The Importance of having a Local Financial Adviser

By Sue Regan
This article is published on: 15th June 2018

15.06.18

Moving to another country is one of the biggest decisions that anyone is likely to make, especially to a country where the language is not your native tongue. Most of the expats I meet say that the hardest thing about moving to France is getting to grips with the language, and I include myself in this.

From my own experience I know that lack of fluency is often a cause of frustration, confusion and anxiety, especially when dealing with bureaucracy, medical matters and finance. Fortunately, there are people and businesses out there who can help.

The Spectrum IFA Group are independent financial advisers and our area of expertise covers the provision of regulated advice on the tax-efficient investment of financial assets, pensions and inheritance planning. We are a French company, regulated in France, which means our business activities will not be affected by BREXIT.

As well as being regulated in the county in which he or she is advising a client, a good financial adviser should also have the relevant knowledge of the tax framework of that country and the tax treatment of suitable products in order to give the most appropriate, tax-efficient advice. You probably wouldn’t have sought the advice of a French regulated IFA to manage your UK investments when you lived in the UK so it doesn’t make sense to expect a UK regulated IFA to advise you when living in a different tax jurisdiction to the one in which they are qualified and regulated.

The Process
In this age of online banking, tele-marketing and robo-advice, we believe that the old- fashioned method of a face to face meeting, to discuss your individual circumstances and financial objectives, plays a vital part in establishing the trust between the client and the adviser, and that should be the number one priority.

An initial meeting with a new client can take up to three hours – there’s a lot to discuss, such as:

Your personal and family situation
Your income – your requirements now and in the future
Your pension provision
Your inheritance wishes – do you have wills? Are they set up correctly for French residency? Who do you want to inherit?
Your property assets
Your financial assets – bank deposits, investments, Trust assets, business interests – where are they situated? Are they tax-efficient for French residency?
Insurance policies
Your state of health and provision for healthcare
Your priorities now and in the future
Your financial objectives and attitude to risk

By the time we have gone through all the above, and usually swapped a few stories about our lives, both the client and I have a very good idea as to whether we feel comfortable with each other and that we can work well together.
If, after this meeting, I believe that I can help you achieve your objectives, I will go away and put together my thoughts and recommendations in a report to you. We do not charge any fees for meetings, research or preparing reports and making recommendations. We will meet again to discuss, in detail, any recommendations made, and the product charges will be fully explained. If you decide to go ahead with a recommendation and become a client of Spectrum, we will be remunerated by the product provider.
This is just the beginning of the relationship. Things generally change over time, such as pensions and tax legislation, investment performance, physical well-being, family situations, income and capital needs. An important part of my job is to ensure that we meet periodically, at least once a year, to review your circumstances and make sure that your finances are on track to meet your current needs and longer term goals.
If you would like to have a confidential discussion about your financial situation, please contact Sue Regan either by e-mail at sue.regan@spectrum-ifa.com or by telephone on 04 67 24 90 95. The Spectrum IFA Group advisers do not charge any fees directly to clients for their time or for advice given, as can be seen from our Client Charter here

Tax threat: the consequences of CRS – The Spanish Situation

By Charles Hutchinson
This article is published on: 14th June 2018

14.06.18

Unlike the UK non-dom or the Portuguese non-habituale tax rules, Spain does not have a specific tax offereing for those planning to come and live in Spain. A taxpayer is either classifieds as resident (taxed on worldwide income and wealth) or non-resident (taxed only on Spanish income and assets).

Those trying to escape from the 183-days rule of physical presence in Spain to avoid been deemed tax resident could be facing an unexpected problem.

Governments all over the World have amended their domestic legislation over the last few years aimed at gathering as much information as possible from current and potential taxpayers and Spain is no exception. Governments have also signed agreements to exchange that information with each other and to disclose relevant data, primarily under the auspices of fighting money laundering and terrorism. Lately, this has had a direct impact on individuals and corporate taxation.

All these changes and improvements equally affect big corporations, large stockholders, important CEOs and ordinary people. Regrettably, the speed and frequency at which those changes take place makes it difficult for ordinary people to keep up and stay up to date with their obligations. Pensioners living abroad are a group particularly affected.

In our experience, we know many people who were just “out of the loop” by ignorance, going about their daily lives without being aware of how all these changes affect them. One of these new rules is the OECD´S COMMON REPORTING STANDARD (CRS).

As of 1 January 2016, Spain fully adopted the provision of the Council Directive 2011/16/EU on administrative cooperation in the field of taxation and the OECD CRS for the automatic exchange of financial account information.

Under the CRS and EU Directive, financial institutions in participating jurisdictions will report the full name and address, jurisdiction of tax residence, tax identification numbers and financial information of individual clients to their local tax authorities, which will then automatically exchange the data with the tax authorities of the participating countries where the individuals are tax resident.

Spain is one of the 102 committed jurisdictions and the list also includes traditional off-shore jurisdictions such as Gibraltar, Guernsey, Jersey or the Isle of Man. As of 5 April 2018, there are now already over 2700 bilateral exchange relationships activated with respect to 80 jurisdictions committed to the CRS. This link shows all bilateral exchange relationships that are currently in place for the automatic exchange of CRS:

http://www.oecd.org/tax/automatic-exchange/international-framework-for-the-crs/exchange-relationships/#d.en.345426

Financial institutions in all participating jurisdictions will be obliged to ascertain and verify the tax residence status of their individual clients by application of specific due diligence procedures under the CRS.

The automatic exchange of information related to financial accounts held by the end of year 2015 and new ones opened afterwards began in 2017. Hence, sooner or later, in cases where there was information exchanged that did not match the information provided by the taxpayer in their declarations and tax returns, people started to receive notifications from the tax office.

Those who have not been registered as resident or have not realized that they should have registered as resident, could be in trouble when the Spanish tax authorities receive information about a supposedly resident taxpayer. This information is gathered by the due diligence process that banks and financial institutions, including trustees, have to carry out. In some cases this can lead to the conclusion that they are resident in Spain (i.e., the postal address to where Banks send correspondence, the bank account to where they regularly transfer funds, the country where credit cards are frequently used, etc.). Spanish tax residents who have not fully disclosed their foreign portfolios to the Spanish tax authorities may encounter trouble as well. Full voluntary disclosure by means of late filings could avoid potential tax fraud penalties.

It is crucial to check with your banks, financial agents, trustees, etc. if they have reported anything to a wrong country. Once the information gets to the tax authorities, those authorities will not doubt or care if the information is accurate or not, even if you try to prove otherwise, because the information has been provided by a Government of another country and it is understood that they, as well as the bank or financial entity who has previously reported to that Government, have complied with the regulations. In our experience, at least in Spain, if information provided by a Bank was not accurate, that Bank would have to amend whatever they had previously reported to their Government. Thus in turn it will amend the information sent to the Spanish tax authorities. The taxman will not stop demanding the taxpayer to pay the corresponding taxes unless the Government of the other country recognizes that it was a mistake.

Source: Santiago Lapausa of JC&A Abagados, Marbella

Spectrum’s Daphne Foulkes appointed to Chair of the European Pensions Institute

By Spectrum IFA
This article is published on: 12th June 2018

12.06.18

Spectrum’s Daphne Foulkes, a board member of FECIF (The European Federation of Financial Intermediaries and Financial Advisers) has been appointed to Chair the newly formed European Pensions Institute (see attached FECIF press release).

We are delighted with this recognition of Daphne’s skills and work representing European IFAs within the trade body. Daphne will be taking on this role in addition to her Spectrum duties.

Click here to read read the full press release

The European Federation of Financial Advisers and Financial Intermediaries (FECIF) was chartered in June 1999 for the defence and promotion of the role of financial advisers and intermediaries in Europe.

FECIF is an independent and non-profit-making organisation exclusively at the service of its financial adviser and intermediary members, who are from the 28 European Union member states, plus Switzerland; it is the only European body representing European financial advisers and intermediaries. FECIF is based in Brussels, at the heart of Europe.

All this talk of a flat tax

By Gareth Horsfall
This article is published on: 8th June 2018

The current political environment in Italy is one which I find very interesting, notably in how it is perceived in foreign media and presented to us through the usual media outlets. In particular, I reference the constant use of the word ‘Populism’ and ‘Populist Government’. I confess that I had to have a quick look at the definition of populism before writing this Ezine and was interested in finding out that the exact defintion, according to Wikipedia, is:

‘Populism is a political philosophy supporting the rights and power of the people in their struggle against a privileged elite’

I have a confession to make that if I can pick and choose only this broad defintion of Populism then I think I can fit myself into a part of the populist ideal. (Clearly it is more complicated than this but I am merely trying to make my point, and as a regular reader of my E-zine’s you will understand my usual approach!)

However, I think it is worth exploring the idea that the Lega and M5S coalition have put together of a flat tax. Although a flat tax for eveyone, no matter how rich or poor is completely obscene in my opinion the ‘flat tax’, proposals, which will launch at 20% for businesses as of July 1st 2018 and 15% – 20% on 1st Jan 2019 for individuals, assuming the Government holds together, actually make a lot of sense to me.

A radical reform of the Italian income tax system is about to take place, and one which is long overdue in my opinion. Not for any populist reasons, but for more practical reasons which I will expand on below.

The proposed flat tax regime
If you want to have a look at the Contratto per il Governo di Cambiamento, then you can do so HERE. It makes interesting reading, if not full of more blurb than actual facts at this stage. However, its a start.

So, going back to the issue of the flat tax. The proposal, soon to be put into force, is to reform the tax regime into 2 flat tax rates, namely 15% and 20%. This sounds very new and certainly will win a lot of those populist votes. But first let’s take a look at how income is currently spread in Italy and the following chart shows just who it would affect:

It’s quite interesting to note from this chart that 80% of the tax paying population of Italy earn up to €29000. The median declared income is €19000pa. Those may sound strange numbers but when you consider the current Italian tax rates (see chart below), you can start to form an idea that there is probably a little bit of fiddling of the figures. After €28000pa in reddito complessivo the tax rate jumps from 27% to 38%. With this in mind, the proposal of a flat tax could potentially bring in alot of, currently, undisclosed (let’s call it what it really is: ‘in nero’) money to the Government coffers.

A QUICK REMINDER OF ITALIAN INCOME TAX RATES
(IRPEF – Imposte sul reddito delle persona)

€0 – €15000 = 23%
€15000- €28000 = 27% (€3450 + 27% on the part over €15000)
€28000 – €55000 = 38% (€6960 + 38% on the part over €28000)
€55000 – €75000 = 41% (€17220 + 41% on the part over €55000)
over €75000 = 43% (€25420 + 43% on the over €75000)

How might it work in practice?
The new proposal is to have a flat tax of 15% on a combined ‘reddito famigliare’ of upto €80,000pa. If your ‘reddito famigliare’ is above €80,000pa then the flat tax rises to 20%.
A proposed maximum tax of €3000 would apply for every member of the family where they have a individual ‘redditto complessivo’ of no more than €35000pa. This would be limited to families where the ‘redditto famigliare’ is between €35,000- €50,000 pa.

In short, the most generous tax deductions are for those who have a ‘redditto famigliare’ between €40000 and €60000pa.

A straniero example……
This all sounds very exciting and some what overly generous for a country which has historically taxed its citizens up to the eyeballs. However, let’s use an average straniero example to see what difference it would make.

Let’s assume that we have a retired couple, with state pensions (€8000pa each) and private pensions of €18000 and €3000 respectively. They also own a property in their home country which generates a UK income of €8000pa (jointly owned). They have investments and savings, but for the purposes of this example they are not relevant as the proposed measures are for income tax only.

Under the current regime the income of each individual would be subject to taxation.

Spouse 1: €8000 + €3000 + €4000= Total €15000pa The tax rate applicable would be 23% therefore the tax would be €3450

For the purposes of this example I am not including any benefits, or credits that might be avaiable to any one individual or another

Spouse 2: €8000 + €18000 + €4000 = €30000pa Spouse 2 exceeds both band 1 and 2 and will enter the higher rate tax bracket creating a taxable liability of €7720

THE TOTAL INCOME TAX BILL WOULD BE: € 11170 per annum

Under the new proposals both spouse 1 and spouse 2 would pay a flat tax of 15% on their combined income , meaning a total tax bill of €6750

A SAVING OF €4420pa

Let’s take a breath and calm down for a moment
So, before we all start getting very excited we all know the Italian Government is not the most coherent at the best of times and we are in an unprecedented era. It may be that this proposal is watered down yet and we get a half way house offer, but I expect that simplification and lower tax rates are on the cards. In the end the country still has to balance the books and attract foreign investment. If they don’t have enough money coming into the Government coffers to keep the system running smoothly (for lack of a better word :0)) then the money will soon dry up and punitive tax rates will have to be imposed to reap that which has been lost.

My soap box moment
And so I move onto my favouritie part of this E-zine. My soap box moment. You see, I have been wanting to write this formally for a long time but never really had the opportunity to do so. I would go on record as saying that I am actually in favour of this radical overhaul of the Italian tax system and whilst I see this proposed flat tax regime as being a little unequally distributed, I do think its necessary and despite what the bankers, economists and bureaucrats tell us, I actually think it would be a good thing for Italy.

The entrepreneurial zone
I have always waxed lyrical that, what I like to call the entrepreneurial zone, in Italy, is completely dead. Any good economics book will tell you that 80% of employment and growth in a society comes from small to medium sized businesses. That is the shop that opens and gets so many customers that they need to employ a young person to manage the business in the mornings, or a new online business which grows rapidly and needs to employ 5 new people to manage operations. It’s worth repeating that 80% of growth in an economy and job growth comes from this area. Not the Vodafone’s of this world or the multitude of other multinational businesses that pop up on the high street. It’s the small businesses and one man bands that grow into medium sized firms that cumulatively turn over billions in revenue each year. This is real growth. And this is what Conte ( the new Prime Minister) talked about in his first address to Parliament when he said that he wanted Italy to grow its way out of debt and not have to impose more austerity. He is absolutely right. The economics speak for themselves.

Which brings me back to the entrepreneurial zone. This is the area which I think is the most important. To take a business from nothing: an idea, a start up, to revenue of €50,000 each year and onto €250,000 each year you need incentive. It is in the Governments’ interest to incentivize you because you are going to employ the people and pay the taxes that will contribute towards 80% of the running of that country. And from there you may have the skills to turn that business in a multi million euro revenue business employing hundreds of people and contributing back even more into the running of the society. The problem with Italy is that after €28000pa in revenue they effectively chop you off at the knees (the tax rates rise astronomically + there is the dreaded social security contributions to pay. INPS) and let you see if you can hobble along and survive whilst they come running after you to chop off your arms, and then take the rest. It’s like being chased by a mad axe man without your legs and seeing if you can hobble faster than he can catch up with you before he hacks the rest off. It just doesn’t work. In my opinion, this is one of the main problems in Italy and why I think both Di Maio and Salvini have got the right idea when it comes to taxation. (The rest of their policies are open to debate, although some of those also have a lot of merit!)).

I am reminded of the conversations I regularly have with clients who recount stories of their children who set up businesses in Italy and either struggle on barely being able to keep the businesses afloat and or eventually closing down. A young business needs all the revenue it can get in that ‘ entrepreneurial zone’, that area between €0 and €100,000 pa. If a business is going well most of that income is going to be re-invested anyway and used to employ people or purchase goods and services. Europe has to support Italy at this time and allow that zone to flourish and provide opportunities to young and old entrepreneurs alike.

So who is responsible for change
There is always a counter argument for every case and clearly in this case, given the cultural back drop to Italy’s tax collection issues there will be economists who will argue that if income tax revenue were to drop drastically by lowering rates so much then how will Italy, ‘The State’, balance its books, after all there is nothing to say that people will suddenly start declaring all their income because the tax rate is more favourable. That is why the proposed tax regime has to be followed by some hardline clampdowns on tax evasion. Otherwise, it just won’t work.

I am going to follow these proposals closely, and feed back to you, to keep you abreast of any legislation changes. (Watch out for the summer months as they like to slip new laws in whilst everyone is on holiday). I am completely in favour of a total overhaul of the Italian tax system and dispute what the media, economists, and supposed experts say (I sound like a Brexiteer). I think drastically cutting tax rates in Italy, whilst having a short term impact on Government revenue would attract foreign investment in droves ( I mean if you had the chance to set up a factory in Huddersfield or one in Umbria, which would you choose?), it could increase investment rapidly, create jobs, create subsidiary businesses servicing the bigger ones, incentivize larger business to relocate because of the tax rates and could create a new economic boom for Italy. That being said, if it isn’t put into place with some heavy Governmental supervision then it could all fall apart and Italy’s days in Europe would be numbered. And therein seems to be the folly of the whole idea. Europe, whilst I love the European project dearly, has not treated countries like Italy favourably and should it continue on its current path without allowing any kind of change and only implementing austerity, then the likelihood is that Italy would eventually decide to Italexit.

Government has to lead
Italy, like any government around the world has to take the lead in forcing through sensible change. The young business people I know who are barely making ends meet are never going to fully declare every euro they earn when they have families to feed, medical treatments to take care of and childrens schooling costs to pay. And given the choice of making a ‘few’ euros ‘in nero’ and being able to look after the family versus paying into a corrupt state which merely extracts the money from you by osmosis for its own nefarious means, the choice is simple. Most families, if not all, will take that risk. They just have to. Or they move abroad!

So I am in favour of Di Maio and Salvini’s tax plans. I hope they manage to find a solution that will help everyone, mainly the poor and the entrepreneurs who want to prosper but don’t have the ability to do so because of draconian tax measures which should have been ditched long ago. It won’t be an easy ride, but I hope it’s a success. And in the end, should it pay off it may just keep Europe together. Can you imagine Di Maio and Salvini going down in the history books as the saviours of Europe!

(You don’t need to write to tell me that my artistic licence has been abused in this article, just enjoy and let’s see what happens. I, for one, am moderately positive about the future if they can bring about positive change in the tax system in the way in which they are proposing to do).

Given the proposed changes in taxes in Italy, it will be an important time to take a look at your own tax and financial planning arrangements and make sure that they are as tax efficient as possible.

Retiring & income in retirement

By Derek Winsland
This article is published on: 8th June 2018

A major part of my role as a Financial Planner involves helping clients move towards retirement and advising those in retirement about the best and most tax-efficient way of generating their income once they stop work.

One question I’m often asked is how much money I should save to enable me to retire comfortably. A good question, it depends on what constitutes a comfortable retirement for that particular person. It’s generally quite a straightforward discussion: how much do you need now, and what will change as you approach retirement (mortgages redeemed, no more school or university fees, travel expenses to and from work for instance). Factor in extra expenses for pursuing hobbies, travelling etc. and we begin to build a picture of what retirement will look like and how long the active retirement period will last for.

In the UK, a Which? survey concluded that, in the UK at least, a couple entering retirement needed £26,000 a year to live comfortably. OK, that’s the UK and not necessarily representative of life here in France, but it is a basis for opening a discussion. The next consideration is to identify what the sources of income are – likely there will be an entitlement to UK state pension, possibly some French state pension and maybe rental income form letting out the old UK home, or Gites in France.

For those people actively thinking about and planning for retirement, it is also likely there will be some private pension provision, perhaps even membership of a final salary pension from time spent working for an old employer. And then there are the savings you’ve set aside for the day when you can put down those work tools, and say “That’s it, I’ve done my bit”.

But what income can I reasonably expect those savings to generate to supplement the other sources of income. The Institute and Faculty of Actuaries have ruminated over this question (well they would, wouldn’t they! I can imagine the topic of conversation going around the dinner table at their annual conference). The conclusion they’ve come to is (not surprisingly) based on the life expectancy of the retiree. Retiring at age 55, they believe you should draw down only 3% of your capital each year to ensure that your money doesn’t run out. This then rises to 3.5% if retiring at age 65. Other financial experts believe the figures could rise to 5% per year for a 65-year-old. This then assumes that your capital is invested to generate returns greater than the rate of inflation.

The options for the individual facing an income shortfall include:

A Financial Planner can draw up a future forecast using established assumptions for inflation, rates of investment return, the most tax efficient way of drawing down or generating income, using either life expectancy tables or any other age after discussing your family mortality history with you. This will give you your ‘number’, the amount of capital you’ll need to live comfortably.

The Office for National Statistics has recently launched an online tool on its website designed to tell you what your life expectancy is. If you’re curious, click here:

Once completed this Financial Plan should be implemented to address any recommendations for re-structuring the existing assets, and thereafter reviewed yearly, updating the investment returns achieved and the impact this has on the capital, checking any changes that need to be made to the assumptions and making any amendments that you want included. Long-lost pension funds will be identified, and the expected benefits brought into the plan, and again, any issues addressed. The move is towards handing the responsibility of retirement over to the retiree, so there is not a better time to consult a fully qualified financial planner.

If you have personal or financial circumstances that you feel may benefit from a financial planning review, please contact me direct on the number below. You can also contact me by email at derek.winsland@spectrum-ifa.com or call our office in Limoux to make an appointment. Alternatively, I conduct a drop-in clinic most Fridays (holidays excepting), when you can pop in to speak to me. Our office telephone number is 04 68 31 14 10.

French Residency – Dispelling the Myths

By Sue Regan
This article is published on: 18th May 2018

18.05.18

French residency is a popular topic of discussion for expatriates when they get together in a social setting. So often I hear people saying that they “choose” not to be French resident and just to be sure, they make sure that they do not spend more than 183 days a year in France. Come April/May time, the chatter on this subject increases. So too do the differences of opinion, mostly about whether or not someone should complete a French income tax return.

Well, to dispel the first myth – residency is not a choice per se. Based on the facts, you are either French resident or not.

The rules on French residency are really quite straightforward, although admittedly some cases are not! For example, take a couple who are lucky enough to have a property in each of France, the UK and Spain. None of the properties are rented to tenants and so all are available for their own personal use. Every year, they spend five months a year in France, four months in the UK and three months in Spain. They receive pensions from sources outside of France and most of their financial capital is in offshore bank deposits in the Channel Islands. They also have current bank accounts in each of the three countries.

Where are they resident? Well the simple answer is “France”. Why? Because this is where they spend most time in a year.
Hence, the second myth of the perceived ‘183 day rule’ is also dispelled.

When anyone has interests in various countries, it is often found that they satisfy the internal criteria for residence of more than one country. Understandably, this can be confusing. In France, you only have to satisfy one of the following four conditions and you will be resident in France:

(1) France is your ‘home’: If you have property in France and another country, but the latter is not available for your personal use (for example, because it is rented to tenants), then France is your home.

(2) France is your ‘centre of economic interest’: Generally, this means where your income is paid from. In addition to pension, salaries, etc., this can include bank interest and other investment income.

(3) France is your place of ‘habitual abode’: Notably, no reference is made in the law to the number of days that you actually spend in France and this is where many people are caught out, believing that if they do not spend at least 183 days in France, then they can decide that they are not resident. This is not the case and your place of ‘habitual abode’ is, quite simply, where you spend most time.

(4) Nationality: If your residency has not been established by any of the above points, then it will be your nationality that determines your residence, however, this is very rare.

As a French resident, you are obliged to complete an annual income tax return and must declare all your worldwide income and gains (even if the income is ultimately taxable in another country).

Thankfully, there are Double Taxation Treaties (DTTs) existing between France and all the EU States (and also with many other countries in the world). For anyone with interests in more than one country, the existence of a relevant DTT is very important. This is because a DTT sets out the rules that apply in determining which country has the right to tax your various sources of income and assets, with the aim of avoiding double taxation.

However, France does not have DTTs with the popular offshore jurisdictions of, for example, the Channel Islands and the Isle of Man. Hence, for any French resident with bank deposits in these jurisdictions, where withholding tax is being charged on the interest, there is no mechanism to offset this against the French income tax that is also payable. Probably the best thing to do to avoid paying tax twice on the same source of income is to shelter the financial capital within an investment that is tax-efficient in France. Notwithstanding this, as everyone’s situation is different, it is also very important to seek independent financial advice before taking any action.

Inheritance taxes should also not be overlooked. As a French resident, you are considered domiciled in France for inheritance purposes and your worldwide estate becomes taxable in France, where the tax rates depend on your relationship to your beneficiaries. However, there are some DTTs on inheritance taxes between France and other countries (although nowhere near as extensive as the number of DTTs that exist for other taxes). Again, it is important to seek advice on your own personal situation because it is my experience that ‘one size does not fit all’.

In summary, French residency is a fact and not a choice. However, by seeking advice, action can be taken to mitigate your future personal French tax bills, as well as the potential French inheritance tax bills for your beneficiaries.
The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action to mitigate the effects of French tax legislation. Hence, if you would like to have a confidential discussion about your financial situation, please contact Sue Regan either by e-mail at sue.regan@spectrum-ifa.com or by telephone on 04 67 24 90 95. The Spectrum IFA Group advisers do not charge any fees directly to clients for their time or for advice given, as can be seen from our Client Charter at: spectrum-ifa.com/spectrum-ifa-client-charter

Common Reporting Standard – Italy

By Gareth Horsfall
This article is published on: 2nd May 2018

02.05.18

You will be aware that since January 2016 the Common Reporting Standard has now been in effect. This is an OECD agreed standard for most nations around the world to automatically report tax and financial information of individuals, to one another, on a regular basis. This circumvents the historical need for the individual to accurately report their financial information on a tax return to ensure that the relevant level of tax revenue is collected. Now, this information is reported directly to the tax authorities and the information declared in your tax return needs to ‘tally’ with that which the authorities, theoretically, already know.

So, were you one of the 30,000 at the start of 2018? I was !
You may wonder what this relates to? In January 2018 it is reported that the Agenzia delle Entrate sent out up to 30,000 letters to people whom they knew had money held overseas, to ask them to report accurately the money they held outside Italy and to ensure a ‘ dichiarazione integrativa’ was completed before the next tax filing date in order to correct any discrepancies. I was the lucky recipient of one of those letters.

In regola
Thankfully my overseas financial affairs have always been ‘in regola’ with the Italian authorities. However, the letter prompted me to take a closer look to ensure I had not missed anything. Indeed, it turned out that I had missed a grand total of £500 from my last Italian tax return.

However, this does beg the question whether the Agenzia delle Entrate knew about this or whether it just sent a generic letter ( all the letters were the same and generic in nature) to put the cat amongst the pigeons, to coin a phrase. I am of the mind that it is the latter, but am I willing to take the risk? Absolutely not.

Are you paying more than you need to be?
My experience over the years has been, that in most cases, you may be paying more than you need to. There are a number of financial planning opportunities, to protect, reduce, and avoid certain taxes in Italy, that few take advantage of unless you undertake a closer look at your full financial affairs whilst living in Italy.

If you have any questions about the content in this E-zine or others then you can contact me on gareth.horsfall@spectrum-ifa.com or on cell: +39 333 649 2356

Are taxes in Italy really ‘that’ complicated?

By Gareth Horsfall
This article is published on: 30th April 2018

As I walk my son to school in the morning we have the opportunity to walk through the palazzo of an ‘Archivio di Stato’ in the centre of Rome. It is a real piece of classical architecture with cloister like columned walkways surrounding a central open space with a tower adorned with various statues at one end. However, it is not this amazing building which captures my attention each morning, but a plaque on the wall as we walk through the columned part. The plaque reads: Alluvione di 1870. The marker on the wall must be approximately 1 metre 50cm high. To think that the water reached that level is quite unimaginable. And thinking about this each day naturally leads me to the subject of floods. My personal flood is the annual flood of emails into my inbox, at this time of year, asking for clarification on taxes in Italy.

So this article is also about laying down some of the details of those pesky taxes that we all have to pay in Italy. Remember that the submission of your tax information should be formalised by the end of May. If you use a commercialista, even earlier, to allow them time to go through your information, ask questions and report it correctly. The first payment for the year is due on June 16th.

So, where do we start?
As a fiscally resident individual in Italy you are subject to taxation on your worldwide assets and income (with some exceptions), and realised capital gains. This means you are required to declare your assets and income and realised capital gains, wherever they might be located, or generated in the world.

Fiscal residency is going to become very important post BREXIT for Britons who reside in Italy. Questions have arisen as to what fiscal residency means. For a defintion you can read my post HERE

Tax on income
If you are in receipt of a pension income and it is being paid from a ‘private’ pension or occupational pension provider overseas or you are in receipt of an overseas state pension then that income has to be declared on your Italian tax return. If you have paid tax already on that income then a tax credit will be given for the tax paid in the country of origin (assuming that country has a double taxation agreement with Italy), but any difference between the tax rates in the country of origin and Italy will have to be paid.

** Government service, civil service and local government pensions of any kind (eg. Teachers, Nurses etc.) are only taxed in the state in which they originate, and tax is deducted at source in the country of origin. They are not taxed in Italy unless you become an Italian citizen **

It is a similar picture for income generated from employment. This is a slightly more complicated issue that depends on multiple factors. If you have any questions in this area you can contact me on gareth.horsfall@spectrum-ifa.com

Investment income and capital gains
As of 1st January 2018, interest from savings, income from investments in the form of dividends and other non-earned income payments stands unchanged and are taxed at a flat 26%. Realised capital gains are also taxed at the same rate of 26%.

(Interest from Italian Government Bonds and Government Bonds from ‘white list’ countries are still taxed at 12.5% rather than 26%, as detailed above. This is another quirk of Italian tax law as this means that you pay less tax as a holder of Government Bonds in Pakistan or Kazakhstan, than a holder of Corporate Bonds from Italian giants ENI or FIAT).

Property Overseas
Property which is located overseas is taxed in 2 ways. Firstly, there is the tax on the income and, secondly, a tax on the value of the property itself.

The income from property overseas.
Overseas NET property income (after allowable expenses in the country in which the property is located and taxed) is added to your other income for the year and taxed at your highest rate of income tax.

I would like to clarify what I mean by ‘net property income’. If we take the UK as an example, this means that you MUST make a tax declaration in the UK first. The UK property is a fixed asset in the UK and therefore must be treated to UK tax law before any declaration in Italy. After you have deducted allowable expenses in the UK and paid any tax liable in the UK, the NET property income figure must be submitted in your UK tax return.

Where many properties are generating all of your income this can prove to be a tax INEFFICIENT income-stream for residents in Italy. It is better to have a diversified income stream to maximise tax planning opportunities.

I will also add some comments here in that I often hear from people who are told by their commercialista that no expenses can be deducted in Italy. This is correct. What they mean (or what I am interpreting that they mean) is that you cannot deduct the UK allowable expenses directly through the Italian tax return. This has to be done first in the UK tax return, in this example. This is correct process. However, it does not mean that the expenses cannot be deducted per se. It just means they have to deducted in the revelant tax return first before reporting the NET result in Italy.

** Tax credits will be given for any tax paid in another country in order to avoid double taxation, where a double taxation treaty exists with Italy.

2. The other tax is on the value of the property itself, which is 0.76% of the value. (IVIE)
Value must be defined in this instance. For EU based properties, the value is the Italian cadastral equivalent. In the UK that would be the council tax value NOT the market value. This value is always expressed asa range of values rather than a specific one. You will find that the market value will, in most cases, be more than the cadastral equivalent value.

For properties located in other European countries, for example France, you will find that they may have a similar ‘cadastral’ value. Where this value is calculated in the same way as Italy, a tax credit is offered against any IVIE tax payable in Italy. The tax credit is not applicable to UK properties as the tax is due on the occupant of the property and not the owner.

In properties located outside the EU, the value for tax purposes is defined as the market value of the property ONLY where evidence cannot be provided of the purchase value of the property, in which case this would be used instead.

** BREXIT FINANCIAL PLANNING OPPORTUNITY**
After the UK exit from the EU, the cadastral equivalent value of a property in the UK will revert to the original purchase price, where evidence can be provided. Given that UK councils are likely to review their council tax bands in the comings years to fund shortfalls in their accounts, this could mean less tax to pay in Italy.

Taxes on Assets

1. Banks accounts and deposits
A very simple to understand and acceptable €34.20 per annum is applied to each current account you own. This includes fixed deposits, short term cash deposits, CD’s etc. The charge is the equivalent of the ‘imposta da bollo’ which is applied to all Italian deposit accounts each year.

The rules regarding whether you need to declare the account can be found on my blog post ‘IF IN DOUBT, DECLARE THE ACCOUNT‘

I am of the view that if you have a bank account in the UK with more than €5000 in it and/or a regular income being credited to it, then you should declare the bank account in Italy regardless of the tax reporting requirements. For the sake of the tax of €34.20, it is not worth taking the risk.

2. Other financial assets
The charge, IVAFE, is levied on other foreign-owned assets which covers shares, bonds, funds, portfolio assets, cryptocurrency, gold deposits, art work or most other types of assets that you may hold. The tax on these is 0.2% per annum based on the valuation as of 31st December each year.

Also remember that if you have a portfolio of managed assets that are NOT held in an a suitably compliant Italian Investment bond, then all the separate funds/shares/assets are considered “individual” and MUST be reported individually on your tax return each year. That also includes reconciling any income/dividend/distribution payments that have been made and also any capital gains that have been realised. A reference to the Banca D’Italia exchange must be made for each transaction on the correct date.

3. Pensions
It is worth noting here that for any UK style private pension or occupational pension arrangements, where the pension structure is an irrevocable trust, then the tax treatment is 2 fold.

a) any income that you draw from the pension each year is taxable at your highest rate of income tax in Italy.

b) the fund itself needs to be reported under ‘monitoraggio’ of trusts section of the Quadro RW. Failure to do so could result in fines. Although highly unlikely, you never can be sure.

This is a concise list of the taxes that affect most of you.

How Do I Find My Pension?

By Spectrum IFA
This article is published on: 19th April 2018

19.04.18

I have been asked this question, more than once. Some clients are embarrassed to ask. Others have simply lost sight of their pension for one reason or another and have no idea how to track it (or them) down.

Why am I telling you this? Well, recently the UK Government announced that there is over £400 million of lost pensions sitting with various pension and insurance companies in the UK – left behind by former employees who have either moved abroad, are unaware that they had a pension (it’s more common than you would think), or simply have not kept track of their pension. In fact, figures show that four out of five people will lose track of at least one pension over the course of a lifetime.

How can this happen?
It is surprisingly easy for people to lose track of their pension(s). Firstly, because people frequently move around for work. As the former Minister for Pensions, Baroness Ros Altmann said:

“People have had on average 11 jobs during their working life which can mean they have as many work place pensions to keep track of…”

That’s a lot of paperwork to keep on top of and to be fair, most people will only really think of their pensions when they are close to retirement. Which brings me to the second point.

We can and do lose contact with the companies which administer our pensions. The most common reason for this is that pension and insurance companies have merged, and hence brand names have disappeared. For example, a company called Phoenix Life owns more than 100 old pension funds. Its list includes schemes from Royal & Sun Alliance, Scottish Mutual, Alba Life, Pearl Assurance, Britannia Life and Scottish Provident. This invariably leads to a lot of frustrated people looking for their money. It will perhaps surprise you that neither the Association of British Insurers nor the Financial Conduct Authority have a comprehensive list of which company owns which funds.

OK, how can I track down my pension?
Glad you asked. We can help with that, of course. We would need as much information from you as possible which, depending on the type of pension, would include:

Personal Pension

The name and address of the pension scheme (you may find that this has changed)
The bank, building society or insurance company that recommended or sold the scheme
Policy/NI Number

Work Pension

The company you worked for and if they have changed names/address since you left
Dates you worked there
When you started contributing to the scheme and when you finished
Employee/NI number

Obviously, the more information that you can provide, the easier it will be to locate your money. However, we will work with what you’ve got to explore all possible options.

Some companies are more efficient and responsive than others when it comes to handling enquiries on historic pensions, even when the original policy documentation is available. It can take years to locate and recover lost funds. You can fight the battle yourself; or we can pursue on your behalf until we get a satisfactory outcome.

Another reason to review your work pension(s) is that transfer values for defined benefit, or final salary, schemes are at record highs. Depending on the company, valuations are higher than most people anticipate. For example, a pension projected to pay £8,000 per year could have a transfer value of over £285,000, well in excess the average house value in the UK!

I’ve got my pension(s). What next?
Depending on your age and circumstances, transferring an existing pension into a new scheme may be beneficial, including if you have more than one pension. Consolidating existing arrangements removes the need to monitor numerous pensions and, perhaps more importantly, allows you to optimise returns from a single, personalised investment strategy, often with greater flexibility over the timing and amount of payments and in your preferred currency.

Ahead of any potential transfer, the first step is to determine whether a transfer is in your best interests. A responsible adviser will always complete a detailed and objective review of your current position and plans. A transfer may not be appropriate, for a variety of reasons – for example if it means the loss of valuable guaranteed benefits – so it is essential to consult only a suitably authorised, qualified and experienced adviser. A proper assessment will enable you to make an informed decision on whether a transfer is best for you.

If you do proceed with a transfer, as part of the exercise you should also expect ongoing advice on matters such as investment performance and outlook, together with guidance on the suitability of the scheme following, or ahead of, a change in your circumstances.

For help with locating and reviewing your UK pension(s), please contact me either by email emeka.ajogbe@spectrum-ifa.com or phone: +32 494 90 71 72.

Tax in Spain can be a matter of opinion

By John Hayward
This article is published on: 17th April 2018

17.04.18

In Spain, there can be a huge difference in what autonomous regions charge for income, capital gains, wealth, and inheritance/succession taxes. Rules generally come from central government in Madrid but how that comes out in the fiscal wash in each region can vary considerably. For the purpose of future articles, my focus will be on the Valencian Community incorporating Castellón, Valencia, and Alicante.

There is also an unwritten rule which seems to be rife. The law of opinion. On a subject that you would think there should be clear instruction from the Spanish tax authorities, there is a lot of ignorance on several tax matters and so the law of opinion kicks in. This is especially true for any products which are based, or have been arranged, outside Spain. With the threat of fines for not declaring assets and paying taxes correctly, it seems at least slightly unjust that there is not clear instruction on how different assets are treated for tax.

As my colleague Chris Burke from Barcelona recently wrote, lump sums from pension funds can have special tax treatment, both in the UK and Spain. However, even though most people and their dog know that there is a 25% tax free lump sum in the UK, not everyone is aware that this lump sum is potentially taxable in Spain. Also, it is not common knowledge that there is a 40% discount on qualifying pension lump sums. It is likely that many people have overpaid taxes due to no or bad advice.

Can you tell the difference between margarine and a Section 32 Buyout?
If you can, you could be leader of the Conservative Party, according to the script of The Last Goon Show of All (Actually the comparison was between margarine and a lump on the head but the qualification would seem equally apt almost 50 years later). It is frightening what little knowledge there is with regard to pension schemes, notably with the advisers who make money for arranging them! A Section 32 Buyout plan is just one of many types of pension scheme which have emerged over the last 30 to 40 years. Few people are familiar with all the different types.

A pension fund is, in many cases, the second largest asset behind a property. People are generally familiar with the property expressions such as “doors”, “windows”, “walls”, “kitchen”, etc. They know where these things need to go and when they need repair and maintenance. When it comes to pensions, it is a different story. In a way, that is great for us because it means people need advice. The problem comes when they leave themselves open to advice which is inaccurate, if not complete garbage.

People need to check the qualifications of an adviser and their firm before exposing themselves to potential problems. I have the Chartered Insurance Institute G60 Pensions qualification. You won´t find too many advisers with this, especially not in Spain. As a company we have a team which is qualified and which keeps up to date with pension rules in the UK and Europe. All enquiries go through them before anything is arranged which should give comfort to those nervous about what will happen to their pension funds.