TAXES ARE a fact of life. Nobody enjoys paying them, but the fact is, we have to accept that we need to fund the infrastructure and other benefits provided by government.
With governments seeming to forever fall short of their budgets, they are always looking for ways to make up the deficit – and that often means increasing taxes across the board. What we do not want to do is to pay more tax than we legally are obliged to.
By the year 2031, almost 30 per cent of the UK population will be over 60. The number of people aged 65 and over rose to 28 per cent between 1971 and 2003. The demographic changes in the European population as a whole means that fewer people are paying income tax to pay the retiring sector in pensions and welfare payments. Since people are also living longer, the burden for government to raise taxes increases.
Financial commentators fear that soaring levels of public spending mean that UK Chancellor of the Exchequer, Gordon Brown, will raise taxes by as much as three pence in the pound next year. They say he is running out of cash and must find £11 billion to fill a Treasury black hole. The knock on effect for taxpayers could be dire if Brown has to find extra revenue to balance the books.
Other European countries are also feeling the pinch and some of those in the Eurozone are falling short of the European Central Bank’s budgetary deficit limit of three per cent GDP (gross domestic product). Portugal, Germany, Italy and France are struggling to balance the books and tighten their excessive public spending. And they are all focussing their attentions in one direction – taxation!
The retired expatriate may have more pressing concerns than increases in income tax. The EU Savings Tax Directive, inheritance tax and capital gains tax are closer to the heart and another source for Treasuries to get their hands on your money.
The Savings Tax Directive recently came into force to crackdown on the people who fail to declare interest on their savings accounts held in either offshore centres, or banks situated in a different European country to the one in which they are tax resident. It is an agreement between Member States to automatically exchange information on savings income to the relevant tax authorities.
The EU also negotiated tax savings agreements with Andorra, Liechtenstein, San Marino, Monaco and Switzerland as well as the Channel Islands, Isle of Man and several Caribbean Islands, which have agreed to apply a withholding tax or exchange information if the client requests it. The withholding tax started at 15 per cent and will rise to 35 per cent by 2011, so, depending on where you are tax resident and what your tax liabilities are, you may end up paying more tax than necessary. In any case, using structures such as a specialist life insurance bond could significantly lower your tax bill, and these structures are fully compliant with the Directive.
If the tax authorities discover significant or intentional discrepancies in your tax affairs, then they will investigate further and this could go back over your tax record for a number of years. Serious penalties could occur! In the UK, the Revenue is working hard on tracking down offshore assets and has recently stepped up its efforts in this respect.
Another major concern for expatriates is the matter of inheritance tax, which can catch up with you even though you are residing overseas, as it is based on domicile and not residency. Domicile is a legal concept and concerned with your loyalties to a country, or ‘belonging’ to it, rather than actually living there.
It is forecast that UK inheritance tax (IHT) could top £2.9 billion this year and the Treasury is taking in £1 billion a year more in IHT than when Labour came to power. In 1997, HM Revenue and Customs (formerly known as the Inland Revenue) accumulated £1.56 billion in IHT, which soared to £2.5 billion – a 60 per cent increase – in 2004. With the huge rise in UK property value, many more people are becoming liable for this tax – the number has nearly doubled in the last eight years.
Inheritance tax bites if your worldwide assets, which include not only property but savings and investments as well as cars, household effects and jewellery, reach £275,000 or over, when taxed at a flat rate of 40 per cent. Capital gains tax should not be ignored either. If you sell an asset and make a profit of more than the current allowances, you may be liable for capital gains tax. An asset could include valuable paintings, shares or a holiday home.
Whether you like it or not, taxes are a fact of life. If you have any undeclared tax liability, knowingly or unknowingly, be assured the taxman will catch up with you in the end. For the discerning taxpayer, one line of defence is to employ ways and means of legally avoiding paying as much tax as possible. There are several avenues to take to reduce tax liability, like investing in certain structures and trusts. It is not a venture that should be taken lightly or by the unskilled. An experienced financial adviser will be able to steer you through the tax maze and determine if and where tax savings can be legitimately made on your behalf.
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