I hope you all had a good summer. I very much appreciated the fact that it wasn’t too hot over the summer. My garden is certainly in a better shape thanks to the better weather. Now it is back to school and back to work and I am looking forward to setting up appointments and meeting people again.
Financial update September 2024 – France
By Katriona Murray-Platon
This article is published on: 5th September 2024
05.09.24
For those who are eligible for the energy cheque but did not receive it this spring or if you did receive it but would like to review the amount received, you can now make a claim on the website chequeenergie.gouv.fr but you must make sure you do this before 31st December 2025.
On 1st August the interest rate of the LEP savings account reduced to 4%. To be able to open one of these accounts your taxable income needs to be below €22 419 (single person) or €34 393 for a couple. This rate reduction puts the LEP at only 1% higher than the other savings accounts such as the Livret A, the LDDS and the Livret Jeune which have an interest rate of 3%, set rate until February 2025.
If you are looking to save for your children there is a new savings plan called the Plan Epargne Avenue Climate (PEAC) which is available from 1st July 2024. It is a hybrid of the Livret A and the PER retirement scheme and allows you to save up to €22,950 with any gains being free of tax and social charges. There is no fixed interest rate, any gains will depend on the investment strategy but the investments are ESG and in “green” bonds. However not many banks or insurance companies offer this savings plan as yet preferring their own versions of assurance vies.
Since 31st July and until 4th December, those taxpayers who declared their income online can correct their declaration or amend any omissions by going onto their personal account on the impots.gouv.fr website under “accéder à la correction en ligne”. However, bear in mind that if the amendment results in less tax being paid or a higher tax credit, the tax office will probably contact you for more information or documents and can refuse to amend the tax return. If they do this, you need to make a complaint via the messenger service and, if this is refused, court action will be necessary. This comes from a decision of Paris administrative court of appeal of 28th June 2024 (no 22PA04610) whereby the the Court ordered the tax office to reissue the tax statement will the requested amendments. The online correction system does not let people know that their amendments can be refused.
As from September, if the amount of tax you pay is greater or less than the previous year, your monthly payments will change from 15th September. If you owe less or the equivalent to €300, the remainder will be taken on that date. If you owe more than €300, the payment will be spread out over four payments taken on 26th September, 25th October, 25th November and 27th December.
For those with Pru assurance vies or those thinking of investing in a Pru Assurance Vie, on Tuesday 27th August 2024 the Prudential Assurance Company (PAC) board reviewed the Prufund Expected Growth Rates (EGR) as part of the quarterly review process. Prufund aims to help customers grow money over the medium to long term ( 5 to 10 years) and it protects customers from some of the short-term ups and downs of the markets by using the unique established smoothing process. The Expected Growth Rate (EGR) is the forward looking element of the Prufund smoothing process. For this quarter the EGRs of the Prufunds in our assurance vie products remained unchanged for the € and $ but the Prufund Growth GBP dropped slightly from 7.7% to 7.3% and the PruFund Cautious GBP dropped from 7% to 6.6%. The Unit Price Adjustment (UPA) part of the smoothing process, which is a backward looking element, and which is formulaic and non-discretionary are also reviewed quarterly. This quarter there was an upward UPA for the Prufund Growth USD fund of +2.19%.
September is really the beginning of the year in France, more so than January, after the long summer holidays. Referrals are very important in our business and so is our reputation with clients. Therefore we are asking clients to kindly give a review of our advisers and our business on Trustpilot. I would be very grateful if you would kindly take the time to leave a comment using the link below: https://uk.trustpilot.com/review/spectrum-ifa.com
Please do get in touch to arrange a free, no obligation phone call or video meeting to discuss any financial or tax matters that you may need advice on. I look forward to hearing from you.
What is going on in the global markets?
By Charles Hutchinson
This article is published on: 5th September 2024
05.09.24
Many of my clients have expressed their worries to me in recent weeks. The axiom “When Wall Street sneezes, the world catches a cold” has never been truer than now. Fears with the US economy sent global markets cascading overnight.
This was followed by a modest recovery as investors bought in at lower levels and the debate ensued as to exactly how well founded were these fears. Markets are still down and will probably remain so until some of these fears are addressed or diminish.
Overall, the U.S. economy in 2024 is not in dire straits, but it is facing significant headwinds. While the labour market remains strong and consumer spending is resilient, high inflation, rising interest rates, and concerns about future growth present challenges.
The overall outlook is one of cautious optimism, with the potential for both recovery and further difficulties depending on how these factors evolve. Let’s look at the US economy in closer detail:
Rising Government Debt Levels: The U.S. national debt has continued to grow, raising concerns about long-term fiscal sustainability. High debt levels may limit the government’s ability to respond to future economic crises.
Rising Interest Rates: To combat inflation, the Federal Reserve has raised interest rates several times. While this is intended to cool inflation, it also increases borrowing costs for consumers and businesses, potentially slowing economic growth.
Housing Affordability Issues: High mortgage rates, combined with rising home prices, have made housing less affordable for many. This has led to a slowdown in home sales and construction, affecting related industries.
Persistent Inflation: Inflation has been a significant challenge, with the Consumer Price Index (CPI) rising at rates above the Federal Reserve’s 2% target. This has eroded purchasing power for many Americans, particularly those on fixed incomes.
Recession Fears: There is ongoing concern about a potential recession. While not inevitable, some economic indicators, such as inverted yield curves and slowing manufacturing activity, have raised alarms.
To balance these, there is some GOOD news:
Robust Corporate Earnings: Many companies, particularly in the tech sector, have reported strong earnings, driven by innovation, digital transformation, and global expansion
Resilient Consumer Spending: Despite challenges, consumer spending has held up, supported by strong job growth and wage increases. This is crucial since consumer spending drives about 70% of U.S. economic activity.
Low Unemployment: Unemployment has remained low, hovering around 3.8% as of mid-2024. Job creation continues in several sectors, reflecting a resilient labour market.
So, as a long-term investor, what should I do until markets pick up again?
Stay invested with your trusted adviser or portfolio manager to ensure that your original investment strategy is not derailed by short-term market events. He/she will also be well placed to capitalise on investment opportunities during spells of market volatility. NEVER try to time the markets with big bets on ‘buying low or selling high’ – ALWAYS stay invested through uncertain times. It has been proven time and time again that this is the safest and most effective principle for achieving long-term investment success.
For further information on discretionary managed or advised portfolios within extremely effective tax structures, please contact me, Charles Hutchinson, via the form below.
Sources: Morgan Stanley, The Economist and the London FT
QNUPS is this right for you?
By Portugal team
This article is published on: 4th September 2024
04.09.24
For those relocating to or living in Portugal, exploring tax efficient investment options is crucial as taxes can run relatively high. One option that has gained attention in Portugal is the Qualifying Non-UK Pension Schemes (QNUPS). In this article, we will delve into what QNUPS are and assess their potential role in a financial strategy.
What is a QNUPS?
A QNUPS is a type of international pension plan designed for individuals based outside of the UK. Unlike the Qualifying Recognised Overseas Pension Scheme (QROPS), which is funded by transferring assets from an existing pension, QNUPS are established with personal funds, assets, or cash.
Interestingly, a QNUPS is not a specific scheme or structure per se; it a tax status deriving from UK inheritance tax legislation (IHT) introduced in 2010. The fact that QNUPS derives from IHT legislation hints at one of the key benefits of using this scheme.
Making contributions to the QNUPS
While registered pension schemes offer tax relief on contributions, QNUPS do not. However, QNUPS are not bound by the annual allowance restrictions that apply to tax-relieved pension schemes, such as the current £60,000 cap for the UK 2024/25 tax year.
Contributions can be made in cash or by transferring assets, although it’s essential to consider potential tax implications, such as capital gains tax when transferring property.
When contributions to a QNUPS are made with genuine pension planning in mind, they generally do not attract inheritance tax. However, if contributions cannot be justified as legitimate pension provision, the inheritance tax position can become uncertain.
Taking money out of a QNUPS
A QNUPS must broadly follow the same rules as UK-registered pension schemes, meaning that at some point, you will need to draw benefits from the scheme.
Most withdrawals must be taken as income, which is likely taxable in your country of residence. For Portuguese tax residents, this income is typically subject to local taxation unless you qualify for pre-April 2020 Non-Habitual Residence (NHR) status, under which pension income could be taxed at 0%.
It is crucial to note that QNUPS may not be tax efficient or appropriate in all cases, as from a tax perspective it breaks the cardinal rule – do not turn capital into income.
To fund a QNUPS you contribute capital (which has already been taxed), and any withdrawals are treated as income and taxed fully – even if you have made a loss within the pension.
Benefits of QNUPS
Inheritance tax (IHT) advantages
One of the significant benefits of QNUPS is the potential inheritance tax relief. If structured correctly, assets within a QNUPS may be excluded from your estate and therefore not subject to the 40% UK IHT charge upon death.
However, it is critical to emphasise that QNUPS must be established with genuine retirement intentions. If the primary motive appears to be inheritance tax avoidance, HMRC may challenge the arrangement.
Ongoing tax efficiency
Generally, funds within a QNUPS are not subject to capital gains tax or income tax. However, exceptions may arise, such as when income is generated from UK-based assets held within the QNUPS.
Income tax treatment in Portugal
In Portugal, pension income is typically taxed according to the scale rates of income tax.
Some individuals report income from QNUPS on an “85/15” basis which, strictly, is applicable to annuities. Under this method, 85% of the income is treated as a return of capital, with only the remaining 15% taxed as income.
However, this approach may not always be appropriate, and professional advice is recommended.
Flexible investment choice
A QNUPS offers a broader range of investment choices compared to traditional pensions, including assets like real estate, non-listed shares, and chattels. This flexibility can be appealing to those with diverse investment portfolios.
Ensuring compliance
The jurisdiction and structure of the QNUPS must meet specific requirements, aligning closely with the rules governing UK pension schemes, particularly in terms of benefit form and timing.
To safeguard against accusations of IHT avoidance or “deathbed planning”, careful consideration must be made not only in terms of the value of an estate placed into a QNUPS, but the underlying investments too. For example, while some may promote the ability to hold non-income-producing assets like fine wine collections, it is essential to consider how such investments will generate income for the mandated future withdrawals.
Summary
QNUPS can be a valuable component of a well-structured financial plan but they are not a one-size-fits-all solution. Unlike registered pension schemes, QNUPS do not offer tax relief on contributions or withdrawals, and their benefits are contingent on proper planning and compliance.
For those interested in QNUPS, consulting with a financial advisor familiar with both UK and Portuguese tax regulations is essential to ensure that this investment strategy aligns with your overall financial goals.
Creating THE important Folder
By Jeremy Ferguson
This article is published on: 3rd September 2024
03.09.24
I have recently had to deal with the passing of one of my clients, and this really brought home the importance of an article I wrote over 5 years ago now.
My client was single and read my article about making a folder containing all of the important things someone may need to deal with in the event of her demise.
We did this together, and I am so glad we did. For her heirs, dealing with Probate has been so much easier than it would have been (importantly saving a huge amount in additional legal fees) and the distribution of the estate happened very quickly.
I keep reminding people, we all spend time every year making sure the ITV for the car is sorted, house insurance and car insurance policies are up to date, tax returns are filed etc. so please put some time aside to create ‘ THE Folder’ as I like to call it?
So what is THE Folder?
It is a single file (digital or physical) where you keep all of your important personal and financial information together. It allows easy access to these documents in the event that you are no longer around to help. It is really important to have it in place when one family member takes the lead on the family finances; this includes paying bills, managing accounts and storing documents. Even if that is not the case, it is an important exercise.
So what should be in THE Folder?
All documentation that is relevant to running your household with regards to finances, such as:
- Birth, marriage and divorce (if applicable!) certificates
- Bank account details, including online login details
- E-mail and social media account details and logins
- Life assurance policies
- Funeral plan policy
- Pension documentation and statements
- Investment documentation and statements
- Wills
- House ownership deeds
THE Folder can be very simple, and I always suggest contact details for each of the relevant policies etc. should be clearly marked as well. Also, make sure that when THE Folder is complete, you sit down together and explain all of the information it contains, as it will be as useful as a chocolate tea pot if you don’t both know exactly what is there.
Is it worth the effort?
Well, I think it is worth the effort. At a time of loss it can be stressful enough, without having to try to piece together the deceased’s financial affairs. This can be a really difficult time for family members, even more so if your support network, typically children, is back home in the UK.
However, preparing THE Folder is much more than just avoiding stress; if you leave behind an administrative nightmare, you could delay access to inheritors’ funds and potentially cost a small fortune in legal fees.
To give you an example of this, the UK Department of Work and Pensions estimates that there is currently more than £400 million sitting in unclaimed pension pots in the UK.
Which is best…..physical or digital?
This comes down to personal preference. It can be done by either creating an electronic file that survivors can access in the event of death, or an actual paper file. An electronic file can be stored on your main computer, in the cloud or on an external hard drive. Make sure everyone knows how to access the computer, cloud or hard drive though!
Alternatively, if you use a physical folder to keep all of the important information together, make sure it is large enough to keep everything together. The good old shoe box has been a long time winner in this department, although a well organised file does make life a lot easier for everyone.
For what it’s worth, I find lots of people prefer paper and are happier with hard copies of everything. I personally prefer digital, which I have shared with some trusted family members. It may even be worth considering asking your legal advisers to hold the folder on your behalf (electronic is much better for this reason), so a simple visit to them if anything happens means they can assist you far more easily with everything.
Typically they will want all of the information it contains anyway, so by saving time when it becomes relevant, the small annual charge they may make for holding the information will normally be offset.
And finally…
I have already stressed this, be sure to tell someone about it! There is little point going to the effort of creating such a folder if no one knows of its existence or where to find it…..
Are gifts to children taxable?
By Amanda Johnson
This article is published on: 21st August 2024
21.08.24
A question I’m often asked:
“I would like to gift some money to my daughter. How can I do this and what taxes do I need to be aware of? Will I need to use a Notaire?”
First, you need to determine if this is a gift or if you are providing financial assistance to a family member. You are allowed to provide financial help (subsistence support) to family members if their income is low, and in some circumstances, you can apply for tax relief on this. They will need to declare this income on their French tax return.
If it is a gift, is it for a wedding present? Is the amount you are gifting relative to your income, and have you gifted similar amounts to other children when they got married? You are allowed to gift up to 100,000€ to each child every fifteen years tax-free, but you must declare this to the tax authorities. If you die within those fifteen years, the amount you have declared will be used towards their inheritance tax allowances.
Your daughter will need to declare this amount to the relevant tax authorities. If she lives in France, she will need to make a Déclaration de don manuel if the amount is less than €15,000, and for amounts above €15,000, a Révélation de Don Manuel. If your daughter lives outside of France, she will need to contact the tax authorities in the country she resides in to declare this gift, and any taxes due will depend on the rules of that country.
The use of a Notaire is required if the gift involves a division of family assets or the transfer of property.
If you are unsure of what needs to be declared and when, you can easily email your local centre d’impôt. Their email address is on your Avis d’impôt.
“Sales shopping” in investments……
By Portugal team
This article is published on: 19th August 2024
19.08.24
With some stock markets falling over the past couple of weeks, it is an opportunity to review markets and risk.
We all love the feeling we get when we grab a bargain and have no hesitation in purchasing our favourite goods or services when they have a price reduction or promotion.
However, the world of investments is probably the only one in which the same price reductions are met with fear and anxiety instead of joy, however if you are a long term investor, the falls can be an opportunity.
The numbers matter
Statistics show that, over the longer term, stock markets go up approx. 70-75% of the time. In this context therefore any fall in values can be seen to be temporary setback and opportunity to buy shares at “sale” prices.
“Breaking news! Shares up over 20% in 2023!”
You will rarely, if ever, see such a headline. In the same way, you would not have seen a headline stating there “wasn’t a single casualty in the millions of commercial aviation flights in 2023”, but you probably have seen many “flight from hell” articles published in the same year.
When it comes to the world of investments, the media is not your friend in helping you make informed decisions as the focus tends to be on short-term news developments without taking into accountant the much broader and longer-term picture.
The media also tends to catastrophise events with news headlines being designed to grab attention. We see discussions of “crashes”, “crises”, “recessions” etc. and this is getting worse in the digital age with “click bait” designed to grab people’s attention. Moreover, through sophisticated algorithms, the same messages are reinforced through links to similarly anxiety inducing articles.
As a result of this, many still equate the stock market to rolling dice at the casino. An alternative and more considered and rational description of the stock market could be:
“a highly diversified selection of some of the world’s largest and financially secure companies, including such names as Apple, BP, Nestle etc. many of which have been in existence for decades if not hundreds of years, and whose return has averaged over 10% per annum over the past 50 years”.
This hardly trips of the tongue, but the emotional reaction is much different.
What is risk anyway?
It is not as clear cut as you think. When people think of investing and risk, they think about the possibility of losing all of their investment.
Whilst it is indeed possible for individual companies to fail, if you hold a diversified portfolio of, say, the top 500 shares in the US (the S&P 500 index), the only way you could lose your money would be if every one of those 500 companies were to fail.
Over a 50-year period, the S&P 500 index has increased by an average of more than 10% per annum and this is a period that has been marred with the inflation shocks of 1970s, wars, emerging market crises, 9/11, “Grexit”, “Brexit”, the great financial crisis of 2007/08 etc. Nevertheless, the market continues to increase consistently.
Does risk lie in ‘safe’ assets?
We live in a world in which costs are constantly increasing in value. If we reminisce and think about the cost of our first car or house, we can really appreciate the extent to which prices rise over time. Therefore, in order to maintain our standard of living over time, our money must at least maintain its purchasing power and ideally increase our purchasing power over time.
With that in mind, holding fixed return investments such as cash in a world in which costs are increasing is not low risk; it is high risk in the sense that you are jeopardising the value of you real wealth over the longer term.
Safety in risk?
Conversely, shares have historically demonstrated the ability to grow well in excess of the rate of inflation and therefore, as they are protecting your wealth, they can be regarded as safe investments.
Indeed statistics show that the risk of investing in high quality shares reduces to zero over a 20 year time horizon. This sounds like a long time but if we consider life expectancy statistics, a couple in their mid-60s can expect to live well into their 80s and one of the couple has a good chance of reaching 100! Furthermore, we find that many clients’ portfolios outlive them and will be handed down to children and/or grandchildren, in which case the investment period is likely to be multiple decades long.
Exchange Traded Funds
By Portugal team
This article is published on: 16th August 2024
16.08.24
(ETFs) – the investment “silver bullet”….?
Difficult times
With high levels of inflation and relatively low rates of returns on cash deposits, it is important to make sure your money is working hard for you.
In order to do this, investors will look to “real” investments i.e. assets that are expected to grow above the rate of inflation over the longer term – the main contenders are shares, bonds and property.
Make your money work harder
Whilst you can purchase individual investments direct, most investors choose to invest through a collective investment where you pool your money with other investors into a larger pot and appoint a fund manager to run this pot for you – in doing so, your combined value is larger and you can spread your investments much more widely which reduces risk. For example, the Vanguard LifeStrategy fund has approximately 22,000 underlying holdings.
‘Active’ versus ‘passive’ management
Active investors appoint a fund manager such as Fidelity or BlackRock to run the fund on their behalf and pay the manager a fee, typically between 1-2% per annum.
The alternative is to simply buy a basket of investments through a ‘tracker’ or passive fund – in this way, your fund will simply grow in line with the performance of the investments within the basket and do not have the personal involvement (and cost) of a fund manager overseeing the fund.
Examples of common trackers are those that mirror the S&P500 or FTSE100 indices, which are the largest companies trading on the US and UK stock markets respectively.
More money in your pocket with ETFs
ETFs are tracker funds that trade on a stock market and the major advantage is the extremely low fees, with annual charges on some ETFs as low as 0.01%. The savings in fees compared with active fund managers can make a substantial difference to the value of your investments over time.
As ETFs are traded in real-time on a stock exchange, they can be accessed quickly, with low costs and they offer access to a wide range of investments, from shares, gold and commodities to AI and environmental funds.
The devil is in the detail
Whilst Exchange Traded Funds certainly have a place in a well-diversified portfolio, there are important considerations when selecting them.
Tracking error – as the sole job of the ETF is to follow the index it is tracking; you must ensure it is following the market accurately. If it fails to track the market it could result in underperformance, and this can be more costly than the fee saving on the management fee.
Skewed risk – be careful that your portfolio is sufficiently diversified e.g. you may think that the S&P 500 is a highly diversified basket because you have 500 different underlying investments but the top 10 holdings make up around 35% of the value of the 500. The risk is very skewed to the big tech firms such as Google, Apple and Meta.
Another example of skewed risk is the MSCI World Index tracker. Although ‘world’ would suggest a globally diversified portfolio around 2/3rd is invested in the US alone.
Counterparty risk – there are different ways of tracking the market. The most secure is “physical replication” whereby the tracker simply holds the underlying investments of the index it tracks i.e. if you buy a FTSE 100 tracker, you will simply hold the 100 shares that make up that index.
The other main way is “synthetic replication” which means the index is tracked by using a complicated financial product supplied by another financial institution. In this situation, you have to think about the additional risk of that counter-party’s financial strength.
Other important points to have clear knowledge of are:
- The size of the fund
- The ETF’s domicile status
- The ETF’s tax residence
- Income treatment
- Currency of the ETF
In short, although Exchange Traded Funds and tracker investments are simple in principle, there are important nuances of which to be aware, especially when considering cross-border investment.
As always, when investing your hard-earned money, take guidance from a professional.
Assurance Vie & inheritance planning
By Sue Regan
This article is published on: 9th August 2024
09.08.24
When it comes to investing in assurance vie for inheritance planning, the focus is often on the very generous inheritance benefits applied to policies where sums are invested before the age of 70. I am often asked by clients ‘is it worthwhile investing in assurance vie after the age of 70?’ The answer is ‘most definitely YES!’
As a change from the norm, this article focuses mainly on the inheritance benefits of assurance vie investment beyond the age of 70.
As already stated, it is often a misconception that investing in assurance vie for inheritance planning is only attractive for people under age 70. Undoubtedly, investing before age 70 has very attractive inheritance benefits, but there are also valuable inheritance planning opportunities for sums invested after age 70 which should not be overlooked.
As a reminder, an assurance vie policy is “outside the estate”, according to Article L132-12 of the Insurance Code. This means that in the event of the death of the insured, the capital does not go to the heirs within the meaning of the Civil Code but to the named beneficiary(ies) of the assurance vie policy.
Sums invested into assurance vie beyond the age of 70 have an inheritance allowance of €30,500 and a exemption from gains on the total sum(s) invested. The choice of beneficiary is completely unrestricted and the allowance (and profit) is shared by all beneficiaries in the proportion to which they have been nominated. If you have existing policies that were funded before age 70 the €30,500 allowance is in addition to the €152,500 per beneficiary granted with pre-age 70 premiums.
It’s probably worth highlighting here that a notable difference between the pre-age 70 allowance and the post-age 70 allowance is that the €152,500 allowance includes both the premiums paid on the policy and the gains on these premiums, whereas the €30,500 allowance relates to the amount of capital invested and all gains across the whole policy are exempt from IHT.
Advantages of taking out a new assurance vie policy for sums paid after at 70
It is perfectly possible to add sums to an existing policy after the age of 70 and the insurance company will calculate the benefit payable on death of the life assured in accordance with when premiums were invested. However, taking out a new policy after the age of 70 has the advantage of:
- Differentiating between sums paid before and after age 70 and therefore simplifying the tax calculation
- Provides an opportunity to nominate beneficiaries that are different from those nominated in other policies
- Designate different policies for different purposes
It is worth noting that there is no limit to the number of assurance vie policies that can be taken out but the IHT allowances apply across all policies of a particular life assured (i.e. the allowances are not per policy).
Let’s take the example of a couple who are living together but have no ‘legal’ relationship (i.e. not married or PACS’d):
– A 70-year-old makes a will in favour of his/her partner. Under standard French inheritance rules the surviving partner is entitled to an IHT allowance of just €1,564 on any assets received via the will, and above that will have to pay IHT at the rate of 60%.
– If the deceased had nominated his/her partner as the sole beneficiary of an assurance vie policy opened after the age of 70, the surviving partner would then benefit from an IHT allowance of up to €30,500 and an exemption from IHT on all the gains and interest on the policy.
Exceptions as to who shares the €30,500 tax-free allowance
Beneficiaries who are exempt from inheritance tax are not taken into account to divide the overall allowance of €30,500. Exempt beneficiaries include spouses and PACS’d partners.
Thus, if the spouse of the deceased is named as one of the beneficiaries of the policy, his/her share will not be taken into account when dividing up the €30,500 allowance, which will only be divided amongst any other named beneficiaries, meaning their exempt share will increase.
If, after applying the exempt allowances, there remains a taxable element of capital invested, this can be offset against the standard inheritance allowances determined by the degree of kinship.
The potential growth in value of an assurance vie policy makes investing after age 70 attractive
Let’s look at a couple of examples:
Example 1
A premium of €30,500 is invested at the age of 70, the insured person dies at the age of 87.
For 17 years, the policy grows at an average rate of 2% per year, net of fees. At the end of 17 years the gain in value is €12,339, thus a total of €42,839 is passed tax-free to the beneficiaries. At 3% per year, the amount of gain after 17 years represents €20,259 meaning a total of €50,759 passes free of IHT. If the €30,500 had been left on deposit with interest added at a similar rate the capital and interest would fall into the estate and be subject to the standard IHT rules.
Example 2
A premium of €100,000 is invested at age 70 and the life assured dies at the age of 90, i.e. 20 years later. The beneficiaries are the life assured’s two children in equal shares.
Taking an average growth rate of 4% per year, the €100,000 becomes €222,258 after 20 years. Each child receives €111,129. This is in addition to anything they may receive from a pre-age 70 policy. €30,500 of the capital and all gains are exempt, therefore the only taxable element for each child is €34,750 (€69,500 / 2). This can be offset against the standard IHT allowance of €100,000 per parent per child if this is not used up elsewhere.
Example 3
A nephew receives €55,000 from an assurance vie policy taken out by his uncle when he was over 70 years old.
The premiums paid amounted to €40,000, the gain was €15,000. €30,500 of the premiums paid and the gain of €15,000 are exempt.
Therefore, the potentially taxable element is €9,500 (€40,000 – €30,500). However, this can be offset against the inheritance allowance between uncle and nephew of €7,967. Assuming the allowance is fully available the taxable element is €1,033 (i.e. €9,000 – €7,967) at the rate of 55%. IHT of €568 is payable (i.e. €1,033 X 55%).
The outcome, €55,000 was transferred via an assurance vie opened after the age of 70 to a nephew who pays only €568 in IHT instead of €25,868 if the legacy had not been wrapped in assurance vie (i.e. €55,000 – €7,967 = €47,033 x 55%).
In summary, if your situation allows, it is definitely worthwhile considering investing in assurance vie after the age of 70 in order to take advantage of the additional €30,500 allowance and exemption on the total gains on investment which, in some cases, could be higher than the capital invested. Not forgetting, of course, that you retain control of the policy and can spend it or change the beneficiaries whenever you wish.
If you would welcome a chat about whether investing in assurance vie is right for you or would simply like a review of your financial situation you can contact me at sue.regan@spectrum-ifa.com or call me on +33 6 89 20 32 47
Foreign exchange market update
By Victoria Lewis
This article is published on: 7th August 2024
07.08.24
With the help of Moneycorp, lets take a look at this month’s market update with the recent political, economic & global news. Whats happened, how has the market reacted and what the future holds.
Big shock to markets in August already – What happened!?
- The month of August has started off with a big shock to global financial markets – the US Federal Reserve are likely to cut rates much quicker than previously thought, with something like 1.00 – 1.25% of cuts this year now on the cards to bring rates down to 4.25 – 4.50%.
- That is up significantly from the 0.50% cut priced in as recently at last Wednesday (31st July).
- This is the result of poor US jobs data – non-farm payrolls – and higher unemployment figures, leading to fears of a US recession building.
- Additionally, as I flagged last week, the Bank of Japan raised rates by 0.15% and the Bank of England cut rates by 0.25% last week, feeding into the overall market volatility globally.
What has been the market reaction?
- We have entered a “risk off” period due to the rapid change of interest rate expectations in the US, meaning everyone is taking their risky investments off the table.
- This means stock markets have fallen significantly since Thursday (1st August), with the S&P 500 down 6.8%, FTSE 100 down 3.1%, and the Japanese Nikkei 225 down almost 17% before recovering today.
- Usually in risk off periods, the US Dollar is the go-to investment as a safe-haven, however as this is driven by US interest rates the US dollar has also fallen between 1-2% against most other currencies and instead Euro, Swiss Franc and Japanese Yen have been bought, rapidly strengthening those currencies.
- GBPEUR is down 1.5% since Friday.
- EURUSD is up 1% since Friday but has been 2% up earlier.
- GBPCHF is down 2.6% since Friday.
- GBPJPY is down 3.3% since Friday.
What next?
- There are no major central bank meetings for the remainder of August, so the FX market will be reacting very quickly off the economic data releases, especially from the US.
- Next Wednesday 15th we will have both UK and US inflation data released. This will almost certainly be a volatile day for FX markets.
- UK GDP released on Thursday 15th – is the UK continuing its recovery?
- US GDP released on Thursday 29th – is the US really going into recession?
- EU CPI inflation on Friday 30th – will inflation still be under control dropping towards 2% in the EU?
Forecast Snapshot
Where do the banks think FX markets will be at the end of the year?
GBP/USD
- Current 1.27
- Barclays 1.31 (very bullish)
- UniCredit 1.26
- Wells Fargo 1.27
- BNP Paribas 1.27
GBP/EUR
- Current 1.16
- Barclays 1.23
- UniCredit 1.16
- Wells Fargo 1.19
- BNP Paribas 1.20
EUR/USD
- Current 1.09
- Barclays 1.06
- UniCredit 1.09
- Wells Fargo 1.07
- BNP Paribas 1.06
Source: Bloomberg Analytics
Please do get in touch if you have forthcoming FX requirements. Along with Moneycorp, I can explain how to reduce FX risk and/or make the most of the potential volatility coming up in August, depending on your risk appetite and timeline.
Love, life and financial planning in Italy
By Andrew Lawford
This article is published on: 1st August 2024
01.08.24
A quick question for all Italian residents (whether you are DOC Italians or foreigners who have moved here):
Have you thought about your family situation and how Italian family law might apply to it?
The answer for many people appears to be “not really”, which may present something of a problem considering the legal consequences of various family scenarios. Italy used to be fairly simple in this regard, in that you were either married or you weren’t. If you were married, the situation was fairly clear, and if you weren’t, your “family” situation might have been somewhat tenuous.
I will explain better below, but first a brief disclaimer: this is a complicated field and each individual situation may lead to a different outcome. This article is intended to highlight some of the issues you may face but it cannot be relied upon as legal advice – I can help you to understand your own situation with the assistance of my network of legal and tax professionals. I am also not particularly concerned here with the dynamics of the legal relationship between parents and children – my focus here is on the status of the couple.
Italy has long had “forced heirship” rules which establish certain family ties that have the right to receive a given percentage of a deceased person’s estate. For simple family situations with uncomplicated assets, this may even mean that it is superfluous to make a will, because the intestacy laws already offer an adequate solution. However, “simple family situations” are now something of an exception to the rule. You might think, for example, that being in a de facto relationship qualifies as simple, given how the treatment of this type of relationship has evolved in many foreign jurisdictions to the point where there is little functional difference compared with marriage. Not so in Italy.
Italy is somewhat more traditionalist in its approach to family life and I don’t think it is an exaggeration to say that it has been dragged kicking and screaming into recognising modern family situations and, in particular, same-sex couples, who until relatively recently had no means of making their relationships official (de facto heterosexual couples did, of course, have the option of getting married – a right that same-sex couples continue to be denied).
Italy being Italy, the modern iteration of family law is complicated and requires action by a couple in order for there to be any kind of recognition of their status. Let’s take a closer look:
Marriage
For better or worse, marriage is still the gold standard of the family relationship in Italy. For reasons that will become clear below, there is no equivalent structure that confers the same level of family rights, some of which are as follows:
• automatic recognition of heirship for each spouse;
• right of the surviving spouse to continue living in the family home, even if that home was 100% owned by the deceased spouse;
• possibility to receive any Italian surviving spouse pension (pensione di reversibilità);
• possibility to enquire as to medical status of one’s spouse;
• reduced inheritance taxes for assets passing between spouses;
• possibility of child adoption.
Unione Civile
One tier below marriage is the Unione Civile, a possibility that has existed since 2016 and which allows two members of the same sex to declare themselves a couple in a similar fashion to a civil wedding ceremony. This confers most of the rights of married couples, but does not allow them to adopt children. Initially, it was intended for the Unione Civile to be available to all couples, but in the final instance it was reserved for same-sex couples. I’m not sure of the reason for this decision, but I imagine it has something to do with not wanting to undermine the concept of marriage, which remains an important topic for certain political factions.
Conviventi di fatto
Below the Unione Civile is the registered de facto couple (conviventi di fatto). This possibility is open to all couples but needs to be registered in your local comune – you will then have a residency certificate which attests to the status of your relationship. The benefits of registering as a de facto couple are essentially that the surviving partner has the right to inhabit the family home, but only for a maximum of 5 years. You certainly don’t automatically become your partner’s heir and there is no concept of family property (although you can stipulate in advance how to deal with your relationship property in the event of a separation). If you contrast this with the effects of marriage above, it becomes clear that this type of relationship isn’t equivalent to marriage in any legal sense.
Unregistered de facto relationships
The unregistered de facto couple, even if they have been together for decades, might as well not exist from a legal perspective, especially if the partners die intestate.
Forced heirship and foreigners
The issue of forced heirship needs a bit more explanation: it specifies certain individuals who cannot be excluded from your estate: spouses (even if legally separated), children and (in the absence of these first two categories) parents have a right to receive a given percentage of your estate. You will also always have a free portion of your estate that can be left to whomever you choose. The fact of forced heirship does not prohibit you from making a will leaving everything to the local dog shelter, but it does mean that these protected categories of people will be able to challenge your testamentary dispositions. For people without a spouse, children or parents, forced heirship is not a problem as the free portion of your estate is 100%, but you must of course make a will in order to guarantee that your desired heirs benefit under your estate.
If you are foreign, you may be able to insert a choice of law clause in order to allow your estate to be dealt with under the rules of your home country. However, the rules around this are somewhat complicated and you will need specialised legal advice to make sure you get it right.
Don’t forget about inheritance taxes
You should also be aware that any inheritance tax exemptions accorded to spouses are unavailable to de facto partners, so under current rules assets left to a de facto partner would be taxed at 8% of their value (against 4% with a €1 million exemption for spouses).
Living Wills
Whilst we’re on the subject of inheritance and wills, another curious area that has evolved over the years is that pertaining to the expression of one’s desires when it comes to medical treatment. There have been some high profile and saddening cases of the medical profession in a pitched battle with the family members of someone who has had the misfortune of ending up in an irreversible comatose state.
If you would like to make clear your desired level of treatment in such a case, you can do so by using a living will (known in Italian as a DAT – Disposizione Anticipata di Trattamento). My wife and I tried to make living wills when we first married, but our notary refused to help us given the uncertain legal context at the time. The situation is now clearer, so we are in the process of sorting these out. If anyone is interested in how this ends up working in practice, send me an e-mail and I’ll be happy to help.
Where to from here?
If any of the above has struck a chord, then please do get in touch. Aside from helping to find a qualified professional to assist with your will, a general review of your assets and associated holding structures will ensure that you pay the least amount of tax possible during your life, whilst also directing your assets to the right people when you pass away. In particular, paying inheritance taxes in Italy is, for most people, a choice rather than an obligation, as they can legally be reduced to a bare minimum through intelligent estate planning.