By Portugal team
This article is published on: 19th August 2024
With some stock markets falling over the past couple of weeks, it is an opportunity to review markets and risk.
We all love the feeling we get when we grab a bargain and have no hesitation in purchasing our favourite goods or services when they have a price reduction or promotion.
However, the world of investments is probably the only one in which the same price reductions are met with fear and anxiety instead of joy, however if you are a long term investor, the falls can be an opportunity.
The numbers matter
Statistics show that, over the longer term, stock markets go up approx. 70-75% of the time. In this context therefore any fall in values can be seen to be temporary setback and opportunity to buy shares at “sale” prices.
“Breaking news! Shares up over 20% in 2023!”
You will rarely, if ever, see such a headline. In the same way, you would not have seen a headline stating there “wasn’t a single casualty in the millions of commercial aviation flights in 2023”, but you probably have seen many “flight from hell” articles published in the same year.
When it comes to the world of investments, the media is not your friend in helping you make informed decisions as the focus tends to be on short-term news developments without taking into accountant the much broader and longer-term picture.
The media also tends to catastrophise events with news headlines being designed to grab attention. We see discussions of “crashes”, “crises”, “recessions” etc. and this is getting worse in the digital age with “click bait” designed to grab people’s attention. Moreover, through sophisticated algorithms, the same messages are reinforced through links to similarly anxiety inducing articles.
As a result of this, many still equate the stock market to rolling dice at the casino. An alternative and more considered and rational description of the stock market could be:
“a highly diversified selection of some of the world’s largest and financially secure companies, including such names as Apple, BP, Nestle etc. many of which have been in existence for decades if not hundreds of years, and whose return has averaged over 10% per annum over the past 50 years”.
This hardly trips of the tongue, but the emotional reaction is much different.
What is risk anyway?
It is not as clear cut as you think. When people think of investing and risk, they think about the possibility of losing all of their investment.
Whilst it is indeed possible for individual companies to fail, if you hold a diversified portfolio of, say, the top 500 shares in the US (the S&P 500 index), the only way you could lose your money would be if every one of those 500 companies were to fail.
Over a 50-year period, the S&P 500 index has increased by an average of more than 10% per annum and this is a period that has been marred with the inflation shocks of 1970s, wars, emerging market crises, 9/11, “Grexit”, “Brexit”, the great financial crisis of 2007/08 etc. Nevertheless, the market continues to increase consistently.
Does risk lie in ‘safe’ assets?
We live in a world in which costs are constantly increasing in value. If we reminisce and think about the cost of our first car or house, we can really appreciate the extent to which prices rise over time. Therefore, in order to maintain our standard of living over time, our money must at least maintain its purchasing power and ideally increase our purchasing power over time.
With that in mind, holding fixed return investments such as cash in a world in which costs are increasing is not low risk; it is high risk in the sense that you are jeopardising the value of you real wealth over the longer term.
Safety in risk?
Conversely, shares have historically demonstrated the ability to grow well in excess of the rate of inflation and therefore, as they are protecting your wealth, they can be regarded as safe investments.
Indeed statistics show that the risk of investing in high quality shares reduces to zero over a 20 year time horizon. This sounds like a long time but if we consider life expectancy statistics, a couple in their mid-60s can expect to live well into their 80s and one of the couple has a good chance of reaching 100! Furthermore, we find that many clients’ portfolios outlive them and will be handed down to children and/or grandchildren, in which case the investment period is likely to be multiple decades long.
By Portugal team
This article is published on: 16th August 2024
Difficult times
With high levels of inflation and relatively low rates of returns on cash deposits, it is important to make sure your money is working hard for you.
In order to do this, investors will look to “real” investments i.e. assets that are expected to grow above the rate of inflation over the longer term – the main contenders are shares, bonds and property.
Make your money work harder
Whilst you can purchase individual investments direct, most investors choose to invest through a collective investment where you pool your money with other investors into a larger pot and appoint a fund manager to run this pot for you – in doing so, your combined value is larger and you can spread your investments much more widely which reduces risk. For example, the Vanguard LifeStrategy fund has approximately 22,000 underlying holdings.
‘Active’ versus ‘passive’ management
Active investors appoint a fund manager such as Fidelity or BlackRock to run the fund on their behalf and pay the manager a fee, typically between 1-2% per annum.
The alternative is to simply buy a basket of investments through a ‘tracker’ or passive fund – in this way, your fund will simply grow in line with the performance of the investments within the basket and do not have the personal involvement (and cost) of a fund manager overseeing the fund.
Examples of common trackers are those that mirror the S&P500 or FTSE100 indices, which are the largest companies trading on the US and UK stock markets respectively.
More money in your pocket with ETFs
ETFs are tracker funds that trade on a stock market and the major advantage is the extremely low fees, with annual charges on some ETFs as low as 0.01%. The savings in fees compared with active fund managers can make a substantial difference to the value of your investments over time.
As ETFs are traded in real-time on a stock exchange, they can be accessed quickly, with low costs and they offer access to a wide range of investments, from shares, gold and commodities to AI and environmental funds.
The devil is in the detail
Whilst Exchange Traded Funds certainly have a place in a well-diversified portfolio, there are important considerations when selecting them.
Tracking error – as the sole job of the ETF is to follow the index it is tracking; you must ensure it is following the market accurately. If it fails to track the market it could result in underperformance, and this can be more costly than the fee saving on the management fee.
Skewed risk – be careful that your portfolio is sufficiently diversified e.g. you may think that the S&P 500 is a highly diversified basket because you have 500 different underlying investments but the top 10 holdings make up around 35% of the value of the 500. The risk is very skewed to the big tech firms such as Google, Apple and Meta.
Another example of skewed risk is the MSCI World Index tracker. Although ‘world’ would suggest a globally diversified portfolio around 2/3rd is invested in the US alone.
Counterparty risk – there are different ways of tracking the market. The most secure is “physical replication” whereby the tracker simply holds the underlying investments of the index it tracks i.e. if you buy a FTSE 100 tracker, you will simply hold the 100 shares that make up that index.
The other main way is “synthetic replication” which means the index is tracked by using a complicated financial product supplied by another financial institution. In this situation, you have to think about the additional risk of that counter-party’s financial strength.
Other important points to have clear knowledge of are:
In short, although Exchange Traded Funds and tracker investments are simple in principle, there are important nuances of which to be aware, especially when considering cross-border investment.
As always, when investing your hard-earned money, take guidance from a professional.
By Sue Regan
This article is published on: 9th August 2024
When it comes to investing in assurance vie for inheritance planning, the focus is often on the very generous inheritance benefits applied to policies where sums are invested before the age of 70. I am often asked by clients ‘is it worthwhile investing in assurance vie after the age of 70?’ The answer is ‘most definitely YES!’
As a change from the norm, this article focuses mainly on the inheritance benefits of assurance vie investment beyond the age of 70.
As already stated, it is often a misconception that investing in assurance vie for inheritance planning is only attractive for people under age 70. Undoubtedly, investing before age 70 has very attractive inheritance benefits, but there are also valuable inheritance planning opportunities for sums invested after age 70 which should not be overlooked.
As a reminder, an assurance vie policy is “outside the estate”, according to Article L132-12 of the Insurance Code. This means that in the event of the death of the insured, the capital does not go to the heirs within the meaning of the Civil Code but to the named beneficiary(ies) of the assurance vie policy.
Sums invested into assurance vie beyond the age of 70 have an inheritance allowance of €30,500 and a exemption from gains on the total sum(s) invested. The choice of beneficiary is completely unrestricted and the allowance (and profit) is shared by all beneficiaries in the proportion to which they have been nominated. If you have existing policies that were funded before age 70 the €30,500 allowance is in addition to the €152,500 per beneficiary granted with pre-age 70 premiums.
It’s probably worth highlighting here that a notable difference between the pre-age 70 allowance and the post-age 70 allowance is that the €152,500 allowance includes both the premiums paid on the policy and the gains on these premiums, whereas the €30,500 allowance relates to the amount of capital invested and all gains across the whole policy are exempt from IHT.
It is perfectly possible to add sums to an existing policy after the age of 70 and the insurance company will calculate the benefit payable on death of the life assured in accordance with when premiums were invested. However, taking out a new policy after the age of 70 has the advantage of:
It is worth noting that there is no limit to the number of assurance vie policies that can be taken out but the IHT allowances apply across all policies of a particular life assured (i.e. the allowances are not per policy).
Let’s take the example of a couple who are living together but have no ‘legal’ relationship (i.e. not married or PACS’d):
– A 70-year-old makes a will in favour of his/her partner. Under standard French inheritance rules the surviving partner is entitled to an IHT allowance of just €1,564 on any assets received via the will, and above that will have to pay IHT at the rate of 60%.
– If the deceased had nominated his/her partner as the sole beneficiary of an assurance vie policy opened after the age of 70, the surviving partner would then benefit from an IHT allowance of up to €30,500 and an exemption from IHT on all the gains and interest on the policy.
Exceptions as to who shares the €30,500 tax-free allowance
Beneficiaries who are exempt from inheritance tax are not taken into account to divide the overall allowance of €30,500. Exempt beneficiaries include spouses and PACS’d partners.
Thus, if the spouse of the deceased is named as one of the beneficiaries of the policy, his/her share will not be taken into account when dividing up the €30,500 allowance, which will only be divided amongst any other named beneficiaries, meaning their exempt share will increase.
If, after applying the exempt allowances, there remains a taxable element of capital invested, this can be offset against the standard inheritance allowances determined by the degree of kinship.
Let’s look at a couple of examples:
Example 1
A premium of €30,500 is invested at the age of 70, the insured person dies at the age of 87.
For 17 years, the policy grows at an average rate of 2% per year, net of fees. At the end of 17 years the gain in value is €12,339, thus a total of €42,839 is passed tax-free to the beneficiaries. At 3% per year, the amount of gain after 17 years represents €20,259 meaning a total of €50,759 passes free of IHT. If the €30,500 had been left on deposit with interest added at a similar rate the capital and interest would fall into the estate and be subject to the standard IHT rules.
Example 2
A premium of €100,000 is invested at age 70 and the life assured dies at the age of 90, i.e. 20 years later. The beneficiaries are the life assured’s two children in equal shares.
Taking an average growth rate of 4% per year, the €100,000 becomes €222,258 after 20 years. Each child receives €111,129. This is in addition to anything they may receive from a pre-age 70 policy. €30,500 of the capital and all gains are exempt, therefore the only taxable element for each child is €34,750 (€69,500 / 2). This can be offset against the standard IHT allowance of €100,000 per parent per child if this is not used up elsewhere.
Example 3
A nephew receives €55,000 from an assurance vie policy taken out by his uncle when he was over 70 years old.
The premiums paid amounted to €40,000, the gain was €15,000. €30,500 of the premiums paid and the gain of €15,000 are exempt.
Therefore, the potentially taxable element is €9,500 (€40,000 – €30,500). However, this can be offset against the inheritance allowance between uncle and nephew of €7,967. Assuming the allowance is fully available the taxable element is €1,033 (i.e. €9,000 – €7,967) at the rate of 55%. IHT of €568 is payable (i.e. €1,033 X 55%).
The outcome, €55,000 was transferred via an assurance vie opened after the age of 70 to a nephew who pays only €568 in IHT instead of €25,868 if the legacy had not been wrapped in assurance vie (i.e. €55,000 – €7,967 = €47,033 x 55%).
In summary, if your situation allows, it is definitely worthwhile considering investing in assurance vie after the age of 70 in order to take advantage of the additional €30,500 allowance and exemption on the total gains on investment which, in some cases, could be higher than the capital invested. Not forgetting, of course, that you retain control of the policy and can spend it or change the beneficiaries whenever you wish.
If you would welcome a chat about whether investing in assurance vie is right for you or would simply like a review of your financial situation you can contact me at sue.regan@spectrum-ifa.com or call me on +33 6 89 20 32 47
By Victoria Lewis
This article is published on: 7th August 2024
With the help of Moneycorp, lets take a look at this month’s market update with the recent political, economic & global news. Whats happened, how has the market reacted and what the future holds.
Big shock to markets in August already – What happened!?
What has been the market reaction?
What next?
Forecast Snapshot
Where do the banks think FX markets will be at the end of the year?
GBP/USD
GBP/EUR
EUR/USD
Source: Bloomberg Analytics
Please do get in touch if you have forthcoming FX requirements. Along with Moneycorp, I can explain how to reduce FX risk and/or make the most of the potential volatility coming up in August, depending on your risk appetite and timeline.
By Andrew Lawford
This article is published on: 1st August 2024
A quick question for all Italian residents (whether you are DOC Italians or foreigners who have moved here):
Have you thought about your family situation and how Italian family law might apply to it?
The answer for many people appears to be “not really”, which may present something of a problem considering the legal consequences of various family scenarios. Italy used to be fairly simple in this regard, in that you were either married or you weren’t. If you were married, the situation was fairly clear, and if you weren’t, your “family” situation might have been somewhat tenuous.
I will explain better below, but first a brief disclaimer: this is a complicated field and each individual situation may lead to a different outcome. This article is intended to highlight some of the issues you may face but it cannot be relied upon as legal advice – I can help you to understand your own situation with the assistance of my network of legal and tax professionals. I am also not particularly concerned here with the dynamics of the legal relationship between parents and children – my focus here is on the status of the couple.
Italy has long had “forced heirship” rules which establish certain family ties that have the right to receive a given percentage of a deceased person’s estate. For simple family situations with uncomplicated assets, this may even mean that it is superfluous to make a will, because the intestacy laws already offer an adequate solution. However, “simple family situations” are now something of an exception to the rule. You might think, for example, that being in a de facto relationship qualifies as simple, given how the treatment of this type of relationship has evolved in many foreign jurisdictions to the point where there is little functional difference compared with marriage. Not so in Italy.
Italy is somewhat more traditionalist in its approach to family life and I don’t think it is an exaggeration to say that it has been dragged kicking and screaming into recognising modern family situations and, in particular, same-sex couples, who until relatively recently had no means of making their relationships official (de facto heterosexual couples did, of course, have the option of getting married – a right that same-sex couples continue to be denied).
Italy being Italy, the modern iteration of family law is complicated and requires action by a couple in order for there to be any kind of recognition of their status. Let’s take a closer look:
Marriage
For better or worse, marriage is still the gold standard of the family relationship in Italy. For reasons that will become clear below, there is no equivalent structure that confers the same level of family rights, some of which are as follows:
• automatic recognition of heirship for each spouse;
• right of the surviving spouse to continue living in the family home, even if that home was 100% owned by the deceased spouse;
• possibility to receive any Italian surviving spouse pension (pensione di reversibilità);
• possibility to enquire as to medical status of one’s spouse;
• reduced inheritance taxes for assets passing between spouses;
• possibility of child adoption.
Unione Civile
One tier below marriage is the Unione Civile, a possibility that has existed since 2016 and which allows two members of the same sex to declare themselves a couple in a similar fashion to a civil wedding ceremony. This confers most of the rights of married couples, but does not allow them to adopt children. Initially, it was intended for the Unione Civile to be available to all couples, but in the final instance it was reserved for same-sex couples. I’m not sure of the reason for this decision, but I imagine it has something to do with not wanting to undermine the concept of marriage, which remains an important topic for certain political factions.
Conviventi di fatto
Below the Unione Civile is the registered de facto couple (conviventi di fatto). This possibility is open to all couples but needs to be registered in your local comune – you will then have a residency certificate which attests to the status of your relationship. The benefits of registering as a de facto couple are essentially that the surviving partner has the right to inhabit the family home, but only for a maximum of 5 years. You certainly don’t automatically become your partner’s heir and there is no concept of family property (although you can stipulate in advance how to deal with your relationship property in the event of a separation). If you contrast this with the effects of marriage above, it becomes clear that this type of relationship isn’t equivalent to marriage in any legal sense.
Unregistered de facto relationships
The unregistered de facto couple, even if they have been together for decades, might as well not exist from a legal perspective, especially if the partners die intestate.
Forced heirship and foreigners
The issue of forced heirship needs a bit more explanation: it specifies certain individuals who cannot be excluded from your estate: spouses (even if legally separated), children and (in the absence of these first two categories) parents have a right to receive a given percentage of your estate. You will also always have a free portion of your estate that can be left to whomever you choose. The fact of forced heirship does not prohibit you from making a will leaving everything to the local dog shelter, but it does mean that these protected categories of people will be able to challenge your testamentary dispositions. For people without a spouse, children or parents, forced heirship is not a problem as the free portion of your estate is 100%, but you must of course make a will in order to guarantee that your desired heirs benefit under your estate.
If you are foreign, you may be able to insert a choice of law clause in order to allow your estate to be dealt with under the rules of your home country. However, the rules around this are somewhat complicated and you will need specialised legal advice to make sure you get it right.
Don’t forget about inheritance taxes
You should also be aware that any inheritance tax exemptions accorded to spouses are unavailable to de facto partners, so under current rules assets left to a de facto partner would be taxed at 8% of their value (against 4% with a €1 million exemption for spouses).
Living Wills
Whilst we’re on the subject of inheritance and wills, another curious area that has evolved over the years is that pertaining to the expression of one’s desires when it comes to medical treatment. There have been some high profile and saddening cases of the medical profession in a pitched battle with the family members of someone who has had the misfortune of ending up in an irreversible comatose state.
If you would like to make clear your desired level of treatment in such a case, you can do so by using a living will (known in Italian as a DAT – Disposizione Anticipata di Trattamento). My wife and I tried to make living wills when we first married, but our notary refused to help us given the uncertain legal context at the time. The situation is now clearer, so we are in the process of sorting these out. If anyone is interested in how this ends up working in practice, send me an e-mail and I’ll be happy to help.
Where to from here?
If any of the above has struck a chord, then please do get in touch. Aside from helping to find a qualified professional to assist with your will, a general review of your assets and associated holding structures will ensure that you pay the least amount of tax possible during your life, whilst also directing your assets to the right people when you pass away. In particular, paying inheritance taxes in Italy is, for most people, a choice rather than an obligation, as they can legally be reduced to a bare minimum through intelligent estate planning.
By Peter Brooke
This article is published on: 28th July 2024
Following my outlook in January I am writing with a quick update on the year so far and a look forward for the rest of the year and into 2025.
One important point I would like to make is that many global issues, especially Politics and the outcome of the many elections we have in 2024, might feel very important to us on a day-to-day basis but might have a very different impact on investment markets and so do please read the following through the lens of investing.
Global equities have been performing well, with US equities gaining 15% in the first half of 2024, led by companies like Nvidia, Microsoft, Alphabet, Amazon, Meta, and Apple, which contributed significantly to market progress.
The economic outlook indicates that the global economy is expected to grow by 2.6% in 2024, with improved growth prospects in the US and China due to factors like loose fiscal policy, immigration, and government stimulus programs.
Market ‘breadth’ has been a concern, with the above five technology stocks driving over half of the returns in the US market; as global growth continues this should lead to opportunities in other sectors like industrials that are connected to the Artificial Intelligence theme; very recently we are starting to see a broadening of market returns.
Market risks related to inflation and interest rates are expected to shift to a positive tailwind in the second half of the year, which should be good for both shares and bonds. Central banks, like the European Central Bank (ECB), are already cutting interest rates and others are likely to follow suit.
Here is a chart of four different Risk Benchmarks and the main UK and US Stock markets so far in 2024; steady, but the US continues to serge ahead… for now.
Inflation hasn’t yet returned to pre-covid levels and is unlikely to drop back this much any time soon. Goods, energy and food inflation have all fallen but services inflation is still high, though this has started to fall slightly in recent weeks. ‘Services’ includes ‘shelter’ e.g. rent and other services such as hospitality.
Interest rate cut forecasts from the ‘experts’ have see-sawed so far this year but the current consensus view is that the first US interest rate cut should now be expected in September. The ECB has already started cutting rates, very slowly, and UK rate cuts might be pushed out into 2025 as services inflation in the UK remains ‘stickier’ than elsewhere.
Elections do pose sporadic risks to markets, though normally election results don’t truly matter in the longer term; but with the huge volume of elections this year and the swings from left to right (and back again) the volatility caused by the outcomes of elections will probably have much greater short-term impacts than normal.
US – The upcoming election is a key risk, with potential market volatility depending on the election result, especially following the attempted assassination of Donald Trump and the withdrawal of Joe Biden.
If Kamala Harris is selected as the Democratic candidate then Democratic party policies are likely to remain unchanged and so volatility in markets could be short lived, but if they enter the time consuming process of selecting a different candidate (increasingly improbable at the time of writing) then the inevitable political uncertainty could drive US share and bond volatility for longer.
According to the polls and bookmakers the Republicans are now more likely to win, but what might that mean for investors? Potential tax cuts, more deregulation, more protectionism and more oil drilling could be good for US corporate profits and might help bring down inflation. This might not be great for the planet and society but could be good for business.
In addition tariffs on goods entering US from China (and the rest of the world) could add to the short term inflation problem.
Europe – there has been a backlash against various EU led initiatives, like climate change policy and immigration leading to a swing towards the right in many countries.
France – President Macron called a snap election as the Far Right were gaining traction in EU elections; several left wing, centrist and right wing alliances formed as tactical voting led to a deadlock. The major coalition is now on the left of the house which is probably negative for French investment returns but any law changes are very unlikely for at least 12 months when another round of elections is expected.
UK – the new Labour majority government was not a big surprise with ‘time for change’ as a leading driver; but will they be able to do what they said they would do? So far they remain quite centrist and don’t appear to be planning on drifting back to the ‘old labour’ way. They are likely to be more fiscally responsible and will target growth BUT can they actually do it as the challenges are significant and the budget is tight – for example the demands on the NHS and the hot potato of immigration.
There might, however, be a big shift with the relationship with Europe, which must be positive for both sides, especially with respect to defence, cybersecurity and trade and even more so if the US becomes more self protectionist under Trump.
Here are some thoughts from our friends at Moneycorp:
As many predicted the Labour Party secured a strong majority, and the FX markets remained relatively stable. We’ve seen GBP strength, with GBP/USD rising by 1.7% and GBP/EUR up by 0.8%.
The French election results, however, were unexpected. We had anticipated significant market movements, but the outcome has been a 3-way hung parliament, with all other parties joining forces to prevent the far-right Rassemblement National (RN) from gaining power. This situation suggests potential political turmoil in France for at least the next 12 months until another election can be called. This is not a favourable outcome for President Macron or Europe as a whole. Despite this, the FX markets have remained stable, as the EUR had already weakened prior to the election.
Inflation data and interest rates continue to be the primary drivers of the FX markets.
Here is a Forecast Snapshot of where the banks think FX markets will be at the end of Q3 (30th September).
GBP/USD
Current 1.2840
Barclays 1.28
UniCredit 1.26
Wells Fargo 1.26
BNP Paribas 1.27
GBP/EUR
Current 1.1860
Barclays 1.22
UniCredit 1.16
Wells Fargo 1.19
BNP Paribas 1.20
EUR/USD
Current 1.0825
Barclays 1.05
UniCredit 1.08
Wells Fargo 1.06
BNP Paribas 1.05
I am, once again, very grateful to the teams at Evelyn Partners, Rathbones, New Horrizons and Moneycorp for their help in putting this summary together and hope it is useful in framing where we are today and how we got here.
Here are some further links to supporting views on the above:
https://www.evelyn.com/insights-and-events/insights/investment-outlook-july-2024/
https://www.rathbonesam.com/knowledge-and-insight/review-week-biden-bows-out
https://www.rathbonesam.com/blog/guess-whos-back
If you listen to podcasts I can highly recommend the Sharp End Podcast from David Coombs at Rathbones Asset Management
As always, please remember that financial decisions should be made with careful consideration of individual circumstances and professional advice, I am here to support you.
If you have missed any previous news and updates these can all be found on the archive page here.
I am away on holidays until 5th August but if you have any questions or need further assistance, please feel free to reach out via the below channels, or the booking system – always drop me a quick message if you need a time slot outside of those available.
For now, have a great day, and a wonderful summer
Best regards
Peter Brooke
By Portugal team
This article is published on: 24th July 2024
Many people have been attracted to Portugal by the very advantageous Non-Habitual Residence Regime, but many are concerned about what will happen to their spending power once the normal tax rates are applied. Mark Quinn and Debrah Broadfield look at the planning you should put in place to prepare your finances for the end of NHR.
What is NHR?
NHR is a preferential tax status granted by the Portuguese government to new residents and lasts 10 years. It offers greatly reduced tax rates on foreign-sourced pensions, employment income generated from ‘highly valued’ professions, tax exemption on foreign-sourced rental income, dividends and on real estate capital gains.
What it does not do is protect from capital gains generated from stocks and shares, company sales or dividends received from funds.
What happens after NHR?
You will become subject to standard rates of tax but your tax position will be determined by the planning (if any) you have implemented during the NHR period.
How to take advantage of NHR
The benefits of NHR are not automatic and you must plan to make the scheme work for you. This might involve rearranging your assets and income sources so you can fully take advantage of the tax breaks. For example:
If you are receiving a salary from an overseas company, dividend payments are preferable as these are tax-free, but a salary is taxable at either 20% (if a qualifying profession) or standard scale rates. Additionally, social security contributions will be due on salary payments, but not on dividends.
If you have foreign property you will want to sell this during the NHR period. Whilst rental income is tax-exempt during NHR, post-NHR it is taxable at scale rates. Similarly, capital gains on sale during NHR are exempt, but post-NHR 50% of the gain is taxable at scale rates.
If you are selling a UK company, you would want to structure the sale as a dividend pay-out, rather than a share sale. The former would be tax-free and the latter would be taxed at 28%.
If you have non-Portuguese sourced savings and investments, interest and dividends from direct equities are tax-exempt (strictly, dividends derived from funds are taxable under NHR) but after NHR, they are taxable at 28%. Capital gains however are not protected under NHR. Gains realised e.g. by selling or switching your investments, are taxable – even if you do not have the gain physically paid out to you and they remain within the investment portfolio/ISA/platform. If the investment holding sold was held for more than 365 days the tax rate is 28% but if held for less, then it is taxable at scale rates of tax. The capital gains tax can be mitigated by restructuring these types of holdings within approved tax wrappers.
Pension income is taxable at 10% under NHR (or 0% if you have pre-31st March 2020 NHR). Post-NHR, generally pensions are taxable at scale rates so some individuals aim to deplete their pension over the NHR period. Just bear in mind however that this might not be suitable for everyone, as moving pension savings out will expose them to UK IHT. Do note, that QNUPS are often sold as a ‘silver bullet’ to protecting assets from UK IHT but this is not the case. There is no guarantee of tax-exempt status and HMRC are vigilant when assessing potential tax avoidance on death.
What can you do to plan?
Portugal does offer very advantageous tax breaks for those that use approved long-term savings vehicles, and it is not dependent on your NHR status. These shelter ongoing income and gains from tax and tax is only applied to gains when you make a withdrawal at 28%. Additional tax reductions apply after years 5 and 8 reducing the tax rate to 22.4% and 11.2%. Having said this the right jurisdiction must be chosen otherwise you could be subject to a punitive rate of 35%.
A particular advantage is that the tax reduction time limit is applied to the start date of the structure, not each time monies are added. This means you can start the structure with a small sum and add to it over time say, as you sell foreign property, drawdown your pension or sell a UK company.
The ideal position is to establish the structure when you are at the beginning of NHR so that by the end of the NHR period the structure is at its maximum tax efficiency.
Many individuals draw on their pensions and dividends during NHR tax efficiently and accelerate the drawdown towards the end of the 10 years to fund the tax-efficient investment. They may also sell property or companies during the NHR period and reinvest the proceeds in preparation for the end of NHR. Then after NHR, they switch the income source to the new investment and generally enjoy single-digit or very low double-digit effective rates of tax.
By Portugal team
This article is published on: 13th July 2024
As we age, financial planning and investing take on greater significance, particularly for those facing health challenges such as dementia or other serious illnesses. These circumstances necessitate a comprehensive and thoughtful approach to ensure that financial stability is maintained and that the needs of both the individual and their loved ones are met.
The Importance of Financial Planning
Financial planning for older adults or those with health issues often requires more detailed and forward-thinking strategies compared to younger, healthier individuals. This is because health care costs can be substantial and may increase significantly over time. Furthermore, cognitive impairments like dementia can make managing finances independently increasingly challenging.
A key concern in such situations is the possibility that one spouse may have predominantly managed the household’s finances. If that spouse were to pass away or become incapacitated, the surviving partner might be unprepared to handle complex financial decisions. This gap in knowledge and experience can lead to significant financial difficulties, or even permanent financial loss which is why proactive planning, and the involvement of both spouses, is crucial.
Put your plan in place
The Role of Financial Professionals
Given the complexities involved, it is often beneficial to work with a financial professional who can provide objective guidance and help navigate the intricacies of financial planning, especially when health issues are a factor.
You also have the control to choose a trusted professional for you and your loved ones to work with. Doing this ahead of any event can provide comfort, continuity in financial safety and quality of advice, especially for financially inexperienced individuals.
An advisor can help in developing a comprehensive plan that considers both current needs and future contingencies. They can also work alongside other professionals such as lawyers, accountants or your executors, to ensure that all aspects of your financial life are coordinated and optimised.
For those with dementia or other cognitive impairments, actively managing investments can become increasingly challenging and an advisor can take over this responsibility, ensuring that the investment strategy remains aligned with the client’s goals and risk tolerance.
An advisor can also help ensure that the surviving spouse is prepared and supported. This includes educating them about the financial plan and ensuring they know how to access accounts. This support can be invaluable in helping the surviving spouse navigate financial matters during a difficult time.
Conclusion
Financial planning and investing for older adults or those facing health challenges requires a proactive and comprehensive approach. The potential for increased medical costs and the possibility of cognitive decline make it crucial to have a well-thought-out plan in place. When one spouse handles most of the financial matters, it is even more critical to ensure that the surviving spouse is not left unprepared.
By addressing these issues head-on and seeking professional advice, older adults and those with health concerns can safeguard their financial future and that of their loved ones. Proactive planning, regular updates, and professional guidance are the keys to managing the financial complexities that come with aging and illness.
By Chris Burke
This article is published on: 11th July 2024
Summer is well and truly here so it’s time to enjoy everything that brings, especially before it gets too hot! It’s hard to beat Spain when we have so many sunny days – a walk along the seafront or a stroll through the forest to keep cool and listen to the nature.
From a financial perspective, I am always here to update you on anything new or tips/hints to keep your finances healthy – this month we are focusing on the following:
Biometric card for entry & exit to Spain
The EES (Entry/Exit System) will be introduced by the EU in Autumn 2024 – this is an automated system for registering travellers from the UK and other non-EU countries each time they cross an EU external border. It will require third country nationals, including UK nationals, visiting the EU to create a digital record and provide their biometric data (fingerprints and facial image) at the border when they enter the EU’s Schengen Zone. It is expected that Spanish Green Certificate holders may face significant delays and difficulties at borders if they do not have a TIE.
The system will register the person’s name, type of travel document, biometric data (ie fingerprints and captured facial images) and the date and place of entry or exit each time they go through a ‘checkpoint’, which will in real terms replace stamping of passports (so those regular travellers to the EU won’t have to worry about running out of passport pages with stamping!).
Whilst hopefully making travelling easier and quicker, it’s also clear to note that there will be a ‘hard electronic’ record of which borders you cross and how many days you are spending in each country, which from a tax perspective could be interesting. Let´s see how long it takes for this to also become common practice at ‘road borders’.
Inheritance tax (IHT) & Gift tax in Spain
One of the great unknowns amongst those who are non-Spanish and tax resident in Spain is how inheritance tax works and what amounts are payable. Particularly if you come from the UK, it’s important to note that Spain does not, (generally), take into consideration the rules of other countries regarding IHT. Inheritance tax in Spain has no ‘double tax treaty’ with the UK, meaning Spain will not take into account any tax paid on this OR rules applicable in that country (for example, if there is no tax to pay in the UK there could be significant tax to pay in Spain).
They purely look at the amount you are inheriting and if you are a Spanish tax resident apply the following to work out how much tax you need to pay them (if any):
Inheritance tax starts from zero (allowances) and can reach up to 82% for a distant relative. Therefore, it’s imperative to understand what this number is should the situation arise, enabling you to plan effectively and maximise the remaining monies. It´s only my personal opinion but why would you not want, with proper planning, to maximise those ‘hard earned monies’ your relatives accumulated and left you over their lifetime?
On a side note, if there are relatives in other countries, (perhaps you have siblings), the Will can be set up to make sure you receive the same amount from the estate net of inheritance tax -the executor of the Will can deduct the tax from the ‘pot’ and then distribute accordingly – therefore the tax can be paid from all members receiving the inheritance not just yourself and enabling you to receive the same amount in real terms. This is something I have come across on a few occasions.
Another way is to receive any monies is as a ‘Gift’ whilst the donor is still alive, the tax on these is between 5-9% (again, the closer the relation the less tax you pay, so for a parent making a gift the tax would normally be 5%). Furthermore the location of the assets, (such as property in the UK), will make a difference to the amount paid.
As you can probably appreciate, by understanding these rules you can start to plan how and when best to receive any assets from relatives/parents. This is an area in which we work closely alongside tax advisers/planners almost every day, making sure our clients take sound financial/tax planning advice and a strategy is implemented to make sure the money is:
80+ state pension for UK persons those living abroad
If you do not receive the UK basic State Pension or you get less than £101.55 a week, you could get the difference paid up to this amount, as long as you were 80 years old before the 6th April 2016.
Other qualifying criteria are:
If you would like to discuss any of the topics above in more detail or you would like to have an initial consultation with Chris to explore your personal situation, you can do so here.
Click here to read independent reviews on Chris and his advice.
If you would like any more information regarding any of the above, or to talk through your situation initially and receive expert, factual based advice, don’t hesitate to get in touch with me.
By Chris Webb
This article is published on: 10th July 2024
Due to emotional and unfortunate circumstances faced by some of my clients recently, I am drawn back to the importance of a simple document we created some years back, during our Covid lockdowns of 2020, and have recommended that our clients do the same.
Most have embraced it, some probably haven’t. Personally, I think it’s of benefit to everybody, but we all have our own ways of doing things. A lot of time and effort went into producing the document, based on previous client experiences, and our own. There didn’t seem to be an appropriate name for it at the time, so we simply called it ‘’The Folder’’.
The whole point of creating your folder is to ensure that there is a record of your assets, your important contact information and plenty more. It is a single file or folder and can be digital or physical. This folder will allow you to detail any important information / assets where it is vital a record is kept. We think we have covered everything and believe this document will make things a lot easier for everybody in many different circumstances.
Recent dealings with my clients reminded me to review my own folder and unsurprisingly there were a few changes to be made………
There are many scenarios where you´ll be thankful for making the folder. When I moved house I went straight to the folder and had all the company’s contact information as well as all the policies or account details which were relevant. This made informing them all much easier. I´ve also lost family members where finding their folder reduced the stress in dealing with their estate. In these moments of stress, you can find yourself trawling through endless pieces of paperwork to ascertain asset and account details, then you get that lightbulb moment…….. why wasn’t it all documented.
And that’s exactly why the folder was created.
Apart from dealing with personal practicalities, like moving house, I believe the folder comes into its element when having to deal with the loss of a loved one. Rather than spending hour after hour trying to unravel their finances, all the information is to hand, in one folder. Having experienced both sides of this situation (one with a folder and one without) I completely understand the additional pain caused by what should have been easy administrative tasks. The folder took most of that pain away. Speaking to some of my clients recently I know they are feeling the same………….
As I mentioned earlier, the folder can be physical or digital. For the physical folder it is vital to only list information that would not create a problem should that folder end up in the wrong hands. So, I have only listed the names, telephone numbers, policy / account numbers of all our assets. It would give enough information for someone to be able to deal with our affairs with minimum hassle.
Some still ask, is it worth the effort?
Well, I think it is. A time of loss can be stressful enough without having to try and piece together the deceased’s financial affairs. This can be a really difficult time for family members. However, preparing the folder is much more than avoiding stress; if you leave behind an administrative nightmare you could delay the access of inheritors or beneficiaries of funds and potentially cost a small fortune in legal fees. Imagine trying to track down investments you have no record of or pensions that may have been held for 50 years or more?
To give you an example of this, the UK Department of Work and Pensions estimate that there is currently more than £400 million sitting in unclaimed pensions pots in the UK. Good luck trying to find out if you have one!
If you´re wondering what to include, the Folder makes that very clear and is simple to follow. It´s essential to list what assets you have, where they are and important contact information for each asset. Keep copies of any insurance policy documents, pension statements etc.
I have put a small list below which would help most people but you do need to look at all your assets individually to make sure the list is as correct as possible
This list is based on my own experiences and those of my clients – you need to be thorough when completing the folder, ensuring nothing is left out.
And don’t forget to review your folder. I will admit to being guilty of not keep my folder up to date and tend to only look at the folder when something significant changes in our lives. It´s easy enough to overlook a change in insurance company or something that at the time doesn’t seem hugely important. I reviewed mine recently and it was just that – small changes to our circumstances, but apart from being hidden deep within our emails there was no other record of those changes.
I would recommend reviewing the folder on an annual basis, but if you’re extra diligent you should review and update every time something changes. For example, if you change insurance companies then add the new details and delete the old. This is a continuous job, its not something you do once and never look at again.
Most importantly – please remember to tell someone about your folder!
Someone needs to know you have made one and whether it´s digital or physical. If its digital they need to know if there´s also a password. Personally, I have sent copies of mine by email to family members, so they have a record of it. They don’t need to know your passwords, just the basics.
Remember, there is very little point going to all this effort if know body knows it exists.
I hope you consider completing your folder. Unfortunately, most people only consider it when they´re trying to deal with a situation and as mentioned, they have that lightbulb moment. Taking an hour out of your time now will save someone many, many hours later down the line.
If you have any questions about The Folder or other aspects of your finances, please feel free to reach out on chris.webb@spectrum-ifa.com
