Tax – if you fail to plan, you are planning .jpg

Tax – if you fail to plan, you are planning

MY RECENT articles have discussed the increasing clampdown on tax evasion. The Portuguese government, the EU, OECD, UK Revenue, plus various other international organisations – they all appear to be out in force against those suspected of evading tax, while also catching many innocent taxpayers in their net. And, at present, it appears that suspicion is aroused very easily!  

Unfortunately, honest taxpayers are also being affected by the new rules and regulations. The EU Savings Tax Directive is a prime example of this. It also means that anyone who has misunderstood the regulations and accidentally got their tax planning wrong will get caught out.

No one likes paying tax (well, perhaps it is just the people I mix with) and, since you’ll have worked hard for your money, it’s understandable – and your right – to want to keep your tax bill as low as legitimately possible. Legitimately is the key word here – while some governments may try to blur the difference between ‘tax avoidance’ and ‘tax evasion’, there is, to quote Expat Investor magazine, “a huge gulf between avoidance and evasion. Any expatriate falling on the wrong side of the gulf could end up in serious trouble”.  

Tax avoidance is the legal utilisation of the tax regime to one’s own advantage to reduce the amount of tax that is payable by means that are within the law.

Tax evasion is the minimising of tax liability by failing to declare taxable income or capital gains, or by submitting false information to the tax authorities.  

To put it another way, quoting former UK Chancellor Denis Healey, “the difference between tax avoidance and tax evasion is the thickness of a prison wall”.

At various levels, tax evasion is a criminal offence in both Portugal and the UK and can carry severe, life changing penalties. Ignorance is not a defence as far as the tax authorities are concerned. It is your duty to declare yourself for tax; establish what tax you should be paying and where, and then declare everything you should.

Tax avoidance, on the other hand, is perfectly acceptable (provided you don’t accidentally stray into tax evasion). Even the OECD, the international organisation so keen to prevent tax evasion, has said that it is “not in the business of eliminating legitimate tax planning”. While in the US, a country where the Inland Revenue Service is even more feared than its UK counterpart, a judge ruled: “Over and over again courts have said there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich and poor, and all do right, for nobody owes any public duty to pay more than the law demands. Taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”

So, how can you avoid paying unnecessary tax and keep on the safe side of the law? For most retired expatriates, a personal assessment of the investment requirements and tax position is needed before setting out a strategy. In many cases, the solution will include a combination of a suitable trust arrangement holding tax efficient investment structures like the Personal Portfolio Bond (PPB).  

A PPB is a specialist life assurance contract designed to hold capital investments and provide significant tax savings to all taxes otherwise payable. This is in addition to offering increased confidentiality, as such structures are specifically excluded from the Savings Tax Directive regulations. It’s also the perfect tool to effectively combine your investment and tax planning. It offers various benefits, including:

• No tax on income and capital gains

  rolled up

• Tax reductions or exemptions on


• Mitigation of wealth and

  inheritance taxes

• Banking secrecy

• The ability to hold a wide range of

  investment assets to meet your

  income and growth requirements

• Administration simplicity and cost


• Easy access to capital and income


Some types of Offshore Trusts are less effective under the Savings Tax Directive, but Discretionary Trusts are wholly exempt. This is very useful because Discretionary Trusts provide the ability to avoid inheritance tax. The benefits include:

• Confidentiality

• Favourable tax treatment

• Protection of capital

• Avoidance of succession laws

• Avoidance of inheritance taxes

• Avoidance of probate and timely


• Family security and tailoring to

  your family’s needs.

The tax benefits from placing investments within a PPB and Discretionary Trust can be stunning, both for you now and for your family in the future. Depending on your investment options within the PPB, you should also get capital growth. Add this to the tax you’ll be saving and it could be a very worthwhile exercise all round!

Professional advice is always essential when it comes to tax planning, in any case. While there’s a huge gulf between tax evasion and tax avoidance, it’s also easy to walk a fine line between the two and, to avoid stepping onto the wrong side, you have to be certain your methods are fully legitimate. The consequences, if you get it wrong, could be disastrous, either for yourself or your family in the future.

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