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, just by not taking advantage of tax reliefs.
The 2015 research, conducted in partnership with Prudential, found that taxpayers will gift £4.9 billion of unnecessary tax to the taxman this year. This is £200 million more than last year.
The most costly mistake is failing to use pension tax relief. Over £1 billion will be wasted by not moving savings and investments into tax efficient individual savings accounts (ISAs), and many people also pay more capital gains tax than they need have.
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 often 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.
Seventy-five percent of the people surveyed had not reviewed their tax planning over the previous 12 months. Even if you do have tax planning in place, it is important to review it from time to time because regulations change, new opportunities become available, or a specialist adviser could point out the opportunities you were not aware of.
It is the same in other countries. In fact, expatriates living in Portugal may be more likely to get their tax planning wrong, because they are dealing with a new and foreign tax system. To make it worse, 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. The rules are quite different, and what was tax efficient in the UK is unlikely to be tax efficient here – you could find yourself paying much more tax than expected. Also, you would pay more Portuguese tax on investments held in ‘tax havens’, like the Isle of Man and Channel Islands, than you would on investments held onshore in Europe.
You need to look at the local Portuguese regime to determine what works here, 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 taxman realises you have not been paying the tax due and possibly opens 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 more 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 is not often at the top of our to-do lists.
“But by failing to plan efficiently, many of us are simply not maximising the available value of our hard-earned savings.”
“Making the most of your money is primarily about the right investment choices, followed by the best use of the various tax reliefs and allowances on offer. Put simply, greater tax efficiency increases the prospect of a better return.”
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.
By Gavin Scott
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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
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