Tax planning is a fundamental part of protecting and maximising your wealth. Yet so many people do not review their tax planning often enough, or do not have all the knowledge they need to set up effective tax mitigation.
There are two key elements to tax planning. The first is a good understanding of the tax regimes that affect you, so that you are fully aware of your tax obligations and how they impact your income and wealth.
If there are two regimes – for example, you live here in Portugal but are also still affected by UK taxation – you need to know how they interact, which country you should pay tax in etc. The second part is knowing how to apply the rules to your advantage and use compliant arrangements to lower your tax liabilities wherever possible.
If you do not have suitable tax planning in place, it is likely that you are paying more tax than necessary, particularly on your invested capital.
Looking at the UK as an example, the annual Tax Action campaign by unbiased.co.uk looks at how much taxpayers in the UK are wasting each year by not taking advantage of tax reliefs.
The 2016 research, conducted in partnership with Prudential, found that taxpayers will gift £4.6 billion of unnecessary tax to the taxman this year. This is £300 million less than last year but still too much.
The most costly mistake is failing to use pension tax relief. Besides this, almost £2 billion will be wasted by not moving savings and investments into tax-efficient individual savings accounts (ISAs) and people will pay more capital gains tax than they need to (up to £208 million from £158 million last year).
And then there is inheritance tax. With its particularly complex rules, many people fail to make use of all the available reliefs. In fact, inheritance tax is often described as a ‘voluntary tax’ because there are steps you can take to reduce or avoid the tax for your heirs.
Remember that being resident in Portugal does not mean your estate escapes UK inheritance tax. It is based on domicile rather than residence, so most UK nationals remain liable even when living abroad.
More than 80% of the people surveyed had not tried to reduce the amount of tax they pay in the last 12 months. Even if you have tax planning in place, it is important to review it from time to time because regulations change, new opportunities arise, or a specialist adviser could point out opportunities you were not aware of.
It is the same in other countries. Expatriates living in Portugal may even be more likely to get their tax planning wrong, because they are dealing with a foreign tax system. Also, the rules can frequently change, so you need to make sure you keep up to date.
You cannot presume that tax will be similar to the UK. What was tax efficient in the UK is unlikely to be tax efficient here. You need to look at the local Portuguese regime to determine what works, and what would be suitable for your personal circumstances and objectives.
Another consequence of an unfamiliar tax system could be that you get it wrong and end up paying too little tax, or in the wrong country. This would have repercussions in future when the tax authorities realise you have not been paying the tax due and possibly open an investigation.
This is why professional advice is so important. With do-it-yourself tax planning there is always the risk that you will miss something important, or not realise where tax mitigation opportunities are available. Expert advice is even more invaluable if you have complex affairs and cross-border interests (you are resident in Portugal but have investments elsewhere, or heirs in the UK etc.).
As the press release by unbiased.co.uk and Prudential points out, tax planning can seem difficult but it can make a huge difference to your wealth. Taking advice could reveal many missed opportunities.
“Ever changing tax rules make it easy to see why many people don’t always make full use of the range of allowances on offer … Tax planning is one of the key areas in which a financial adviser can make a difference, both in the short and long term.”
Making the right investment choices is key in making the most of your money, but you also need to make the most out of tax planning opportunities to increase the potential for better returns.
To ensure you fully understand how the Portuguese tax regime affects you, and that you are aware of all the tax planning opportunities available, you need specialist advice. This advice must be personalised for your circumstances and objectives.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
By Gavin Scott
|| [email protected]
Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. | www.blevinsfranks.com