coming to Spain from the UK, or any other non-EU country, you will satisfy the first general requirement above, but you will also need to meet the other requirements. However, the non-lucrative visa is aimed at those who do not need to work and as such will appeal specifically to those who are retired but who have sufficient income, because you are not allowed to work. It’s also known as a retirement visa for this reason, but it is also possible to undertake work as long as it is for clients based outside Spain.

In addition to the above qualifications, it is necessary to demonstrate income of at least €27,936.96pa for the main applicant and an additional €6,984.24 for each additional family member. So, for example, a married couple would need to prove €34,921.20. This can be in the form of pensions or investment income, but if in the form of dividends from a company it may be necessary to provide confirmation that no work is performed for the company concerned.

It can also be in the form of bank deposits, showing that you have sufficient funds to live on for the first year.

After one year, you then apply to renew your visa for a further two years. The income requirements will have no doubt increased slightly since then (the IPREM figures, on which the calculation is based, is updated annually), and, if basing your renewal application on cash in the bank, you would need to prove at least two years’ worth.

The visa needs to be applied for at the Spanish Consulate in the country of residence of the applicant, and only when the visa is granted can the applicant move to Spain.

What are the benefits?

  • As above, the visa can be applied for the main applicant and spouse, plus minor children and dependent children over the age of 18
  • The visa provides an initial one year residence permit, followed by the ability to renew for a further 2 years, then another 2 years, and after that for a further 5 years. After 5 years, permanent residency can be applied for
  • The ability to travel within the Schengen area, as above
  • Even though you are unable to work in Spain, you are permitted to work remotely with clients located outside Spain
  • Once established in Spain, it should prove easier to apply for a working visa

Other Issues
Remember that being able to live in Spain, and spending most of the year there, will mean you will be fully exposed to Spanish taxes. Also, coming from a non-EU country will almost certainly mean your investments and perhaps some sources of income may no longer be suitable. For these reasons, it is essential to take professional advice well in advance of a move to Spain in order that any rearrangements can be considered.

Living in Spain after BREXIT

By Chris Burke
This article is published on: 26th July 2022

26.07.22

In this months regular article I’ll be discussing three main concerns I’ve heard from clients recently:

  • Changes to UK driving licenses in Spain
  • Living in Spain after Brexit, managing your personal finances
  • 18 months on from Brexit in Spain – What has changed / what do you need to do to move here?

Changes to UK Driving Licenses (When Living in Spain)
Up until the end of 2020, British driving licenses were valid in Spain. Furthermore, Brits were able to exchange their British Driving License for a Spanish one up until 31/12/20. From this date onwards, Brits residing in Spain prior to this have not been able to exchange their British driving licenses for a Spanish one.

For those residents who failed to meet the Spanish deadline to exchange their licences for a Spanish one, they currently (as of 08/07/22) cannot drive on their UK licence – this does not apply to holidaymakers hiring a car. The Spanish Government has already issued four extensions to the ‘grace period’, allowing Brits to still drive using their UK license. The grace period ended on 30/04/22.

Hugh Elliot, the British Ambassador to Spain and Andorra, issued an update on Twitter stating that they were working on a resolution to this. The belief is that they are hoping to secure a deal, similar to the UK’s deal with France, Sweden and many other European countries, in which UK Driving Licenses can be swapped for the license of that country (providing that the individual is resident).

According to SpanishNewsToday, the proposed deal would allow Brits living in Spain to swap their UK driving licenses for a Spanish one for an additional period of six months. The deal would also see UK Driving Licenses valid for a further six months. If this proves to be the case and you have not yet exchanged your license, I would recommend that you seize this opportunity.

Spain and Italy are the only EU countries in which Driving License exchange conversations are ongoing.

spanish tax

Financial Matters for Brits living in Spain after Brexit
From a tax perspective, for Brits living in Spain before Brexit there should not be a change as it is highly likely that you were a tax resident prior. Being a tax resident in Spain means that ‘your centre of economic or vital interests is in Spain’. As a result, if this is the case you must declare your wealth and worldwide income accordingly.

However, what has changed is the Private Pension agreement in relation to the Wealth Tax. In 2019, a ruling by Spain’s Directorate-General for Tax declared that Private Pensions from non-EU states are now eligible for Wealth Tax. Please read this article on Wealth Tax to find out more about it.

Furthermore, it is now more important than ever that Brits ensure that their finances are managed correctly. From 2021 onwards, Financial Advisers based in the UK are no longer permitted to advise clients based within the EU. The same situation applies to UK based banks, investment and insurance companies and stockbrokers.

If you are still using a UK-based financial adviser or service whilst a resident of Spain, they may well be breaking the law whilst servicing you. This could still be the case even if you only engage with them when returning to the UK to visit, providing that you are a resident of Spain. Furthermore, their professional indemnity insurance may not cover you. This may leave you vulnerable if you were to receive poor advice.

Book a telephone call or zoom chat with Chris now
Living in Spain after Brexit

18 months on from Brexit in Spain – What has changed?
We are now over a year on from the end of the Brexit Transition Period (31/12/2020). Whilst British Expats in Spain continue to enjoy their life as it was before the Brexit, overall things are a little more complex than they once were. It’s important to understand these changes – some are more complex than others.

For Brits wanting to move to Spain in 2022, although it is far from impossible, the changes imposed have made this more complex. The door has not closed, however, it is important to seek clarification from experts who are aware of the legislation and will be best suited to providing you with available options.

Many Brits in Spain have experienced frequent ‘run of the mill’ changes to their lives in Spain compared to before Brexit. Whether this be extended queues when going through passport control, taxes on imports or companies no longer shipping to EU customers, most British people in Spain will have been effected at least in a minor way. However, there are bigger issues which people need to be aware of.

Living in Spain after Brexit
Book a telephone call or zoom chat with Chris now

90 Day Travel Rule
To summarise, unless you are a Spanish resident or have a visa you can no longer spend more than 90 days in Spain in a rolling 180-day period. This rule has particularly affected Brits who have holiday homes in Spain and used to come and go as they please. Now, it is important to plan your trips to Spain throughout the year to ensure that this 90 in 180-day rule is not broken. Furthermore, this rule does not only apply to Spain. It applies to everyone country in the Schengen Zone.

Brits who are non-residents must also now get their passports stamped as they enter and exit Spain. However, this is a temporary procedure. The EU are working on the European Travel Information and Authorization System (ETIAS), which is set to come in to force towards the end of 2022. This system will allow for the electronic tracking or arrivals and departures.

Spanish Residency Permits – Green Card and TIE
Those who were resident in Spain before the Brexit will keep their Spanish citizens’ rights. They should have the old green NIE card or a new TIE. The TIE, also known as the ‘Tarjeta de Identidad de Extranjero’ in Spanish, should state on it ‘Articulo 50’, meaning that it was issued as part of the Brexit Withdrawal agreement.

Although according to Spanish Law the green card remains valid, Brits have been encouraged to change it. Certain authorities have been said to no longer accept this card as suitable verification. Furthermore, the TIE is far more durable, can simplify administrative processes and acts as a valid form of ID as it contains a photo. In Spain, the law is that you must carry a form of ID when outside of your home. The TIE is allowable whereas the NIE ‘green card’ is not.

Spanish Residency Permits – Post-Brexit Arrivals
There are several ways in which you could apply for a residency permit post Brexit. However, although far from impossible, it must be said that this process is significantly more complicated than if you had arrived pre-Brexit. Working visas have proved challenging to obtain and, depending on your individual circumstance, sponsorship may be required.

If you are retired, you may be able to apply for a Non-Lucrative Visa and Residency Permit. To qualify, you must prove that you are financially stable (with sufficient resources to support yourself moving forward) and have suitable medical insurance along with a clean police record. It is also imperative that you go through the application process in the UK, before arriving in Spain.

Another option is the Golden Visa. You must invest a minimum of €500,000 into a qualifying investment scheme or property. If you were the obtain the Golden Visa, you would not need to abide by the 90 in 180-day rule and you could enter and exit Spain as you please. Please note that this does not give you freedom of movement around Europe, but only in Spain.

If you would like to speak with a Financial Adviser in Spain, Chris Burke is experienced, qualified and legally able to discuss your financial matters. Chris is also able to review your current pensions, investments and other assets, with the potential to make them more effective and tax efficient moving forward.

If you would like to find out more or to talk through your situation and receive expert, factual advice about living in Spain after Brexit, don’t hesitate to get in touch with Chris via the form below – or click the button below to make a direct virtual appointment here.

Book a telephone call or zoom chat with Chris now

Succession planning in Portugal

By Mark Quinn
This article is published on: 22nd July 2022

22.07.22

How to protect your loved ones

Death and taxes are the two certainties, but it is surprising how many of us fail to properly plan during our lifetimes.

The key considerations for most of us in this area of planning are ‘control’ and ‘taxation’. This is ensuring that assets are passed to the right individuals, in the right proportions, at the right time with minimal taxation. But as expats, in order to ensure this happens, you must carefully consider the succession rules of Portugal, your originating country, and any interaction between the two.

Understanding the Portuguese rules
Unlike the UK, where you can generally leave your assets however you wish, Portugal has ‘forced heirship’ rules. These force you to leave certain proportions of your assets to specific family members and applies to your worldwide estate (except for non-Portuguese real estate).

For expats, the ‘Brussels IV’ regulation means that the rules of your country of habitual residence will apply, so forced heirship could apply to you unless you specifically elect for the succession law of your country of nationality to apply via your Will, or other appropriate legal documents. This must be done during your lifetime and cannot be changed after your death. But it is important to note that this does not affect the tax rules that apply, only the rules around succession, and these two issues should be looked at independently.

There is no inheritance tax in Portugal. Instead, Stamp Duty is due at 10% on assets located in Portugal that pass to someone other than a spouse or direct line ascendants or descendants. This tax is paid by the recipient irrespective of where they live and must be paid before receiving the asset. It is due within 6 months of the death, so for large gifts and inheritances, this could be a problem for your loved ones.

Impact of your nationality
A particular issue for British expats is that their liability to UK inheritance tax (IHT) is not determined by where they live (as with Brussels IV), but by their domicile. This means that even if you live in Portugal, and have done so for many years, you can still be subject to UK IHT as well as Portuguese taxes. There are rules in place to avoid double taxation, but again this will have to be sorted out by the recipients and your executors which might be complex and costly.

It is possible to shed your UK domicile however this is very complex, so specific advice should be sought.

Succession planning in Portugal

Tax mitigation
IHT is sometimes considered a voluntary tax as with the right planning, there are many steps you can take to reduce the tax liability on your estate and gifts. From a Portuguese perspective, this can be as simple as holding your assets outside of Portugal. For UK nationals, the planning is likely to be a little more complex such as utilising all allowances and the gifting rules, trusts or trust-like structures, or domicile changes.

What about Wills?
UK Wills are valid under Portuguese law but practically, it is likely to be more difficult, costly, and time-consuming for your executor or heirs to go through the bureaucracy in Portugal. We suggest that you have a separate Will for each country in which you hold assets. They should acknowledge the other Wills, however, they must not override or conflict with each other.

Even if you already have a plan in place, it is important to review this periodically, or if your family or financial circumstances change.

With careful planning and our specialist cross-border advice, we can help you create the right estate plan for you and your family.

Are you paying too much on your investments?

By Jeremy Ferguson
This article is published on: 19th July 2022

19.07.22

Paying too much for something is never a good idea!

Unless you have been spending all your time either on the beach or playing golf, it would be almost impossible not to have seen what´s been happening in the financial world at the moment.

Stock markets have had their worst start to a year in 50 years. Almost every day all you see and hear is doom and gloom about rising inflation, rising food prices, rising fuel prices, rising interest rates, supply chain issues, falling consumer confidence. And on and on it goes.

As usual with such issues, it can affect retirees who live here the most, as their Pensions and Investments are normally exposed to the stock markets and various other investment instruments, pretty much all of which are falling at the moment. How much worse can it get? Who knows.. When will it recover? Who Knows.. How long will it take to make up for all of my losses this year? Who knows…!

Nobody does, and looking at history can give a good indication as to the likely answers, but as I keep saying, this could well be history in the making, as opposed to history repeating itself.

Looking at history can help calm the nerves and add perspective. Over the last 150 years there have been 13 major stock market crashes. In 1877 markets fell by 33%, in 1970 they fell by 25% and again in 1974 by 39%. The latest memorable events were the financial crisis of 2008 which resulted in losses of 49% and the Covid lockdown period, which again resulted in heavy losses.

Taking the median of all of these 15 events, an average fall of 33% has taken on average of around 2 years to recover. So, although I have said this may well be history in the making, what we can all be sure of is that things will eventually get better. It’s just a question of how quickly, and that again is an unknown. The speed of recoveries is always quite impressive. Many people miss the fact that if you lose 50% on something, that something has to double in value to return to where you were.

Paying too much for something is never a good idea!

One thing I do know though, is that if you have Pensions and Investments which are expensive, trying to reduce the costs incurred is one thing that will have an immediate positive effect on your returns, and can have an incredibly positive effect on the long-term returns.

Something else that is also relevant to costs, is the type of investments retirees are in. One of the first things to assess when I meet a client is what risk they are prepared to take with their investments. Typically, (as most are retired), I think being driven by caution (or fear) rather than greed is paramount, meaning a client should typically be very concerned about protecting their capital, and therefore their investments should be at the lower end of the risk scale.

Therefore, it makes perfect sense if you are looking to achieve a certain annual return that reducing the annual costs as best you can will mean you can take less risk to achieve your objectives, and therefore see better capital protection.

Many people are coming to me asking if we can take a look at their existing arrangements, and very often we are able to offer a solution to reduce the costs and achieve a more suitable strategy in view of where we find ourselves.

In these times of rising costs, every penny helps, and very often just talking through situations like this and having someone to listen to your worries can be a great help, so if you would like a quick chat in confidence about your financial situation, please get in touch.

Buying a property in Portugal seminar

By Mark Quinn
This article is published on: 18th July 2022

18.07.22

Are you thinking about buying a property in Portugal?

Do you have questions about tax, currency, mortgages, the visa options available or financial planning in Portugal?

Join us on Thursday 28th July at 6pm for this live and free event to learn about everything involved in buying a property in Portugal and talk direct to our panel of experts.

Mark Quinn, our Portugal office Manager will be joining the esteemed panel including:

Register for the event here
Buying a property in Portugal?

Responsible investing and ESG

By Andrew Lawford
This article is published on: 12th July 2022

12.07.22

Why things really aren’t that bad

It might seem rather strange for me to be writing an article with this title given everything that is currently going on in the world. In truth, however, I have been vaguely working on this for some months, and whilst in no way am I trying to downplay the difficult situation in Eastern Europe, I have no particular insights to share on the topic (apart from wishing that calmer heads will soon prevail), and I am quite sure everyone is receiving enough information about it already.

We have a natural tendency to focus on bad news for the simple reason that no newspaper ever appeared with the title: “Everything’s going well – not so much to report today”. This is not strictly true – the website Future Crunch offers a periodic newsletter dedicated to good news. It is the perfect complement to the diet of negativity that we receive from traditional news outlets.

I had assumed that I was fairly knowledgeable about the world around me and had an objective view of humanity’s current state of affairs. I was thoroughly disabused of this notion by Factfulness by Hans Rosling, one of the most eye-opening books I have ever read and which I thoroughly recommend to everyone.

However, if you have little time or inclination for reading, you can take the Gap Minder test here, which is based on the work done by Rosling. It won’t take long and I suggest you do it before reading the rest of this article.

Gapminder

So what is my point? We tend not to realise that improvements are so gradual as to be imperceptible to us, and this, combined with the fact that we don’t often receive information that challenges our negative stereotypes, leads to a bias towards negativity. It is interesting how much bad news is anecdotal and how much good news is statistical – but of course you wouldn’t want it to be the other way around!

Is a negative bias worthwhile as we consider challenges such as climate change? I don’t know, but I would say this: panic is not a strategy, and going from bad to slightly better (whilst creating incentives to improve continually) is something we should celebrate. This reflection is also relevant to the field of investments: almost all investment houses now make ESG (Environment, Social & Governance) considerations part of their “process”. Are these processes perfect? Certainly not, but it is a start, and some of the leaders are blazing a trail that others are bound to follow. Again, from bad to not-so-bad is still something to celebrate.

Download our guide to responsible investing and ESG

In Italy, it is easy to complain about the bureaucracy, but I have to admit that some things are getting better. For anyone doubting this, consider the advent of SPID (Sistema Pubblico di Identità Digitale), which acts basically as a digital gateway to any interaction with the public administration. It is a Substantial Headache to get set-up (capital letters intended), but once you have it working, it is very useful. Also, consider PEC (Posta Elettronica Certificata) – a sort of “registered e-mail”. For anyone who has spent time and money sending raccomandate from their local post office – and let’s face it, you haven’t really lived in Italy until you’ve had to send a raccomandata, you really should invest in a PEC. For 10 euros or so a year you can send as many digital raccomandate as you like from the comfort of your own home, and they have the same legal validity as their paper counterparts. All companies and state entities have to have a PEC, so they are a very effective way of making official communications.

common reporting standard

Of course, this technological advancement has also been a way for the Agenzia to concentrate its tax-collecting efforts. They are no longer in the dark about your assets abroad, thanks to the mechanisms of CRS (Common Reporting Standards). Most people have now come to terms with this and are making the necessary declarations. If you or someone you know have been sitting on the fence – talk to me about the best way of sorting out your situation – the key being that you should do this before you receive any requests for clarification.

There are also a number of tax incentives that have been launched in recent years, favouring pensioners, digital nomads and even very wealthy people. I took the opportunity recently to speak to tax practitioner Judith Ruddock from Studio Del Gaizo Picchioni about a number of them (as well as other matters of interest for Italian residents) and have published a podcast which you can find on Apple Podcasts, Spotify, Google Podcasts or Stitcher.

Italian Financial Adviser

Please also check out my other podcasts, available on
Spotify, Google Podcasts, Apple Podcasts and Stitcher.

Inheritance Tax in Catalunya

By Barry Davys
This article is published on: 11th July 2022

11.07.22

Inheritance Tax in Catalunya – A Guide

Inheritance tax in Catalunya is calculated using the same basic principles as the national system in Spain. As in the national system, the taxable entity is the person RECEIVING the bequest, not the person who has passed away.

However, the allowances (deductions) and rates of tax are different in the Automonous Community Catalunya from the national rate. The law that sets these rates and allowances is Catalunya Ley19/2010 which was amended in February 2014.

Who’s this article for?

  • People living in Catalonia
  • People who have recently inherited or are about to inherit
  • People whose parents are doing inheritance tax planning

Overview
Inheritance tax in Catalonia is calculated in a different way than in many other countries and even in other autonomous communities in Spain. The tax to be paid is not necessarily bad. The tax can be less than in the UK for example.

What you get?
This guide gives a reasonable understanding of how Catalan inheritance tax works and the possible amount to pay. You get access to an adviser who specialises in this area and an introduction to an English speaking lawyer who specialises in helping International people living here.

Your Investment
The time taken to read the guide, and perhaps a second read as Catalan IHT tax takes some getting used to. You will also need to book an initial telephone call if you want advice specific to your situation.

If you are resident in Catalunya these are the rules that will apply. Here we have produced a guide to Catalan Inheritance Tax. The most important deductions available are as follows:

Personal Deductions
The starting point in making the calculation is to work out which Group the person receiving the inheritance belongs to as follows:

Group I Children, including adopted children, under the age of 21
Group II Children over 21, spouses, parents and grandchildren
Group III Close relatives such as brothers and sisters, aunts and uncles
Group IV More distant relatives or unrelated

Allowances/deductions available in Catalunya are:

Group I
Deduction of €100,000 plus €12,000 for each year under 21 years of age up to €196,000

Group II
Spouse: €100,000; Child: €100,000; Other Descendants: €50,000; Parents: €30,000

Group III
€8,000

Group IV
No deductions available

Disabled Heir
In addition to any personal deductions applicable a beneficiary who is disabled may add an additional €275,000 deduction if the disability is determined to be greater than 33% or €650,000 where it is greater than 65% disability

Heir over 75 years old
A deduction of €275,000 may be applied where the heir is over 75 years of age who is a beneficiary within Group II though this deduction is applied instead of the other allowances.

Inheritance of the Family Home
Where a property inherited is the main family home then a reduction amounting to 95% of the value of the property up to €500,000 may be made where the beneficiaries are the spouse, child or parent of the deceased as well as collateral relatives, older than 65, that lived with the deceased during the 2 years previous to the decease . The property may not be sold for a period of 5 years if the reduction is claimed.

Allowances available for the Inheritance of the Family Business
A tax deduction of 95% of the value of the interest held by the deceased in the business This applies to all beneficiaries who were related to the deceased to the third level of blood relative and persons in the employ of the business for at least 10 years.

Allowances available for income from Life Insurance Policies
A deduction of 100% is applicable on any income from a life insurance policy held by the deceased up to a maximum of €25,000 where the beneficiary is the spouse, descendant or parent of the deceased.

Inheritance Tax Rates in Catalunya:
Once all deductions have been applied the final amount of tax payable is determined then it is necessary to apply the relevant rate:

Taxable Sum Tax Payable on this Sum Any Reminder up to Applicable Rate on Remainder %
0 0 50,000 7%
50,000 3,500 150,000 11%
150,000 14,500 400,000 17%
400,000 57,000 800,000 24%
800,000 153,000 Above 800,000 32%

Existing Wealth:
Once the relevant tax has been calculated the result is multiplied by a coefficient determined by the existing wealth of the beneficiary as well as the group to which they belong:

Existing Wealth Multiplier Coefficien

Existing Wealth in Euros Group 1 & 2 Group 3 Group 4
From 0 a 500.000 1,0000 1,5882 2,0000
From 500.000, 01 to 2.000.000 1,1000 1,5882 2,0000
From 2.000.000, 01 to 4.000.000 1,1500 1,5882 2,0000
More than 4.000.000, 00 1,2000 1,5882 2,0000

As a reminder the Groups referred to consist of the following beneficiaries:
Group I Children, including adopted children, under the age of 21
Group II All other descendants, spouses, parents and grandchildren
Group III Close relatives such as brothers and sisters, aunts and uncles
Group IV Distant relatives and unrelated

Special Deductions – Spouse
After applying the tax rates and coefficients above a discount of 99% shall be applied to any tax payable.

Special Deductions – Other Relatives Groups I & II
For Group I & II beneficiaries, apart from the spouse, the following discounts may be applied to the calculated amount of tax due, depending on the amount inherited:

Group 1

Bottom of Taxable Band Euros

Total discount to this level %

Top of Taxable Band Euros

Discount for this band %
0,00 0,00 100.000,00 99,00
100,000 99,00 100.000,00 97,00
200,000 98 100.000,00 95,00
300,000 97 200.000,00 90,00
500,000 94.20 250.000,00 80,00
750,000 89.47 250.000,00 70,00
1,000,000 84.60 500.000,00 60,00
1,500,000 76.40 500.000,00 50,00
2,000,000 69.80 500.000,00 40,00
2,500,000 63.84 500.000,00 25,00
3,000,000 57.37 upwards 20,00

 

Group II:

Bottom of Taxable Band Euros Total discount to this level %

Top of Taxable Band Euros

Discount for this band %
0,00 0,00 100.000,00 60,00
100,000 60,00 100.000,00 55,00
200,000 57,50 100.000,00 50,00
300,000 55,00 200.000,00 45,00
500,000 51,00 250.000,00 40,00
750,000 47,33 250.000,00 35,00
1,000,000 44,25 500.000,00 30,00
1,500,000 39,50 500.000,00 25,00
2,000,000 35,88 500.000,00 20,00
2,500,000 32,70 500.000,00 10,00
3,000,000 28,92 upwards 00,00

 

Special Deductions – Other Relatives Groups I & II
The discount shall be reduced by 50% should the beneficiary apply any of the following deductions:

  • Family Business
  • Any other deduction to the amount of tax payable except the deduction applicable to the family home.

Many expats pay more tax on their inheritance than they should because they fail to follow some simple rules.
To discuss how to pay only the appropriate amount, please click the button below to get in touch with us.

This information is intended as a guide only. It is based on the current legislation for Inheritance tax in Catalunya as at August 2017. A suitable qualified tax lawyer should always be used to calculate a specific liability. If you require the assistance of a tax lawyer please contact barry.davys@spectrum-ifa.com who will introduce you to an appropriate lawyer. Please also note that this guide does not apply to Gifts (donaciónes) which have their own rules.

Request a Phone or Video Call

At a time that is convenient for you

Sign up to our series of seminars and webinars
FAQ's about The Spectrum IFA Group

     

     

     

    YesNo

     

    YesNo

     

     

     

    The Spectrum IFA Group is committed to building long term client relationships. This form collects your name and contact details so we can contact you about this specific enquiry. For further information, please see our Privacy Policy.