Le Tour de Finance came to the wonderful Chateau La Coste near Aix-en-Provence and was once again, a resounding success. Over 50 guests came along to listen to a number of industry experts talking about issues effecting expats.
Le Tour de Finance – autumn seminars
By Spectrum IFA
This article is published on: 7th November 2017
07.11.17
These independent industry experts spoke about highly topical issues such as the proposed changes to the French tax system, pensions, international banking, foreign exchange, assurance vie, discretionary fund management and Brexit.
The event was hosted by The Spectrum IFA Group’s Christopher Tagg and Victoria Lewis, Spectrum’s local adviser explaining how she provides practical financial solutions for expatriates living in France. Other industry experts on hand form their Head Offices around Europe included; Tilney, Momentum, Rathbones, Standard Bank, SEB Life International, Old Mutual and prudential International.
The subjects open for discussion are wide ranging, relevant to expats living in France and the guests are readily invited to participate in the open forum.
Le Tour de Finance will be back in the Spring of 2018 and to learn more about Le Tour de Finance, please click here or visit the dedicated Le Tour de Finance website.
Where are you domiciled?
By Gareth Horsfall
This article is published on: 1st November 2017
01.11.17
As a foreign national living in Italy for many years I find it sometimes confusing to look at where you come from and know where you belong. I rang my prefettura the other day to check on the progress of my Italian cittadinanza application only to be told that I would have to keep checking the Ministero del Interno website to see whether any updates or further requests for information would be required and that no confirmation email would be sent.
Anyway, this got me thinking about the issue of ‘where we belong’ and ‘where we think we belong’. The difference being, one is based on facts and one is based on what we believe to be true.
If I take a cross section of you, my group of clients, and stranieri living in Italy, I could split you into many different groups (it is not an exhaustive list), but a good summary would be as follows:
- Foreign nationals married to Italians (like myself)
- Foreign nationals who are married/partners with someone of their same nationality
- Foreign nationals married/partner with someone of a different nationality
- Foreign nationals who are not married
And within this group I could create sub groups of you:
- those who don’t intend on returning to your country of origin
- those who have made a long term move to Italy but intend on moving away from Italy at some point in the future, mainly for reasons of later retirement when language, health, and maybe grandparenting considerations become more of an issue
However, in each category and sub category we have to work with the fact that we have accumulated financial assets which, from a fiscal point of view, will be subject to taxation in any one country or another. Knowing which group and sub group you belong to, and the definition of such, will likely determine which jurisdiction you are considered for inheritance tax/ succession purposes.
So let’s focus on the subject of domicile for a moment, since the application of domicile will determine which tax authority will have overriding power when it comes to your inheritance tax or successione. Firstly I want to highlight the definition of domicile in the UK (which may also be applied in other similar countries which work on a basis of common law)
Definition of domicile
The domicile is the country which a person officially has as their permanent home, or has a substantial connection with. When you’re born, you’re automatically assigned to the same domicile as your parents, which is defined as your domicile of origin. If your parents were not married, typically your domicile of origin will be the same as your mother, although this may vary depending on each individual’s circumstances.
Your domicile of origin then continues until you acquire a new domicile – even if you move abroad, unless you take specific action, it is unlikely that your domicile will change.
Now let’s look at the definition of domicile in Italian law, which has a totally different meaning:
The place of domicile is taken to be an individual’s principal place of business and interests.
(see full definition of residency and domicile in Italy HERE)
As you can see the two definitions have quite a different meaning. This creates problems when looking at inheritance tax, succession planning and will writing.
CAN I BREAK DOMICILE OF ORIGIN?
For those of you who fit into the category of having lived in Italy for many years and have few or no connections back in your country of origin, it might be that you are now in the position that you could break the domicile of origin and be subject to the law of Italy on your worldwide estate. This might have some advantages given that succession taxes in Italy are very low compared to other European countries.
However, to break the domicile of origin rule, specifically when relating to UK citizens, you would have to:
- show that you were not domiciled in the UK within the three years before death
- show that you were not resident in the UK in at least 17 of the 20 income tax years of assessment ending with the year in which you died
CHANGING YOUR DOMICILE
You might also try and actively change your domicile but to do this you will need to satisfy a number of criteria and be able to provide evidence of each one. The basic criteria for changing your domicile will typically include as an absolute minimum:
* Leaving the country in which you are domiciled and settle in another country
* Provide strong evidence that you intend to live in your new location permanently or indefinitely.
However, the criteria for changing your domicile are incredibly varied and include things like closing bank accounts down in your country of origin, selling all properties that you may own there and finally each case will be judged on it’s merit incorporating the evidence provided.
SO WHAT IS THE SOLUTION IN ITALY?
The long and short of this is that when you die, it is highly likely that as a foreign national living in Italy, that unless you have attained cittadinanza, the Italian authorities will refer back to your country of origin and allow that authority to apply their inheritance tax code to your worldwide assets. (Any Italian taxes would still need to be applied, where appropriate to Italian domestic assets, such as property) Whilst this might be preferable for some, you may wish the Italian tax code to apply on death because of its lower tax rates. If this is the case then you have to try and break domicile and this can only be determined at the point of death by the relevant tax authorities. If you want to know how hard that could be then see the ”famous example’ in the column opposite.
Clearly it makes sense to start planning to minimise problems from an inheritance tax point of view, as soon as possible. Having a will in place is the first step to ensuring that your relatives are not left with cross border legal burden when the inevitable happens.
The EU – a Financial success or not?
By Chris Burke
This article is published on: 31st October 2017
31.10.17
What better subject to discuss, than one closest to the heart of someone living and studying in Europe.
Geneva Business School (GBS) in Barcelona, is a leading Business School providing cutting edge, innovative, Swiss quality education on a global scale. Part of their curriculum is to invite guest speakers along to hold a forum/debate on a topical subject, to enhance their knowledge, practice what they are learning and increase their debating skills.
So, where better to format the debate on discussing what the original reasons were for the EU being formed. Easy I hear you say. Ok, well we started discussing putting all the countries together and how that could make them stronger under one currency, against other economies. It was soon apparent that although this seems a sensible idea, did this work for everyone? Greece was debated as already being financially in trouble before it joined the EU, and has continued down that path, but why? When we looked at the Government debt of each country before joining the EU and present day, it’s clear many of the country’s debt has doubled; The UK, Greece, Italy, France to name but a few, but why haven’t others? No one was surprised Germany’s hadn’t, but why hadn’t it? We discussed Germany’s manufacturing capability compared to the other countries; this could well be a valid reason. There was mention of ‘black’ money still prevalent in certain countries, mainly Italy and Greece where in some places you still couldn’t pay by card, only cash. It was well known a few years back the Greek underground had been losing money hand over fist due to passengers not paying. Was there a cultural issue here that was denying the government, in those countries, of more revenue from tax?
Freedom of movement was on everyone’s lips as another good reason for the EU being born. Freedom to move elsewhere, find work, perhaps a new life, career. It was quickly pointed out this didn’t work for everyone, an Italian farmer (highlighted by an Italian student) would not agree this had worked well for him. Of course, you cannot please everyone and there are countries in the EU whose farmers receive subsidies to help.
Access to the common market, so trading made easier for countries in the EU, cheaper and more direct for them to sell within. This making them potentially more competitive than those outside it. This was a strong reason for the EU to be formed.
So there was one more, major reason, that after we discussed what it was, agreed that perhaps this could be the biggest reason for the EU being formed, but is hardly ever brought up. We discussed that during the Brexit negotiations this was hardly ever mentioned as a reason to remain, if it was its press headlines were minimal. When you are part of a team, whether it be a sports team or any other, you have a common reason/goal to make it work. You may have disagreements, but because you all want the same outcome, which benefits you all, you work hard to find a solution. Differences can be put aside, or debated, and there may be a skirmish occasionally but in general, conflict is usually avoided or at least minimal. Stopping wars and keeping the peace was one of the founding reasons for forming the EU, yet it hardly ever gets the status it should deserve.
So, taking all this into account, did we think the EU has been a financial success? Certainly not to everyone, but if you were a consultant brought in to investigate and make a decision, the debaters at Geneva Business School voted marginally it had. Wars cost money, however they can also generate it……
Other key questions asked were:
Where are we economically in the world?
We are in the second longest Bull Run in the history of the stock markets, we certainly aren’t on the bottom run of the ladder in terms of its upward curve, probably not in the middle, how long there is to go is anyone’s guess, but we are probably in the final third.
Government debt are at the highest rates ever, can it be repaid?
No. Even if we had ten more fantastic years on the stock markets, which is highly unlikely, it’s my belief it’s almost impossible to repay these. Looking at debt clocks is frightening and best not to be done!
Bitcoin, good investment or not?
The jury is still out on this, it continues to provide itself as an investment choice. Will it last? Do the bank’s want it to last? Will it be here tomorrow? For the high risk takers it’s a choice, for everyone else it’s too early to tell.
Property, a good investment in Barcelona?
Simply, if you are intending on holding it for a decade or so, and being able to fix the mortgage interest rate for life, it’s hard to advise against it. For anything less, you wouldn’t want all your investments in one asset class.
So, our final thoughts were, on Maslow’s Conscious Competence Model, where did we rate the EU? And the overwhelming answer was:
Conscious Incompetent – that is to say, the EU knows it isn’t working, and is arguably trying to fix it although isn’t sure how. But how much we wonder…….
Proposed French Tax Changes 2018
By Sue Regan
This article is published on: 25th October 2017
25.10.17
Since my last article the October Tour de Finance event has taken place at the Domaine Gayda in Brugairolles, near Limoux. As always, it was a huge success and very well attended. It was great to see some familiar faces as well as make some new contacts. Over 70 guests in all came along to listen to a number of industry experts speak about highly topical issues such as the proposed changes to the French tax system, pensions, assurance vie, discretionary fund management and, of course, the “B” word!
In this article I will concentrate on our understanding of some of the proposed changes to the French taxation regime, as published in the Projet de Loi de Finances 2018. Of particular interest to many of our clients are the proposed changes to Wealth Tax, the increase in Social Charges and the new 30% Flat Tax on revenue from capital. At the time of writing, these, and other proposed changes have still to be agreed in Parliament and then referred to the Constitutional Council for review before entering into French law. So we won’t know for sure the exact changes that will take place until the end of the year. However, below is a brief summary of the main proposals as we understand it.
WEALTH TAX (Impôt de Solidarité sur la Fortune)
The government proposes to abolish the current wealth tax system and replace this with Impôt sur la Fortune Immobilier (IFI).
IFI would apply only to real estate assets and the principal residence would still be eligible for the 30% abatement against its value. Therefore, taxpayers with net real estate assets of at least €1.3 million would be subject to IFI on taxable assets exceeding €800,000, as follows:
| Fraction of Taxable Assets | Tax Rate |
| Up to €800,000 | 0% |
| €800,000 to €1,300,000 | 0.5% |
| €1,300,001 to €2,570,000 | 0.7% |
| €2,570,001 to €5,000,000 | 1% |
| €5,000,001 to €10,000,000 | 1.25% |
| Greater than €10,000,000 | 1.5% |
This is good news for French residents with substantial financial assets, including those held within assurance vie. However, there have already been some protests to the scope of the new form of ‘Wealth Tax’ being levied only on real estate, with luxury items such as yachts and gold bullion being exempt. Thus, I don’t think we have heard the last of this!
SOCIAL CHARGES (Prélèvements Sociaux)
It is proposed to increase the Contribution Sociale Généralisée (CSG) by 1.7%. This will result in investment income and property rental income being liable to total social charges of 17.2% and, where France is responsible for the cost of the taxpayer’s healthcare in France, at a rate of 9.1% on pension income.
FLAT TAX on revenue from capital
It is planned to introduce a Prélèvement Forfaitaire Unique (PFU) at a single ‘flat tax’ rate of 30% on investment income, made up as follows:
➢ a fixed rate of income tax of 12.8%; plus
➢ social charges at the rate of 17.2% (taking into account the proposed increase).
The PFU will apply to interest, dividends and capital gains from the sale of shares.
How does this affect Assurance Vie contracts?
Based on information currently available and, of course, the finer details may change before being passed into law, it is our understanding that for premiums invested totalling €150,000 or less per person (so €300,000 for a joint life policy) the existing system of withholding tax (prélèvement forfaitaire libératoire PFL). Taking into account social charges at the increased rate of 17.2%, this results in gains on amounts withdrawn, continuing to be taxed, as follows:
➢ during the first 4 years at 52.2%
➢ between 4 years and 8 years at 32.2%
➢ post 8 years at 24.7%
The first draft of the bill proposed that the new ‘flat tax’ will replace the existing PFL system but will only apply to gains on premiums invested after 27 September 2017, that exceed the thresholds above. However, the National Assembly has already decided that it is illogical to have different tax rates, depending on how long the premium has been invested, for new investments made from 27 September 2017. Therefore, an amendment to the bill has already been proposed that all new investments made should be subject to the ‘flat tax’.
It is proposed that all taxpayers will have the possibility to opt for taxation at the progressive income tax rates of the barème scale, plus social charges. Therefore, any potential gains on capital, including withdrawals from assurance vie policies, should be assessed on an individual basis to determine in advance as to which method of taxation would be most appropriate.
There is no change to the inheritance tax treatment of assurance vie contracts and the post 8-year abatement of €4,600 for a single taxpayer, or €9,200 for a couple, will be maintained. Thus, despite the proposed tax changes, the assurance vie will continue to be a very useful vehicle for sheltering financial assets from unnecessary taxes. In addition, as assurance vie policies fall outside of your estate for inheritance tax purposes, you can leave your investments to your chosen beneficiaries without being subject to the French Succession Laws of “protected heirs”.
The abolition of taper relief
The reform also proposes the abolition of the taper relief on capital gains from the sale of shares, in respect of gains from disposals from 2018.
So, if you are sitting on a portfolio of shares which are not sheltered in a tax wrapper, then now is the time to have a look at any gains you may have and, possibly make use of the taper relief of up to 65% on the total gain, while it is still available. Don’t delay in speaking to your financial adviser who should be able to identify whether the restructuring of your investments is in your best interests.
Le Tour de Finance visits “Escape to the Chateau”
By Spectrum IFA
This article is published on: 19th October 2017
19.10.17
Following recent successful events in Aix-en-Provence and Carcassonne, Le Tour moved north to the Mayenne, before heading on-wards to Clecy and Lanvallay. The first event this week event took place at the Chateau de la Motte Husson, the “star” of Channel 4’s Escape to the Chateau.
Le Tour de Finance is a series of financial forums designed to give expatriates in France access to various financial experts. Hosted by The Spectrum IFA Group’s Christopher Tagg, topics covered were the tax advantages of Assurance Vie by SEB Life’s Jeremy Ferguson, Calum Harkiss of Currencies Direct answered questions relating to Foreign Exchange, Mark Ommanney of Tilney gave his views on the current state of the markets, Paul Forman of Momentum Pensions tried to help make sense of the complex UK pension rules and talked about QROPs and Prudential’s Edny Van Den Broek spoke about investing for the risk averse. Spectrum’s Michael Doyle gave a practical example of how our experts services provide practical financial solutions and benefits for expatriates living in France.
Finally, a vote of thanks to the day’s attentive hosts, Dick and Angel Strawbridge.
To learn more about Le Tour de Finance and to registered or find out about future events please click here or visit the dedicated Le Tour de Finance website
Thoughts on the British Pound
By Gareth Horsfall
This article is published on: 18th October 2017
18.10.17
Using long term macroeconomic data, sterling looks to be significantly undervalued versus the euro (see graph). Without Brexit, we could be looking at, what we call, an ‘equilibrium’ value of around 1.50 euros to the pound, taking into account economic fundamentals only (relative prices, relative productivity and relative expected savings).
Assuming Brexit, we’re working on the basis of circa €1.3 to £1 – but it could take a number of years to get there!
Productivity is a key driver of our data used in this calculation – particularly productivity in the tradable goods sectors. This is likely to suffer after Brexit due to non-tariff barriers to trade (think complying with overseas regulation and customs regimes). That said productivity growth in Europe has been weak, and is unlikely to surge ahead while the UK economy recalibrates, somewhat limiting the damage to the equilibrium rate. If the European project revives around a new Macron/Merkel nexus, then further gains from integration may lower the equilibrium rate a little further via improving Eurozone productivity.
Although the long-run economic value of the pound would shift lower in a ‘hard Brexit’ scenario (i.e. no special deal), primarily due to the impact on productivity, the actual exchange rate is so far below the economic equilibrium value that we expect the pound to rise on a long-term basis in any scenario. It is really just a question of speed.
Unfortunately, such long-term analysis does not help us forecast currencies on a 6-12 month view, and the newspaper headlines generated by ongoing Brexit negotiations could well drive exchange rate volatility.
Until June, the EUR/GBP exchange rate over the last couple of years has closely tracked changes in relative interest rate expectations (i.e. what the market thinks interest rates will be in Europe in 3 years’ time relative to what they think they will be in the UK). This lends some shorter-term support to the pound, and indeed could favour sterling further if the run of strong data in the Eurozone starts to decline.
CURRENCIES DIRECT
You may be aware that at The Spectrum IFA Group we refer our clients to Currencies Direct in the UK for foreign exchange transactions.
I had a recent conversation with them about the number of new entrants into their market space and the availability of competitor firms and how it was affecting their business model. However, they informed me that they have some of the most competitive foreign exchange rates on the market, because of their size, and they are happy to discuss beating rates offered by existing long terms providers and also the newer online only entrants into this market place.
If you are making transfers through an existing service or want/need to start then let me know on gareth.horsfall@spectrum-ifa.com and I can introduce you to their representatives to discuss their competitive rates.
As my grandma used to say to me:
“IF YOU LOOK AFTER THE PENNIES THE POUNDS WILL LOOK AFTER THEMSELVES”
Currency Fluctuations
By Gareth Horsfall
This article is published on: 17th October 2017
This week I want to dedicate my Ezine to the currency of living abroad.
How many people do you know in your home town or in your home country that worry about currency fluctuations? Have you ever heard anyone worry about the EUR v GBP or EUR v USD level at any one time? Maybe they look once a year when they are going on holiday and leave the post office with a smile on their face or have a sullen expression depending on the exchange rate. But for the rest of the year?
It’s not so simple for the life of the straniera/o!
Almost everyone I know is concerned to some extent about the exchange rate. Whether it is someone who is building a house and watches the exchange rate drop (you know who you are!) or people living on fixed pension incomes. I also include myself in the exchange rate trap since part of my earnings are in GBP. I understand your pain.
Of course, these are the simple aspects of currency re/devaluation and to some extent we can budget and plan for its eventuality and prepare ourselves. But what about when multiple currencies are at play in our investment portfolios. There it can create even more unusual effects.
The following comments (slightly modified by myself for easier understanding) come from Robert Walker at Rathbones Asset managers who wrote a piece about the interplay of currencies in a managed portfolio of assets. I thought it might interest you.
CURRENCIES AT WORK
With a portfolio approach that is global in nature, currency volatility is playing an important role in the reported returns to clients on a quarter-by-quarter basis. The last two years have seen substantial US dollar, British Pound and Euro volatility as confidence in the respective economic regions ebbs and flows. This has a profound effect on how the overseas assets’ performance are reported in the investor’s base currency, based on their individual circumstances.
US DOLLAR
The US dollar has been a safe haven in times of increased economic uncertainty. In the first few months of Donald Trump’s presidency, the US dollar strengthened on the presumption that tax cuts would stimulate the economy. This has subsequently reversed, as the realisation of many false or premature promises has taken hold.
BRITISH POUND
The British pound has seen its value fall significantly against the US dollar and euro due to Brexit uncertainty. Until the exact path of Brexit and the economic ramifications of this are known, it is likely that the pound will remain weak. There will be many twists and turns along the way until March 2019, not least with the Conservative’s General Election result and subsequent reliance on the Democratic Unionist Party. The current status quo is very vulnerable to further turmoil and the weakness of sterling is a by-product of this.
EURO
At the turn of 2017, markets were focussing on the possibility of anti-establishment vote in both The Netherlands and France. At the time, both countries had parties with anti-European Union policies in opinion poll ascendency and thus the consensus was to remain underweight in the Eurozone. Since that time, the euro has undergone a substantial recovery of over 14% against the US dollar as political risk subsided and economic confidence in the Eurozone improved. Against sterling, it is up over 7% this year in addition to the weakness after Brexit of 2016. Both of these currency movements have had the impact of weakening the value of US and UK assets for euro investors.
THE INTERPLAY OF CURRENCIES
Performance of globally diversified portfolios has been affected by each of these currency movements. For example, had a US investor bought euro assets at the start of 2017 the translated value would be increased by 14% due to the currency effect alone, but a euro investor who bought US assets at the start of the year would be seeing a translated loss of over 12%. Investors in sterling will have seen the value of overseas assets increase markedly during the Brexit process as the pound has weakened significantly, but euro investors with sterling exposure have seen a corresponding fall.
Over the long-term, we would expect the impact of shorter term currency movements to average out. For the pound particularly. (See comments about the Pound in the right hand column).
When managing portfolios in euros, sterling and US dollars, we ordinarily have a degree of country of residence bias to a client’s base currency. However, this is dependent on a client’s unique circumstances. Our portfolios are globally diversified, where we are trying to gain exposure to a portfolio of high-quality global assets in order to reduce risk to any one particular economic region. Indeed, currency analysis can be somewhat circular, as the underlying investments in each region are typically multi-nationals that have a global spread of currencies. This can mean that an individual portfolio may deviate against a certain measure or benchmark over the short-term, but which is most likely a temporary effect, but we feel that the spread of global investments will reward clients well over time, rather than focusing on fast changing and unpredictable currency movements.
HEDGING
Almost all investment professionals admit that forecasting future direction of currencies is a thankless task, as currencies are largely influenced by future unknown events which are, by definition, unpredictable.
As with most investments, volatility can also be driven by speculative investors such as hedge funds. Hedging currency risk, i.e. eliminating the currency impact on returns and focussing on the underlying return, is sometimes considered by investors. This can add to certainty but also more cost. In many cases, due to the inherent unpredictability of currency markets, hedging not only detracts from returns, due to the increased costs, but often proves to be the wrong action in hindsight.
If you want to review your portfolio returns over the last year/s with an eye on the impact of currency fluctuations and how this might affect your income and expected returns then you can contact me on gareth.horsfall@spectrum-ifa.com or call me on 3336492356
Successful estate planning in France – Having a will is just the beginning
By Spectrum IFA
This article is published on: 16th October 2017
16.10.17
When I left school, I knew more about Shakespeare than I did about personal finance. While we gain academic knowledge through education, and professional knowledge through work, there is no formal channel for learning the key life skill of money management. Most of us pick it up in the same way we acquire our wealth – very few have a strategy, even fewer have a plan.
The problem is that personal finance can be complex, sometimes very complex. Mistakes can be costly. This is especially so in France, even for the French themselves. How much more so then for those of us whose first language is not French. And one of the most complicated areas of personal finance in France is estate and inheritance planning.
Successful personal finance is not just about organising our financial affairs so that, while we work hard for money, our money works hard for us. It is also about putting in place arrangements to transmit that resultant wealth in the best conditions to the chosen ones we leave behind.
The passing of a loved one can be one of the most stressful moments of our lives, one where our families are at their most vulnerable. It is then that we need to rely on the robustness of the arrangements that we have already put in place. In spite of this, most of us do not have even a basic will.
The starting point of any successful estate planning starts with defining the ultimate goal. There are three aspects: –
- The capacity to transfer at death whatever assets remain to your preferred beneficiaries in proportions of your choosing
- In the most cost efficient and tax intelligent manner with the minimum amount of deductions
- While ideally retaining and maximising as much control as possible during your lifetime
The bad news is that in France ‘forced heirship’ succession law and inheritance tax rates of up to 60% can make this difficult to achieve. For families with complicated situations, such as step children, this can be especially problematic and UK arrangements will not necessarily function in France and may have unpredicted results. Moreover, finding a proactive English speaking French lawyer prepared to take the time to fully understand your situation and needs can be both challenging and expensive.
The good news is that there is also a complexity of legal and financial planning strategies that can be used when defining your plan to help you achieve your goals and get you nearer to the ideal goal, as defined above. Here are some examples: –
- A will with the possible addition of a ‘clause d’attribution intégrale au survivant’ or ‘clause de préciput’. Given Brexit, hand written wills in English should not be relied on in practice.
- A change of marriage regime, typically from ‘séperation de biens’ to ‘communauté universelle’ to protect the surviving spouse
- Brussels IV (EU Regulation 650/2012) allows you to avoid French succession law (not tax) by opting for the law of your country of nationality rather than of your residence
- Adoption of step children
- Gifts (‘donations’)
- A strategy of dismemberment (‘démembrement’) of real estate into life interest (‘nu-propriété) and usufruct (‘usufruit’). This can significantly reduce the inheritance tax bill, especially if done sooner rather than later via a will at time of death
- Use of assurance vie as tax optimisation wrapper for financial assets, ideal for transmitting inheritance to distant relatives, friends or third parties
- Careful editing of the beneficiary clause within an assurance vie policy
- A strategy of dismemberment can also be applied to certain assurance vie policies.
- Use of inheritance tax free allowances –the standard 100,000 EUR per child per parent and a second one via assurance vie adds another 152,500 EUR per beneficiary.
So make it easier on your lawyer and help him to help you. Given the complexity of both the issues and the solutions, ask for a free holistic review of your situation from your financial adviser so you can already begin to define your needs and goals, and have an idea of what strategies are possible.
Thus prepared, you will make your lawyer’s job easier and so less time consuming. As well as achieving peace of mind, you might even save yourself some fees!
Saving tax is a good policy
By John Hayward
This article is published on: 9th October 2017
09.10.17
Having recently written about the benefits of using a well-established investment or insurance company to manage your savings, within a Spanish compliant insurance bond, with the benefit of your money growing by more than inflation and far more than any bank has offered in recent years, I want now to explain how brilliantly tax efficient a Spanish compliant insurance bond is. I will do this by telling stories of two married couples. Mr and Mrs Justgetby and Mr and Mrs Happywithlife. Both couples are retired and tax resident in Spain. Also, both couples have two adult children in the UK.
Story 1 – Mr and Mrs Justgetby
Mr and Mrs Justgetby have lived in Spain for 10 years. They had sold up in the UK in 2007 and bought a property on the Costa Blanca (Valencian Community). This is valued at €300,000 and owned jointly. They each receive pensions from the UK in the form of State pensions and both have small company pensions. These cover their expenses but do not allow them to do much more. From the sale of their property in the UK, they were left with £200,000. They exchanged £50,000 before moving to Spain when the exchange rate was 1.45 euros to the pound. This gave them €72,500. They have had to eat into this because they needed a new car, they have done a bit of work on their house, and they have had to supplement their pension income. The exchange rate has also gone against them by about 20%. They are now left with €50,000 in their joint Spanish bank account. This does not pay any interest. The remaining £150,000 is in the UK in a variety of investments made up of premium bonds, ISAs, and fixed term savings accounts. The accounts have been split so that each holds exactly the same in individual accounts so that they each hold £75,000.
INCOME/SAVINGS TAX
“ISAs and premium bonds are…..not tax free for Spanish residents”!
Whilst no interest is being paid on their Spanish bank account, at least there is not a tax concern there. However, some of the money in the UK is in tax free accounts. ISAs and premium bonds are tax free for UK tax residents but are not tax free for Spanish residents. Therefore, any income or gains from these investments should be declared to Spain. Mr and Mrs Justgetby have not been declaring any of the prizes they have received from neither the premium bonds nor the interest from the ISAs believing this not to be necessary. With automatic exchange of information that has come into force, Mr and Mrs Justgetby may be in for a nasty shock for unintentionally evading tax.
INHERITANCE TAX
On the death of either Mr or Mrs Justgetby, there are some significant tax issues. As they are tax resident in Spain, the surviving spouse will be liable to Spanish inheritance tax (known as succession tax in Spain) on 50% of both the property value and the bank account as well as 100% of the assets owned by the deceased in the UK. The inherited amount in euro terms, based on an exchange rate of 1.13 euros to the pound, is €150,000 (property), €25,000 (bank account), and €84.750 (UK investments). This totals €259,750. The Spanish inheritance tax on this, after allowances, could be around €11,500.
On the death of the other spouse, the children in the UK would have a liability of around €5,000 each based on current rules and on the assumption that their pre-existing wealth is not over certain limits.
Story 2 – Mr and Mrs Happywithlife
By coincidence, Mr and Mrs Happywithlife were in the exactly same position as Mr and Mrs Justgetby in terms of when they sold their UK property and they had exactly the same amount of money as Mr and Mrs Justgetby in cash. They also have a property in Spain worth €300,000. Instead of investing in ISAs, premium bonds, and deposit accounts in the UK, from the £200,000 property sale proceeds, they put £175,000 into a Spanish compliant insurance bond in joint names. The policy will pay out on the request of Mr and Mrs Happywithlife or when the second of them dies. They felt that it would not be necessary to hold so many euros in a low or no interest bank account in Spain. They kept £5,000 in a UK bank account to cover the times that they pop back to the UK to see their children and the remaining £20,000 they exchanged into euros and deposited almost €30,000 with their local bank.
INCOME/SAVINGS TAX
“……tax is only due when withdrawals are made.”
Once again, the interest in the bank account in Spain has paid little interest and so has not created a tax problem. However, the Spanish compliant insurance bond has increased in value but has not created a tax liability to date. This is because tax is only due when withdrawals are made and then only on the gain part of the withdrawal. This has allowed the plan to increase on a compound basis as tax has not been chipping away at the growth. They have decided to take regular amounts from the bond now. Each time the money is paid out, the insurance company deducts the appropriate amount of tax and pays this to Spain. As mentioned, the amount of the tax will be determined by the gain portion. In the early years, this is generally little or nothing due to the special tax treatment afforded to these types of savings plans. Longer term, the tax payable is likely to be a fraction of that payable by those who own non-compliant investments.
“….tax that they saved has gone towards a cruise….”!
Unlike Mr & Mrs Justgetby who would have had to pay €1,980 on the €10,000 gains they made, Mr and Mrs Happywithlife would not have had to pay anything. Instead, the €1,980 tax that they saved has gone towards a cruise they are going on next year.
INHERITANCE TAX
On the death of either Mr or Mrs Happywithlife, using the same assumptions as with Mr and Mrs Justgetby, the surviving spouse will inherit 50% of the property value (€150,000), 50% of the Spanish bank account (€15,000) and 50% of the UK bank account (€2,825). This totals £167,825. The Spanish inheritance tax on this, after allowances, could be around €3,500, €8,000 less than Mr and Mrs Justgetby´s position.
On the death of the other spouse, the children in the UK would have a tax liability of closer to €4,500 each as their parents had less money in the Spanish bank than Mr and Mrs Justgetby.
The difference the Spanish compliant bond makes
As the bond was set up on a joint-life, last survivor (second death) basis, there is no “chargeable event”, as it is known, on the death of the first spouse. Nothing is paid out on the first death as the insurance bond was taken out to pay out when the second party dies. This will have saved either Mr or Mrs Happywithlife thousands of euros in tax.
Words of warning
Tax rules change regularly and the figures quoted are estimates based on our knowledge at this time. The allowances assumed are those applying to the Valencian Community at the time of writing.
Brexit could have an effect on the benefits received by the children in the above cases. Allowances apply currently to the children as they live in the UK and are part of the EU. The allowances may not be there after Brexit.
There are a number of other ways to reduce taxes by distributing wealth appropriately. Everyone is an individual and we all have different needs. Therefore, a financial review is the first part of the solution.
It is vital, from a compliance point of view, to take a look at all our financial arrangements and more importantly to review them on a regular basis. What we may have once bought many years ago, and which complied then, may now have become obsolete and could cause tax questions later.
Reviewing existing contracts and investment arrangements has become much more important with the open border tax sharing arrangement, the Common Reporting Standard’ which has now been fully implemented.
It might just be the right time to start looking at your existing arrangements to ensure they comply before anyone starts looking.
Fun Financial Fact
The Latin for head is caput. In ancient times, cattle were used as a form of money and each head of cattle was a caput. Therefore, someone with a lot of cattle had lots of caput or capital
Is your Pension close to the UK Lifetime Allowance?
By Spectrum IFA
This article is published on: 6th October 2017
06.10.17
With careful planning you can avoid the penal 55pc tax hit on pensions valued at more than £1 million
To find out how to avoid penal taxation on larger pension pots contact your local Spectrum adviser to arrange a free, no obligation consultation.
Lifetime allowance (LTA): what does it mean for your pension?
- You need to monitor how much you’re putting into your pension funds and how well your investments are performing. Money held in a personal pension, including workplace schemes and SIPPs, Final Salary pensions, all count towards the limit, but the state pension doesn’t
- If you have a defined contribution scheme or a SIPP the total fund value is assessed against the limit. This will be tested when a Benefit Crystallisation Event (BCE) arises. There are 13 different BCE’s. However the most common would be taking your PCLS, buying an annuity, transferring to a QROPS, reaching age 75, death etc. Each time an event occurs your pension is tested against the LTA limit
- Generally if your final salary pension is worth more than £50,000 a year you’ll be over the £1m lifetime allowance
- If you have a mixture of pensions, with benefits taken at different times, then it can get quite complicated to work out, how much LTA was used when and how much you have going forward
- The LTA excess charge is 55% if the excess is taken as a lump sum and 25% if it is taken as an income. (If taken as income then the net amount is then subject to income tax at the members highest marginal rate, which usually works out to be a total tax of around 55% in total)
- There are certainly very good ways to reduce the potential LTA liability in the future. This could include applying for protection to increase the LTA limit, however there are restrictions to apply
- Furthermore if you live abroad there could be other options with International Pensions, such as QROPS, to help reduce or remove future liabilities
- With our pensions specialists we are able to review your pensions, work out your current situation and then work out clearly your current situation and what the best way forward to help minimise any future tax liability with your pension