In just a few months’ time, the tax authorities in Portugal and the UK will start to receive new information on their taxpayers’ offshore assets and income.
This is carried out under the Common Reporting Standard (CRS) for automatic exchange of financial account information in tax matters. One hundred countries have so far committed to obtain information from their financial institutions and pass it on to the clients’ country of residence.
Fifty jurisdictions began collecting data from January last year, and have to pass it on by this September. In the UK, financial institutions had a deadline of May 31 to submit the information for year ending December 31, 2016 to HM Revenue & Customs.
Another 50 jurisdictions began collecting information from January this year, ready to share it by September 2018.
This automatic information exchange will be repeated every year going forward.
The information being shared about the financial assets you own outside your country of residence includes personal data such as your name and address, country of tax residence and tax identification number. You have probably received requests from financial institutions to confirm these details.
The information to be reported about your accounts includes the investment income you earned over the year, such as interest, dividends, income from certain insurance contracts, annuities etc. Account balances are also reported, and gross proceeds from the sale of financial assets.
The financial institutions that need to report include banks, custodians, certain investment entities such as investment funds, certain insurance companies, trusts and foundations.
When local tax offices receive this information, they will be able to verify whether the taxpayer has accurately reported their income on their income tax returns.
In the UK, HMRC has sent out very clear warnings to taxpayers about the consequences of not paying tax correctly on offshore assets.
In a document entitled “If you have money or other assets abroad, you could owe tax in the UK”, the Revenue advises that the tax world is becoming more transparent and that it is getting tougher on those who are not paying the right amount of tax across their offshore tax affairs.
The document states: “From 2016, HMRC is getting new financial information about our customers from more than 100 jurisdictions – including details about overseas accounts, structures, trusts and investments.
“HMRC is already using information, supplied by overseas banks, insurers, and wealth and asset managers, to identify the minority who are not paying what they owe.”
It asks recipients if they are confident that their UK tax affairs are up to date, advising them that it is their responsibility to regularly check they have declared all their UK tax liabilities and bring their tax affairs up to date if necessary.
It is clear that, if someone has not paid the correct amount of tax, HMRC will now find out about their money and overseas assets. Penalties are increasing for offshore tax evasion, which could be based on the value of the asset as well as the tax due, resulting in potentially life-changing consequences. Criminal prosecution is also a possibility, depending on circumstances.
While this document is aimed at UK taxpayers, it is worth paying attention wherever you live, as the principles are the same.
First of all you need to establish where you are resident for tax purposes, and then ensure you are fully declaring all your income and wealth as required by law. If you live in one country and earn income in another, be clear on where you need to declare this income and where it is taxable. Make sure you are following the double tax treaty correctly.
Cross-border tax planning can get very complex, so you need specialist advice to ensure you get it right as well as to take advantage of compliant tax mitigation opportunities.
The HMRC document also notes that: “Personal circumstances change. For example, you may have recently inherited assets overseas. Tax laws change too. All of this means that previous advice can be out of date, with costly consequences.”
If you do receive an inheritance from another country, it is important to establish if and where you personally have to pay tax on it.
Another point worth considering about inheritances is that if you do not make sure your affairs are in order now, this could cause problems for your heirs when they inherit these assets.
The tax regime in Portugal does provide compliant tax planning opportunities for your investment capital, so that you do not end up paying the headline rates of tax. Portugal can be an attractive country for retirees to live in from a tax point of view. Take personalised, specialist advice to structure your assets to in the most tax-efficient way for Portugal.
By Dan Henderson
Dan Henderson, Partner of Blevins Franks, is a highly experienced financial adviser, specialising in retirement, investment and succession planning. He holds the Diploma for Financial Advisers and advanced CII qualifications in pensions and investment planning.