A tax on your savings

IT IS finally here. July 1 will see the start of the EU’s much debated Savings Tax Directive. EU ministers, financial advisers, bankers, savers and investors…they have all had plenty to say on the matter over recent years. But, like it or not, the debates are now over and the simple fact is that the Directive starts in just a few months time.

The year of the

Savings Tax Directive

2005 will go down in history as the start of this revolutionary new tax regime, one which significantly impacts on our tax and financial planning. Coincidentally, as I write this article, the Chinese New Year has just begun. 2005 is, apparently, the year of the Rooster and a glance at a list of Rooster characteristics tells me that they’re “keenly observant. It’s hard to slip anything past a Rooster, since it seems to have eyes in the back of its head!” While I don’t usually set much store by astrology, this seems highly appropriate given the “Big Brother” aspects of the Directive.

Another interpretation (my own this time) is that the start of 2005 is a wake-up call: are you ready for the tax changes taking place this year? There are only a couple of months left to make any necessary changes to keep on the right side of the taxman.

Big Brother is watching

The Savings Tax Directive affects all EU residents with savings or other interest bearing investments. It will end tax evasion by non-declaration. The taxman will no longer need to rely on you to supply details of your income on your tax return; instead, he will find out about it directly from the source of the income, or else it will be taxed at source.

Once the Directive starts, almost all EU Member States will exchange information annually. If you’re resident in Portugal and have a deposit account in the UK, details of your UK account, interest earnings, identity and residence will be given to the Portuguese tax authorities.

The principal aspect of the Directive is that exchange of information will be automatic. Information about your finances will be exchanged, regardless of whether you have declared this income and irrespective of how law abiding you are (tax evasion is officially a crime). The days of financial confidentiality are long gone. Big Brother is now well and truly watching.

It is true that some jurisdictions have been granted an exception (Andorra, Austria, Belgium, Guernsey, Isle of Man, Jersey, Liechtenstein, Luxembourg, Monaco, San Marino and Switzerland). They will impose a withholding tax instead of automatically exchanging information. This starts at 15 per cent but rises to 35 per cent by 2011.Although information will not be automatically exchanged (unless the client requests it), tax will be automatically deducted at source.

There are two important points to note here. First of all, if your taxman suspects you of tax evasion, he can request information from those jurisdictions applying the withholding tax option – they have agreed to disclose information on request for cases of fraud or “comparable misbehaviour”.

Secondly, the EU Directive makes it clear that the withholding tax option is for a “transitional period” only. The ultimate aim is for all EU States and participating jurisdictions to automatically exchange information. The EU is aiming for 2011, which is a mere six years away.

Complex legislation

The Savings Tax Directive is a complex piece of legislation and includes detailed definitions of terms such as “savings income”, “paying agent” and “beneficial owners”. While many people are aware of the Directive and its basic premise, they may not be knowledgeable of all the small print. For example, the definition of “savings income” includes various types of investments as well as bank and deposit accounts. I recommend that you seek advice now to understand how all the facts affect you.

While it’s important to know what the Directive includes, it’s just as important to know what it excludes. This is possibly the most important information for anyone wishing to keep their tax bill low, at the same time as conforming with the law and the new Directive.

Insurance exclusion –

an opportunity

In particular, the Directive contains a specific exclusion for insurance benefits. It‘s possible therefore to use a life insurance “wrapper” or portfolio bond to help lower, or possibly eliminate, your tax liabilities. This legal structure is the perfect tool to combine your investment and tax planning in one exercise. It offers various benefits, including:

• No tax on income and capital gains rolled up within the bond

• Favourably taxed withdrawals

• Convenience of holding all your assets in one portfolio

• Flexibility and choice

• Easy access to capital

• Regular income facility

• Cost efficiency

While many see the advent of the Directive as a threat, it’s also possible to view it as an opportunity. This is an excellent time to review your financial planning and improve it where necessary. Whether you are an experienced investor or someone who thinks it’s time to get their affairs in order, a financial review, with the help of a wealth management professional, will prove invaluable. The important points to establish are whether your affairs are fully legal and whether your current savings and investments are working as well for you as they could be – and then make changes as necessary.

With the clock ticking towards July 1, time is tight – your affairs need to be in order before then. You’ve had your wake-up call…now it’s time for action.

Blevins Franks will be discussing these issues at our forthcoming seminars. See advert for further details.