By: BILL BLEVINS
Financial Correspondent, Blevins Franks
IN TODAY’S financial environment it can be difficult and time-consuming to keep your hard earned wealth intact and not ravaged by the harmful effects of taxation and inflation, as well as the possibility of falling interest rates.
Your money can easily and quickly be eroded if you are not watchful. Some people think that the way to avoid tax is not to disclose your nest egg to the taxman, but this is illegal and harsh penalties are in place for defaulters. Many people do not realise how damaging inflation can be or how ‘good’ bank interest rates are not as effective as they seem.
Interest rates appear attractive at the moment but there are signs that they may start to fall soon. Even if they remain on hold for the moment, rates are more than likely to come down in the coming years.
Tax authorities all over the world are tightening up on their tax laws and targeting dodgers for unpaid tax. Most importantly they are proving to be remarkably effective in breaking down banking secrecy. In an unprecedented move, HM Revenue & Customs (HMRC) forced offshore banks to disclose confidential details of their UK account holders.
So far, the HMRC is examining 400,000 offshore account holders from five leading banks, but it vows to eventually include all 550 UK banks in its quest for unpaid tax. If you are British and live in Portugal but return to the UK for more than 90 days in a UK tax year, or your bank still has a UK address for you, then you could come under the eyes of the tax inspectors. The UK authorities may report suspicions to their Portuguese counterparts.
Portugal is also clamping down on tax evasion and has stepped up moves to claw back 1.6 billion pounds sterling in back tax this year. This is a 10th of what the government is owed in unpaid tax, all of which it intends to recoup over the coming years at the same time as preventing more tax revenue being lost.
The government is under pressure to shrink its Gross Domestic Product to the EU limit of three per cent by next year, down from 4.6 per cent last year. In a bid to meet its target, extra tax inspectors have been employed. Tax cheats have been named and shamed on the internet and their property and possessions seized.
Finance Minister, Fernando Teixeira dos Santos, described the fight against tax evasion as “almost unending” and said: “The recovery of unpaid taxes through coercive measures has been rising every year”.
The Portuguese authorities are also cracking down on bank confidentiality and wealth evidence and have introduced new legislation whereby they have the right to investigate all your bank accounts. Situations that will trigger an inspection are: if your annual tax return is replaced by the original because of a tax implication; you contest the decision of the tax authorities; you are late in submitting your annual return; and if your declared income does not correspond with your visible wealth. All taxpayers in Portugal can be targeted including expatriates.
The EU Savings Tax Directive is another way by which the Portuguese authorities can know about your wealth. Under the Directive, information on an offshore account is automatically exchanged with your tax residency. Your bank may apply the withholding tax instead but you are still legally obliged to declare it.
Don’t forget that if you are a UK domicile you are also liable for UK inheritance tax at 40 per cent above the current tax free amount of 300,000 pounds sterling.
Inflation can be another serious threat to your wealth. It slowly eats away at your capital, particularly if it is held in a bank. The EU’s target for inflation is two per cent. The inflation rate in Portugal was a surprising 1.9 per cent in August, but for the rest of the year it has been above 2.3 per cent and last year it was three per cent and your real rate of inflation is likely to be higher than these official figures.
Indications are that inflation is bound to rise again with latest news that crude oil rose to a record 82 US dollars a barrel in New York in September. Oil prices are expected to remain high from increased demand, rising costs and political unrest in oil producing countries.
Food prices are also at record levels. Corn prices have doubled since last year and, in September, wheat prices reached their highest level in 10 years. The escalated cost of animal fodder has had a knock-on effect of increasing meat and dairy prices. The rise in food prices is called ‘agflation’ and is running at six per cent in the UK, 2.5 per cent in the Eurozone, 3.9 per cent in the US and 4.9 per cent in Australia.
Bank interest rates are misleading. You have to deduct your ‘real’ rate of inflation from your bank interest rate to determine your ‘real’ rate of return, which in turn will be subject to taxation.
A portfolio containing strategically well diversified assets can give you a higher and more secure rate of return than bank interest rates. Your capital will have the opportunity to grow too.
Such a portfolio can also be structured to mitigate tax, leaving you better off and without the need to worry about the dangers that can threaten your wealth and financial security.
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