Inheritance Tax in Italy
By Gareth Horsfall
This article is published on: 14th January 2015
14.01.15
You may not be aware but from an Inheritance tax point of view, Italy is actually considered a bit of a fiscal paradise (after you have picked yourself up off the floor because I just called Italy a ‘fiscal paradise’, you might want to read on). If your estate or part of it is likely to be subject to Italian Inheritance Tax on your death then the latest developments could interest you.
Italian Inheritance tax law dates back to the Napoleonic period which requires parents, on death, to leave a major proportion of their wealth to their children instead of just their spouse.
At the moment Italy’s Inheritance tax works as follows:
* If the estate is passed to your spouse or relatives in a direct line (i.e children) then they are required to pay 4% on the value of the inheritance that exceeds € 1million.
* Brothers and sisters must pay 6% with an allowance of €100,000
* Other relatives must pay 8% but without any allowance.
Despite Italy having approximately 1.5 million people who are subject to Inheritance tax each year with a combined value of approximately €56 billion, the tax collection is relatively small due to the high allowances and also the fact that that ‘successione’ for a property is based on the catastale value, not the market value.
WHAT ARE THE PROPOSED CHANGES?
Italy, like most other countries, is in desperate need of cash and they naturally see inheritance tax as a way of increasing tax revenues. In addition, the EU is encouraging Italy to review the present system to bring it into line with other, ‘less financially rewarding’, European countries.
The ideas, which are just ideas at this stage, are as follows:
* For spouse and direct line relatives, to increase the taxable rate to 5%. But, reduce the non-taxable allowance from €1 million to €200,000.
* Whilst the taxable rate will rise from 6 to 8% for brothers and sisters, and the allowance will reduce to between €50,000 and €100,000.
* The rates for other relatives will likely increase to 8% without any allowance.
This means that a lot of people will now be caught in the Italian Inheritance tax trap whereas previously they might not have been. Although, it should be said, the rates are still quite low.
However, as part of any inheritance tax /succession planning that you may undertake you may want to look at ways in which you can hold any asset, in a more tax efficient way. The polizza assicurativa (or Life Assurance Bond) meets exactly that criteria.
Any money that you hold in one of these tax efficient accounts is completely free from Italian Inheritance tax and is kept outside of the estate when the value is calculated. The not so good news is that if the majority of your estate is in your property, unfortunately, this cannot be placed inside the tax protective structure. However any other invested/investable assets can be, generally, from €50,000 upwards.
One of the great advantages is that there is no upper limit to contributions. You can protect a large part of your estate from Italian Inheritance tax easily and with maximum flexibility to access the capital and any income from it during your lifetime. The other big advantage is that the monies (whilst held inside the account) are not subject to Italian income and capital gains tax.
Expats in Italy and bank accounts
By Gareth Horsfall
This article is published on: 13th January 2015
13.01.15
During the course of my many conversations, one particular issue comes up all too frequently which I thought I just have to write about. It is something which has been on my radar for some time now. Now the time has come.
What am I talking about?
I am referring to basic bank accounts that expats use in Italy, those bank accounts which were probably set up when you first moved to Italy, either because the person who you were buying a house from suggested you open an account at the same branch to make life easier, or you were referred to the local branch because most people used it, or someone knew someone who could open you an account when you may not have even been a resident at the time. I am sure these reasons may sound familiar to some of you.
But unfortunately, you are more than likely being charged an extremely high amount of bank charges for little to no service.
Monte Pashi di Siena;
Monte Paschi di Siena keeps coming up as the worst culprit, by a long stretch, but yet, seemingly used most frequently by the expats I meet. One person I met last week was paying 34 euros a quarter for the bank account and then on 210 euro transfers to another Italian bank account (a simple bonifico) a commission of 4.50 eur. (2% commission PHEW!).
I did not even get to see what they were paying for exchange rate conversions (the mind boggles) or transaction fees for taking money from the hole in the wall and other services.
I estimated the costs could be as high as 800 Euro a year.
But it is simply daylight robbery and too many of you could be getting ripped off (I have no better words for it I am afraid) because you think that ‘it is just not worth the hassle of changing’ or ‘they are all alike’ or ‘banking back home is much better’.
However, this is no longer the case. In the last few years, Italian banks have really started to compete for business and there are options available. If you are happy with internet banking, then that’s even better.
I personally use 2 banks (personal and business). My personal account is Fineco (who? I hear you say). Fineco! (part of the Unicredit group). I am VERY satisfied with the service they offer. It is an exceptionally well operated online bank and even won the Global Finance Award for Best bank in Italy in 2013. It is 100% online. Now, I imagine that you might be thinking, online – Italy – errr, not sure, I need to keep an account where I can talk with someone if things go wrong. But, for basic banking it operates very smoothly. And I have emailed them many times and got responses within 24 hours.
And the best part is, at the time of writing:
ZERO canone. In other words no monthly, quarterly or annual charges just for having an account. FREE withdrawals from ANY cash machine throughout the whole of Italy. FREE credit card cash withdrawals from any Unicredit machines in Italy (and there are many). ZERO cost bank transfers in Italy.
My other bank for the business is Banca Popolare del Commercio e dell’Industria. This does not mean much, but it is part of the larger UBI banca group network.
I chose this account at a branch as it is a business account and I need to speak with my bank Director from time to time, but otherwise I operate everything online.
I pay only 5 EUR a month for this account and 0.50 Eur to make bank transfers. I can also withdraw cash from the UBI Banca group bancomats for FREE. The account, in general, is more expensive than the Fineco account but it is a business account and it has to be expected.
However, there are other personal account options with similar cost structures to Fineco, such as Ingdirect, Webank, Chebanca or Hellobank.
A good comparison website is www.confrontaconti.it
My simple message is to pay some attention to your bank account in Italy if you have not done so for some time. It is not difficult to change or use accounts, as in the past. With basic Italian you can do it without any problems.
You could be making huge savings just through changing bank accounts. They are as easy to operate as online bank accounts abroad and if, in this person’s case, a saving of 800Eur a year can be made then I would think it is definitely worth it. Any savings made can compensate for the increased taxes in recent years!
Take some time and have a look at your old bank statements to see what charges you are paying and compare this on the web link above to find out how much you ‘could’ be paying.
Tax and residency in Italy
By Gareth Horsfall
This article is published on: 12th January 2015
No 1. Expat tax Grief
Not a week goes by these days, where I am not contacted by someone who has a question about their residency in Italy, and what that means for them fiscally. Either by people who are about to move to Italy or others who have already been living here for some time and want to become ‘in regola’.
The conversation then naturally flows into the minutiae of exactly what are the taxes that need to be paid in Italy.
So, I would write and explain those pesky taxes that apply to expats who have income being paid and/or assets held in other countries. It may act as a good guide for those who are thinking about, or in the process of, doing something about their Italian tax returns for 2014.
Where to start?
Well, firstly I start by confirming that, as a resident in Italy, you are subject to taxation on your worldwide assets and income (with some exceptions). That means that if you are a resident in Italy then you are required to declare your assets and income, wherever they might be located or generated in the world.
TAX ON INCOME
If you are in receipt of a pension income, for example, and it is being paid from a private pension provider overseas or a state pension, then that income has to be declared on your Italian tax return (nb. different rules apply to Government service pensions, where tax is generally deducted at source in the country of origin and there is no further requirement to report the income in Italy). If tax is deducted at source in the country of origin, the income must still be declared again in Italy. A tax credit will be given for the amount of 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.
It is a similar picture for income, generated from employment. This is a slightly more complicated issue that depends on many factors and, therefore, I shall not dwell on it here. If you have any questions in this area you can contact me on the details at the bottom of this page.
INVESTMENT INCOME AND CAPITAL GAINS
This is one area where Italy excels above other countries, in that its system of calculation is very simple. As of 1st July 2014, interest from savings, income from investments in the form of dividends and other income payments are taxed at a flat 26%. Capital gains tax is the same rate of 26%.
** Interest from Italian Government Bonds and Government Bonds from ‘white list’ countries is still taxed at 12.5% rather than 26%, as detailed above. This is another quirk of Italian tax law as this means it is more convenient, from a tax position, to invest in Government Bonds in Pakistan or Kazakhstan, than it is to buy corporate Bonds from Italian corporate giants ENI or Unicredit. **
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.
1. Income from property overseas.
Unlike rental property located in Italy, which is taxed at the rate of approx 23% depending on what kind of rental you operate, overseas income from property is added to your other income for the year and taxed at your highest rate of income tax.
There is one advantage to this, in that tax in the country of origin has to be applied to the income in the first instance. Therefore, the net income (after expenses) in the country of origin is added to your other income in Italy for the year. This can be quite useful if the property/ies are investment properties, the expenses are high, the country of origin allows multiple deductions and the net income position is low. However, as I have written before, if you are reliant on the income to live on, then a high net income position (before declaration in Italy) can result in a much lower net amount (after Italian tax) depending on the amount of other income you receive each year. Once your total income for the year moves above €28,000 you enter into the punishing 38% tax bracket in Italy.
This can prove to be a tax INEFFICIENT income-stream for those hoping to live in Italy by relying on income from property overseas.
2. The other tax is on the value of the property itself, which is 0.76% of the value.
However, value must be defined in this instance. For EU based properties, the value is the Italian cadastral equivalent. In the UK (the area I am most familiar with), that would be the council tax value NOT the market value. You will find that the market value will, in most cases, be more than the cadastral equivalent value.
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.
TAXES ON ASSETS
It would not be right that other assets escaped Scot free!
BANK ACCOUNTS AND DEPOSITS
A very simple to understand and acceptable €34.20 per annum is applied to each current account you own. However, from 2014 every deposit account that you own overseas with an ‘average’ balance of €5,000 in it, each calendar year, is taxed at the rate of 0.2% of the average balance throughout the year. 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.
Lastly, we have the charge on other foreign-owned assets (IVAFE). This covers shares, bonds, funds, portfolio assets or most other types of assets that you may hold. The tax on these is 0.2% per annum, (from Jan 1st 2014) based on the valuation as of 31st December each year.
This guide is only meant to be a broad outline of the taxes that affect most expats. It is not a full tax list and does not take into account personal circumstances. It is intended to be a guideline to help you make the right decisions.
My experience over the last 4 years has been, in most cases, that expats will end up paying more by being resident in Italy (which most seem to accept as OK, for the lifestyle they can lead) but, there are often a number of financial planning opportunities, to protect, reduce, and avoid certain taxes, that few take advantage of.
If we haven’t discussed these already or if you would like an initial chat to discover whether any of those opportunities are open to you then please feel free to contact me. There are no fees for enquiries and consultations.
Risk – Simply a Box of Chocolates?
By Jonathan Goodman
This article is published on: 7th January 2015
07.01.15
What is financial risk, and is it all down to chance?
Whether you are investing for your retirement or for more immediate financial needs, there are three factors that could keep you from achieving your goals: inflation, taxes, and risk. It is easy to plan for inflation and to reduce taxes, but risk is another matter as it is so unpredictable.
Types of financial risk to watch out for include:
Investment Specific Risk:
Risk that affects a very small number of assets.
Geopolitical Risk:
Risk of one country’s foreign policy unduly influencing or upsetting domestic political and social stability in another country or region.
Credit Risk:
Risk that a borrower will default on any type of debt by failing to make required payments.
Interest Rate Risk:
Risk that arises for bond owners from fluctuating interest rates. How much interest rate risk a bond has depends on how sensitive its price is to interest rate changes in the market.
Inflationary Risk:
The possibility that the value of assets or income will decrease as inflation shrinks the purchasing power of a currency.
Currency Risk:
Risk that stems from the changes in the valuation of currency exchanges. Fluctuations result from unpredictable gains and losses incurred when profits from foreign investments are converted from foreign currencies.
Volatility:
Risk of a change of price of a portfolio as a result of changes in the volatility of a risk factor. Usually applies to portfolios of derivatives instruments, where volatility is a major influencer of prices.
Liquidity Risk:
Risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit).
Diversification Risk:
Allocation of proportional risk to all parties to a contract, usually through a risk premium.
Leverage:
The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.
Counterparty Risk:
The risk to each party of a contract that the counterparty will not live up to its contractual obligations.
Overcoming Risk: Prudential & Smoothing
Prudential Multi-Asset funds work by spreading your money across a number of different types of assets. Funds are designed to deliver smoothed growth through a number of investment options, such as company shares, fixed interest bonds, cash and property, balancing the risk being taken. So if one asset is falling in value, another may be increasing.
Risk: Simply a Box of Chocolates?
Understanding the importance of risk is a central pillar of financial planning. Risk can be measured and assessed; it can be managed. Learning how to do this is an invaluable aspect of becoming a successful investor.
Risk may be uncertain but it’s no box of chocolates. If you prepare for the uncertainty – do your research and seek relevant and informed advice – you can be fairly confident of what you’re going to get. It’s not all down to chance.
French Tax Changes 2015
By Spectrum IFA
This article is published on: 5th January 2015
05.01.15
During December, the following legislation has entered into force:
- the Loi de Finances 2015;
- the Loi de Finances Rectificative 2014(I); and
- the Loi de Financement de la Sécurité Sociale 2015.
Shown below is a summary of our understanding of the principle changes.
INCOME TAX (Impôt sur le Revenu)
The barème scale, which is applicable to the taxation of income and gains from financial assets, has been revised as follows:
| Income |
Tax Rate |
| Up to €9,690 |
0% |
| €9,691 to €26,764 |
14% |
| €26,765 to €71,754 |
30% |
| €71,755 to €151,956 |
41% |
| €150,957 and over |
45% |
The above will apply in 2015 in respect of the taxation of 2014 income and gains from financial assets.
WEALTH TAX (Impôt de Solidarité sur la Fortune)
There are no changes to wealth tax. Therefore, taxpayers with net assets of at least €1.3 million will continue to be subject to wealth tax on assets exceeding €800,000, as follows:
| Fraction of Taxable Assets |
Tax Rate |
| Up to €800,000 |
0% |
| €800,001 to €1,300,000 |
0.50% |
| €1,300,001 to €2,570,000 |
0.70% |
| €2,570,001 to € 5,000,000 |
1% |
| €5,000,001 to €10,000,000 |
1.25% |
| Greater than €10,000,000 |
1.5% |
CAPITAL GAINS TAX – Financial Assets (Plus Value Mobilières)
There are no changes in respect of the taxation of capital gains arising from financial assets. Therefore, gains arising from the disposal of financial assets will continue to be added to other taxable income and then taxed in accordance with the new progressive rates of tax outlined in the barème scale above.
However, the system of ‘taper relief’ still applies for the capital gains tax (but not for social contributions), in recognition of the period of ownership of any company shares, as follows:
- 50% for a holding period from two years to less than eight years; and
- 65% for a holding period of at least eight years.
This relief also applies to gains arising from the sale of shares in ‘collective investments’, for example, investment funds and unit trusts, providing that at least 75% of the fund is invested in shares of companies.
In order to encourage investment in new small and medium enterprises, the higher allowances against capital gains for investments in such companies are also still provided, as follows:
- 50% for a holding period from one year to less than four years;
- 65% for a holding period from four years to less than eight years; and
- 85% for a holding period of at least eight years.
The above provisions apply in 2015 in respect of the taxation of gains made in 2014.
CAPITAL GAINS TAX – Property (Plus Value Immobilières)
With effect from 1st September 2014, the taper relief applicable to gains arising from the sale of building land has been brought in line with that applicable to other property gains, as follows:
- 6% for each year of ownership from the sixth year to the twenty-first year, inclusive; and;
- 4% for the twenty-second year.
Thus, the gain will become free of capital gains tax after twenty-two years of ownership.
However, for social contributions (which remain at 15.5%), a different scale of taper relief applies, as follows:
- 1.65% for each year of ownership from the sixth year to the twenty-first year, inclusive;
- 1.6% for the twenty-second year; and
- 9% for each year of ownership beyond the twenty-second year.
Thus, the gain will become free of social contributions after thirty years of ownership.
An exceptional reduction of 30% of the taxable capital gain, arising from the sale of building land only, has also been introduced, subject to the following double condition that:
- a compromis de vente has been signed between 1st September 2014 and 31st December 2015; and
- the completion of the sale of the land must take place by 31st December of the second year following the signing of the compromis de vente.
The exceptional reduction applies for both the capital gains tax and the social contributions liabilities. However, it is not available for land transferred between spouses and PACS partners, nor to ascendants or descendants.
It should also be remembered that there is still an additional tax applicable for property sales, when the gain exceeds €50,000, as follows:
| Amount of Gain |
Tax Rate |
| €50,001 – €100,000 |
2% |
| €100,001 – €150,000 |
3% |
| €150,001 to €200,000 |
4% |
| €200,001 to €250,000 |
5% |
| €250,001 and over |
6% |
Where the gain is within the first €10,000 of the lower level of the band, a smoothing mechanism applies to reduce the amount of the tax liability.
The above taxes are also payable by non-residents selling a property or building land in France. However, at some point during 2015, the European Court of Justice (ECJ) will most likely rule on the outcome of the European Commission’s infringement procedures against France, regarding the application of social contributions on income and gains arising in France for non-residents. Following the delivery of the legal opinion of France’s Advocat General to the ECJ, it is widely expected that non-residents will become exempt from social charges on gains and income arising from French property.
One other point worth mentioning concerns the rate of capital gains tax for non-residents. To date, this has been at the rate of 19% for residents of EU/EEA countries and at 33.33% for non-residents of other countries, except for those of ‘non-cooperative territories’, who have been liable to a 75% capital gains tax rate.
In October 2014, the French Conseil d’Etat, which is the highest court in France for tax matters, decided that the higher rate of capital gains tax for non-residents is illegal, in certain circumstances. The basis for its decision was that it considered this to be a disincentive for non-residents from outside of the EU/EAA to purchase property in France. As such, the court considered this was a restriction on the free movement of capital and thus, contrary to EU law.
Arising out of this decision, the government proposed to harmonise the capital gains tax rate at 19%, but not for those residents of ‘non-cooperative’ States, for whom it decided that the 75% rate should be maintained. However, when considering the proposed legislative changes, the Constitutional Council ruled that a capital gains tax rate of 75% is excessive, when taken into account with the social contributions of 15.5% and so ruled that this is contrary to France’s Constitution.
The Constitutional Council’s decision is somewhat of a surprise, since the 75% tax rate plus social contributions has already been the practice. One assumes, therefore, that as and when France is instructed not to apply social contributions to gains arising for non-residents, then the 75% capital gains tax rate will no longer be considered unconstitutional!
Finally, one other good point for some non-residents is that for those who are resident in the EU (and in some cases in the EEA), it will no longer be necessary to appoint a tax representative in France to deal with the calculation of the capital gains tax, when the property is sold.
GIFT TAX (Droits de Mutation à Titre Gratuit)
In order to promote the release of building land and revive housing construction, a temporary exemption from gift tax has been introduced for donations made in the following situations:
- for full transfers of building land (i.e. the donor cannot retain life use), for which the acte authentique is signed between 1st January and 31st December 2015, on the condition that the recipient builds a new property destined for housing, within four years of the date of receiving the gift.
- for full transfers of new residential properties, for which a building permit is granted between 1st September 2014 and 31st December 2016, on the condition that the deed evidencing the gift must be signed no later than three years of the date of the building permit and that the building has never been used or occupied at the time the gift is made.
In both of the above situations, the following exonerations from gift tax will be given, limited to the declared value of the asset:
- €100,000 for transfers between descendants or ascendants in direct line, or between spouses and PACS partners;
- €45,000 between siblings; and
- €35,000 between any other person
It is also indicated that the total of the donations made by the same donor cannot exceed €100,000. However, what is not clear from the drafting of the legislation is whether or not this limit applies separately for each of the above situations or if this limit is applied globally. Therefore, we will have to wait for further precision on this.
Other Changes:
- Charitable Donations & Bequests:
France exempts from inheritance duties donations and bequests made to certain charities that are registered in France. However, charities established in other States of the EU are generally subject to a 60% tax (after an allowance of €1,594) on the value of the gift or bequest received.
The European Commission considers the above to be an unjustified obstacle to the free movement of capital and so referred France to the European Court of Justice (ECJ) in July 2014. Anticipating a condemnation by the ECJ to be almost inevitable, France has changed its law so that there is no discrimination between the charities registered in France and those in the rest of the EU/EEA.
- Additional Tax on Second Homes:
With the objective of reducing the housing shortage in areas where there is a marked imbalance between supply and demand, provision has been made within the law for an additional tax on ‘second homes’, i.e. for furnished properties not designated as a principal residence.
The decision as to whether or not the tax will be applied will be made by the municipal council of the municipality concerned. The rate has been fixed as 20% of the municipality’s share of the taxe d’habitation and the revenue from the additional tax will be allocated to the municipality.
Tax relief should be given from the additional tax in the following situations:
- by those who need a second dwelling near to their place of work because their principal residence is too far away; and
- if the owner is living permanently in a nursing home or other care facility and the property was their former principal residence.
Others may also receive the tax relief where they can no longer designate the property as their principal residence for circumstances outside of their control.
EU Directive on Administrative Cooperation in the Field of Direct Taxation:
Although not directly related to France’s tax changes, it is worth mentioning that with effect from 1st January 2015, under the terms of the above EU Directive, there will be automatic exchange of information between the tax authorities of Member States for five additional categories of income and capital. These include income from employment, director’s fees, life insurance products, pensions and ownership of and income from immoveable property. The Directive also provides for a possible extension of this list to dividends, capital gains and royalties.
2nd January 2015
This outline is provided for information purposes only. It does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action to mitigate the effects of any potential changes in French tax legislation.
UK Pensions Reform Overview
By David Odonoghue
This article is published on: 31st December 2014
This year brings about major changes in UK pension rules. Under the reform of ‘Freedom and Choice in Pensions’, people will be provided with more choice about how and when they can take their benefits from certain types of pension arrangements.
Following proposals first made in March last year, subsequent consultation resulted in the Pensions Taxation Bill being published in August, with further amendments being made in October. Additionally, some provisions were clarified in last month’s UK Autumn Budget Statement. Therefore, subject to there not being any further changes before the eventual enactment of the legislation, we can be reasonably certain of the new rules.
To understand the reform, you need to understand the two main different types of pensions. The first is the defined benefit pension (DBP), where your employer basically promises to pay you a certain amount of pension, which is calculated by reference to your service and your earnings. DBPs are a rare breed now, as employers have found this type of arrangement too costly to maintain. This is because the liability for financing the scheme falls upon the employer (after anything that the individual is required to contribute) and if there is any shortfall in assets to meet the liabilities – perhaps because of poor investment returns – the employer must put more money into the scheme.
The second type of pension is what is known as a money purchase plan (MPP). You put money into an MPP, perhaps your employer does/did also, as well as the government in the form of tax rebates and in the past, national insurance contribution rebates. Maybe your ‘MPP’ was not through an employer at all and you just set up something directly yourself with an insurance company. They are several different types of MPP arrangements, but they all result in the same basic outcome, i.e. the amount of the pension that you get depends on the value of your ‘pension pot’ at retirement and so the investment risk rests with you. There is no promise from anyone and therefore, no certainty of what you might receive.
The proposed reform is all about the MPP, although there is nothing to stop a person from transferring their private DBP to a MPP, if they have left the service of the former employer.
The majority of the changes will be effective from 6th April 2015 and these will apply to ‘money purchase’ pension arrangements only. Therefore, people with deferred pension benefits in funded defined benefit plans, who wish to avail themselves of the changes, must first of all transfer their benefits to a money purchase scheme. Members of unfunded public sector pension schemes will not be allowed to have such a transfer.
Under the new rules, people will be able to take all of their ‘pension pot’ as a one-off lump sum or as several separate lump sum payments. For UK resident taxpayers, 25% of each amount will be paid tax-free and the balance will be subject to income tax at the marginal rate (the highest tax rate being 45%).
Alternatively, it will be possible to take 25% of the total fund as a cash payment (again, tax-free for UK residents) and then draw an income from the remaining fund (taxed at marginal rate). The commencement of income withdrawal can be deferred for as long as the person wishes. Furthermore, there will be no minimum or maximum amount imposed on the amount that can be withdrawn in any year.
The Annual Allowance, which is the amount of tax-relieved pension contributions that can be paid into a pension fund, is currently £40,000 per annum. For anyone who flexibly accesses their pension funds in one of the above ways, the Annual Allowance will be reduced to £10,000 for further amounts contributed to a money purchase arrangement.
However, the full Annual Allowance of up to £40,000 (depending upon the value of new money purchase pension savings) will be retained for further defined benefit pension savings.
The ‘small pots’ rules will still apply for pension pots valued at less than £10,000. People will be allowed to take up to three small pots from non-occupational schemes and there is no limit of the number of small pot lump sums that may be paid from occupational schemes. 25% of the pot will be tax-free for a UK resident. Accessing small pension pots will not affect the Annual Allowance applicable to other pension savings.
The required minimum pension age from which people can start to draw upon their pension funds will be set as age 55, in all circumstances (except in cases of ill-health, when it may be possible to access the funds earlier). However, this will progressively change to age 57 from 2028; subsequently, it will be set as 10 years below the State Pension Age.
The widely reported removal of the 55% ‘Death Tax’ on UK pension funds has been clarified. Thus, whether or not any retirement benefits have already been paid from the money purchase fund (including any tax-free lump sum), the following will apply from 6th April 2015:
- In the event of the pension member’s death before age 75, the remaining pension fund will pass to any nominated beneficiary and the beneficiary will not have any UK tax liability; this is whether the fund is taken as a single lump sum or accessed as income drawdown; or
- If the pension member is over age 75 at death, the beneficiary will be taxed at their marginal rate of income tax on any income drawn from the fund, or at the rate of 45% if the whole of the fund is taken as a lump sum. From April 2016, lump sum payments will be taxed at a beneficiary’s marginal tax rate.
There will be more flexibility for annuities purchased after 6th April 2015. For example it will be possible to have an annuity that decreases, which could be beneficial to bridge an income gap, perhaps before State pension benefits begin. In addition, there will no longer be a limit on the guarantee period, which is currently set at a maximum of 10 years.
French residents can take advantage of the new flexibility and providing that you are registered in the French income tax system, it is possible to claim exemption from UK tax under the terms of the Double Taxation Treaty between the UK and France. However, there are French tax implications to be considered, as follows:
- you will be liable to French income tax on the payments received, although in certain strict conditions, it may be possible for any lump sum benefits to be taxed at a fixed prélèvement rate;
- if France is responsible for the cost of your French health cover, you will also be liable for social charges (CSG & CDRS) of 7.1% on the amounts received;
- the former pension assets will become part of your estate for French inheritance purposes, as well as becoming potentially liable for wealth tax (i.e. if your net taxable assets exceed the wealth tax entry level).
Therefore, as a French resident, it is essential to seek independent financial advice from a professional who is well versed in both the UK pension rules and the French tax rules before taking any action. Such advice should also include examining whether or not a transfer of your pension benefits to a Qualifying Recognised Overseas Pension Scheme (QROPS) could be in your best interest.
Note, that for those expats who already have transferred pensions to a QROPS or are thinking of doing so? the Pension Taxation Bill makes provision for the proposed UK pension reform to follow through to such schemes.
However, a complication exisits, due to the fact that the separate UK QROPS Regulations do not necessarily allow people to fully cash in their pesion funds in all circumstances.
The Pensions Taxation Bill does already make some provision for the proposed UK pension reform to follow through to Qualifying Recognised Overseas Pension Schemes (QROPS). However, a complication exists, due to the fact that the separate UK QROPS Regulations do not necessarily allow people to fully cash in their pension funds, in all circumstances.
Therefore, before the new flexible rules could apply to QROPS, the UK Regulations must be amended and it is understood that there is on-going work in this regard. Whether this work will be completed before 5th April 2015 is not known.
However, even if the UK does amend the QROPS Regulations, it will then fall to individual QROPS jurisdictions to make the necessary changes to their own internal pension law. For the well-regulated jurisdictions, it cannot be ruled out that their own Regulators may not agree entirely with the UK’s ideas of flexibility! In effect, there could be a preference to ensure that pension funds are used only for the purpose of providing retirement income for life, with the possibility of income continuing to a member’s dependants.
In any event, the taxation outcome of someone fully cashing-in their pension fund (whether whilst still in a UK pension arrangement or if later allowed, from a QROPS) is likely to be a sufficient practical deterrent for anyone actually wanting to do this. Therefore, for someone who has left the UK, a QROPS should continue to be a viable alternative to retaining UK pension benefits, particularly since the advantages of a QROPS have not changed. However, everyone’s situation is unique and this is why seeking advice from a competent professional is essential.
Saving for Retirement in Spain
By Chris Burke
This article is published on: 28th December 2014
How do you save for retirement in Spain and what are the best options for expats?
These days there are quite a few choices on how to receive your pension as a British expat and, if you qualify for a UK state pension, you can claim it no matter where you live. The money can be paid into a UK bank or directly into an overseas account in the local currency. If you move to Spain before retirement and work there for a number of years, it may also be possible to receive a state pension from more than one country.
If you’ve qualified for a state pension from the UK, it will be paid (and taxed) in Spain but uprated every year in the same way as the UK. The personal tax allowance in Spain is €6,069 (£4,923) compared with £10,000 in the UK. The basic rate of tax is also higher, at around 24% compared to 20% in the UK. And in Spain there is no 25% tax free lump sum available when retiring, and any Isa’s you have in the UK will be liable for tax if you become resident in Spain.
A lot to consider…
Saving for Retirement: Tips
Plan Ahead: Pay off debts and take advantage of tax free personal allowances.
Do Your Homework: Before sitting down with an independent financial adviser, make sure you have a clear picture of your current finances and what you need to consider in order to achieve the lifestyle you want over the years ahead.
Consider Your Saving Options: The recent Budget announced radical changes to pension schemes – good news for savers. From April 2015, individuals may withdraw as much or as little from their pension fund in any year with 25 per cent being withdrawn free of tax.
Regularly Review Investment and Retirement Plans: Review your investment and retirement plans every six months to ensure any advice received is up to date and relevant.
Prudential: Flexible Savings for Retirement
The Prudential Flexible Retirement Plan gives access to a range of flexible retirement and investment solutions to suit your changing needs and priorities. Whether you are approaching retirement or some way off, the flexibility provides an easy transition from saving for retirement, through to approaching retirement and then taking an income.
Professional Advice for Expats
The earlier you get your financial planning in order, the better. Make a mistake with your pension, and you could end up paying for it for the rest of your life.
A pensions expert will be able to point you in the right direction. You will need to take Spanish rules into consideration, so taking advice from an adviser conversant with both UK and Spanish pension and tax rules is essential.
Finding a Financial Adviser in Barcelona
By Chris Burke
This article is published on: 27th December 2014
The number of British people moving abroad is rising, with about one in 10 British people now living overseas.
Despite its obvious economic difficulties, Spain continues to be one of the most popular destinations for British expatriates, as the laid-back lifestyle and improved transport links with the UK gives it an allure that is hard to resist.
However, setting up residence in a Spanish city, such as Barcelona, involves a great deal of upheaval, both on a personal and practical level, and it’s a sad reality that expats can be particularly vulnerable to poor financial advice.
How to Choose a Financial Adviser
In practical terms, one of the most important things to get right as an expat is your finances, and having the right banking arrangements is a fundamental part of life overseas. Banking services should ideally meet at least two main criteria: flexibility (money should be easy to access and transfer between countries); and financial security (in a reputable bank that complies with international financial regulations and has a solid capital base).
But what other factors should you take into consideration when searching for a Financial Adviser in Barcelona?
- Are they regulated? Do your research, visit websites, and confirm registration with the IFA before choosing an adviser.
- Qualifications: Every nation has different rules relating to how qualified a financial adviser needs to be to gain authorisation, but the UK is a world leader in terms of required qualifications. So if you’re speaking to a British adviser abroad, you can gauge their industry education based on the British qualifications they have.
- Experience: You can ask your adviser how long they’ve been qualified and giving advice, and you can research the brokerage to see how long they’ve been in business.
- Are they independent? Ensure that your adviser is independent rather than tied to one financial institution, so that they are able to advise you on suitable products from the entire financial market place.
- Testimonials: If your IFA is good at their job, they are highly likely to have a list of satisfied clients, from whom you can request a testimonial.
The Spectrum IFA Group
At The Spectrum IFA Group, we provide financial advice to expats on all aspects of living, moving and working in Spain. From calculating the cost of living to choosing a good school for your children, our guides to money management and family finances will help you prepare for the challenges of living and working abroad – so you can make the most of your expat experience.
We provide Insurance Intermediation advice and assist clients in their choice of Investment Management Institution. Mutual respect is earned by working together, looking after your best interests and by adding value to your financial planning through qualifications, experience and enthusiasm.
UK Pension Transfers – Update for Expats
By Chris Burke
This article is published on: 24th December 2014
The rapidly changing landscape of pension schemes in the UK has led to a great deal of confusion, and it’s not just UK pensioners who are affected: the rule changes also impact expats living outside the UK, especially those considering the benefits of a Qualifying Recognised Overseas Pension Scheme.
As an expat, it’s hard to know which route to take. Should you transfer to a QROPS or leave your pension in the UK? What are the benefits and drawbacks? What impact have recent changes had on your options?
Let’s look at the facts…
Reasons to transfer
● Pension Commencement Lump Sum of 30% of the fund. This is tax-free if UK resident but could be taxable if resident outside of the UK.
● No pension death tax, regardless of age, in Gibraltar and Malta
● Greater investment freedom, including a choice of currencies
● Retirement from age 50 (Malta), and 55 in Gibraltar and Isle of Man
● Income paid gross from Malta (with an effective DTT), and only 2.5% withholding tax in Gibraltar
● Removal of assets from the UK may help in establishing a Domicile outside of the UK (influences UK inheritance tax liability)
What will happen if you leave your personal pension in the UK
● On death over the age of 75, a tax of 45% on a lump sum pay-out.
● Income tax to be paid when receiving the pension, with up to 45% tax due, likely deducted at source,
● Registration with HMRC and the assignment of a tax code.
● Proposed removal of personal income pension allowance for non-residents. Although this is still on the agenda, it has been confirmed that there will be no change to non-residents’ entitlement to personal allowance until at least April 2017.
● Any amounts withdrawn will be moved into the client’s estate for IHT purposes, if this is retained and not spent.
● As the client will be able to have access to the funds as a lump sum, these could potentially be included as an asset for care home fees/bankruptcy etc.
● No opportunity to transfer from many Civil Service pension schemes from April 2015 (Only five months remain for public sector workers to review their pension and then make their own informed decision)
What Does All This Mean?
Regardless of the proposed legislation amendments, transferring to a QROPS still provides certain benefits that the UK equivalent would not be able to offer, although it’s fair to say that both still hold a valid place in expatriate financial planning. The answer to which pension is more suitable for you will ultimately depend on your individual circumstances and long term intentions.
GIVEWATTS and The Spectrum IFA Group
By Spectrum IFA
This article is published on: 17th December 2014
17.12.14
Please see below an open letter sent to The Spectrum IFA Group
by GIVEWATTS
Dearest Christine and Chris,
I hope you are well indeed! You have a big place in my heart, part of my secure base. Thank you for everything you have done and for always being there!
I can’t thank you and Spectrum enough for the support to GIVEWATTS over the years! It has meant a great deal, both in terms of funding (see attached project update), but also morally. You joined us at an early stage, taking a chance on something you believed in. I am happy to say that it is really working now, and it also has a great deal of impact.
It has been a very good year for GIVEWATTS. Our partnership with Spectrum has been a key component in our being able to scale up during the year. We have grown into 649 schools across Kenya, and we are starting in Tanzania early next year, and DRC a month after that. More reasons for you to come and visit again!
The school calendar has all the kids in Christmas recess now, and we are waiting for the final grades for the last term in January 2015. In the current report the improvement is at 7%, and this reflects the changes between a county wide diagnostics test and the national exam. After that we will update those numbers, as well as the changes in school ranking. You should expect a change of around 20%, which is the average change across our Kenyan schools between two national exams.
You will be pleased to see that 107 lamps have been paid off. The balance of lamps have been signed up for and are being paid for now. The total savings for the households is almost CHF 40K, and using the most conservative measures available (100 kg of Co2 per replaced kerosene lamp) so far the project has offset a total of about 17 tonnes of Co2. This calculation is based on number of total days lamps have been replaced. For comparison, for the total 265 lamps in the project, the saved emissions will be 26,5 tonnes per year. As the number of lamps increase, this number will go up.
I also include two impact videos. Short and concise for busy Spectrumers. We are also changing our project page on the website again, to make it more interactive. The local web developer we are using says that this will be done early next week. As soon as we have it, I will send you a note.
I hope to make it to Lausanne in the first quarter of 2015, and I will so very much take you out for a meal to celebrate our joint success! And just to have a curry with some great people!
A very Happy New Year!!
Jesper Hörnberg
To download the full report please click here
