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Inheritance tax and investments in Portugal

By Paul Beckwith features@algarveresident.com

Paul Beckwith is an International Financial Advisor working with Blacktower

Financial Management (International) Limited

Most offshore life companies go to some lengths to highlight that their products are not totally tax free.

For example, most life offices will point out the issue of ‘withholding tax’ that may apply to certain assets. This is most commonly seen on UK equities where dividends suffer advanced corporation tax (ACT), something that can never be reclaimed.

They also go some way to make clear that even though a non-UK resident client may not be subject to tax in the UK at the time of a chargeable event (this being a withdrawal, surrender, part-surrender etc.), there is still the likelihood of them being taxed locally in their country of residence. It is due to these comments that offshore life products are sometimes discounted as suitable solutions by both Independent Financial Advisers and clients alike.

How many UK expats are still holding onto a portfolio of Individual Savings Accounts (ISAs) and/or Personal Equity Plans (PEPs)?

It is interesting to contrast these with UK tax-favoured products especially ISAs. Often we see articles written claiming that ISAs are tax-free when they should properly be described as ‘free of income and capital gains tax’. Perhaps there should also be reference to withholding tax, since ISAs are not able to reclaim ACT and suffer this in the same way as offshore life companies.

UK based-IFAs compliance ‘processes’ will usually insist on an adviser ensuring that ISA allowances are fully utilised, before capital can be invested into other products. In not doing so, the IFA has to jump through a lot of hoops to justify why not. So before they can consider the multitude of investment options out there, they are required to maximise these so called ‘tax-free’ allowances.

There is perhaps an even bigger issue for Advisers who fail to point out to their clients that ISA’s are to IHT planning as unfriendly as you can get!

But what about the effects of Inheritance Tax?

Most important is the inheritance tax (IHT) issue facing an increasing number of investors and particularly those who have been assiduously funding their ISAs and PEPs for many years. There are a surprising number of people who have, or very soon will have, more than the £325,000 nil-rate band held in these products. In that situation, and when included in the total value of an estate, the ISAs (or PEPs) are almost certain to give rise to a liability to inheritance tax at 40%.

Inheritance Tax Planning with ISAs and PEPs…

Unlike other investment products, ISA’s cannot be held in trust or given away, so they are unsuited to IHT planning. In fact for some unlucky investors, the amount of IHT that could be payable as a result of these holdings could be higher than the income and capital gains tax that they have saved.

What options are open to me?

To counter this, investors need to be critically aware of their situation and plan appropriately, avoiding the seduction of inaccurate claims of tax-free status. A bigger financial picture is required to take into consideration all aspects of financial planning with a big emphasis on ‘Taxation’ in your place of residence as well as ‘Inheritance Tax Planning’.

Remember being non resident in the UK does not necessarily exempt you from your UK domicile and therefore a liability to UK IHT.

The reasons for using Offshore Bonds are as follows:

Virtual tax-free growth

Often referred to as the ‘gross roll-up’ effect, investment in an offshore bond grows virtually free of  income tax and capital gains tax charges, unlike comparable onshore bonds which suffer tax on any growth. Small amounts of irrecoverable withholding tax may be payable on certain investment funds.

No capital gains tax

Fund switches do not trigger a capital gains tax liability. Such switches within a portfolio of onshore direct equity or unit trust investments would incur a capital gains tax charge in the tax year during which the switches were made.

Access to your money

You can take regular withdrawals accessing your capital in a tax efficient way by withdrawing 5% of each investment amount every year. This 5% amount can be taken every year for 20 years, or accumulated and withdrawn less frequently without triggering a ‘chargeable event’ for tax purposes if UK tax resident (a ‘chargeable event’ in Portugal occurs when you withdraw in excess of your capital invested).

Tax control

Tax deferment is a key feature. This enables you to choose when a tax charge may occur, as this will be when you cash-in some, or all, of your bond. The tax payable at the point of a chargeable event will depend on your highest marginal rate at that time. This allows you to defer such an event until you are either a lower rate tax payer or have moved to a country with lower taxes.

This facility is not suitable for all expatriates and we recommend that specialist advice should always be sought to examine any financial planning requirements you may consider. As an Independent Financial Adviser, Blacktower seeks to ensure that our clients receive the advice suitable for their specific circumstances.

The appointed representatives of Blacktower Financial Management (International) Limited are not tax advisers. Before making any financial decisions relating to tax you are strongly advised to seek professional advice from a qualified international tax consultant. Blacktower can introduce you to such a specialist should you require. Please contact us for further details on 289 355 685.

Blacktower Group with offices in the United Kingdom, Gibraltar, Portugal, Spain, France & Italy  Blacktower Financial Management (International) Ltd is licensed in Gibraltar by the Financial Services Commission (FSC) License No. 00805B Blacktower Financial Management Ltd is Authorised and Regulated in the UK by the Financial Services Authority.