By: PAUL BECKWITH | [email protected]
Paul Beckwith is an International Financial Advisor working with Blacktower Financial Management (International) Limited.
In line with other countries in Europe facing significant fiscal deficits after the financial crisis, Portugal has introduced a number of tax increases which particularly affect the more affluent, including expatriates resident here.
In addition to a new top rate of income tax of 46.5%, charged on income over €153,300, which was introduced for income received from 1st January 2011, a solidarity tax of an additional 2.5% will be imposed on income received in 2012 and 2013 that exceeds €153,300, giving an effective top rate of income tax of 49%. This follows the Portuguese government’s imposition of a one-off tax charge of 3.5% on all taxable income (including investment income) received in 2011.
Savings and investment returns are also being targeted with the fixed rate of tax applied to interest and investment income increasing from 20% to 25% from 1st January 2012. Where interest income arises in a tax haven, such as the Channel Islands or the Isle of Man, interest will be taxed at 30%.
Advisers in Portugal will be assisting their clients mitigate the effects of these high tax rates, with the emphasis on transparent investment products such as locally compliant life assurance bonds. Blacktower Financial Management Group have been supporters of these investment vehicles in Portugal for more than a decade. 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 made 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 for example, 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 This 5% amount can be taken every year for 20 years, or accumulated and withdrawn less frequently without triggering a ‘chargeable event’ for tax purposes (a ‘chargeable event’ occurs when you withdraw in excess of your capital invested).
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.
Inheritance tax planning
Structuring your assets through an offshore bond held in Trust can mitigate, or avoid altogether, taxes due when transferring wealth. Assets above the nil rate band (the threshold above which inheritance tax applies) which are not held in Trust may be liable to inheritance tax at 40%. Spouses and civil partners can apply to transfer their nil rate band allowances so that any part of the nil-rate band not used when the first person died can be transferred to the surviving spouse or civil partner for use on their death. However, the inclusion of residential property in the value of an estate for inheritance tax purposes means that many people will exceed this double allowance.
As offshore bonds are not UK-based investments, this can help you mitigate your UK tax bill if you are a UK expatriate. A fundamental benefit is that it provides a ‘tax wrapper’ around your investment choices, with potentially more favourable tax treatment than an onshore equivalent.
Offshore bonds offer access to household name fund managers in the UK market, plus many more international and specialist fund managers. This allows you to access a wider range of asset classes when your professional adviser is reviewing your asset allocation.
First class jurisdictions
Most UK clients set up their offshore bond with companies based in the UK dependent territories, such as the Isle of Man and Channel Islands, or EU Member States such as the Republic of Ireland and Luxembourg. All these jurisdictions benefit from stable governments, strong regulatory controls and measures to protect policyholders.
This facility is not suitable for all expatriates and we recommend that advice is sought before one makes any commitment. As an Independent Financial Adviser, Blacktower seeks to ensure that our clients receive the advice suitable for their specific circumstances. Please contact us for further details 289 355 685.