When it comes to savings and investments, is your main objective to preserve your wealth, provide an income or generate growth? Perhaps it is all three? Whatever the answer, tax planning plays an important role in protecting and making the most of what you have.
While the tax tail should not necessarily wag the investment dog, there are numerous benefits to strategic tax planning, especially for expatriates who have cross-border considerations.
A reduced tax bill for you
The most obvious advantage is reducing your overall liability for income tax, capital gains tax and any other taxes on your savings, investments, assets and pensions.
If there is a more tax-efficient way to hold your capital and assets, doesn’t it make sense to explore if it could work for you? Yet many people fail to do just that and unknowingly end up paying more than they should, such as income tax on bank interest they are not even withdrawing, or capital gains tax when switching between investments.
Many expatriates are also caught out by not reviewing their arrangements for their new life abroad. Once you are no longer UK resident, certain assets that were tax-efficient back home, such as ISAs and UK investment bonds, may become taxable in Portugal. Meanwhile, you could be missing out on alternative structures available here that can reduce your tax liability as well as providing other potential benefits, such as currency flexibility.
Less taxation for your heirs
Of course, the less tax you pay in your lifetime, the more you have to either spend now or pass on to your chosen heirs. With some investment structures, you may also be able to lower the inheritance tax liability for your heirs. A Portuguese-compliant life assurance bond, for example, can be highly tax-efficient for estate planning purposes. Ideally you want a solution that will limit inheritance taxes while also providing tax-efficient income and investment growth throughout your lifetime, so take personalised, specialist advice to explore your options.
In any case, strategic tax planning could help make things easier for your family when you are gone. Many investment arrangements that provide tax efficiency also offer more estate planning flexibility and control.
Most UK pensions, for example, are only transferable to your spouse on death, but when transferred to a Qualifying Recognised Overseas Pension Scheme (QROPS) or reinvested in a suitable tax-efficient structure for Portugal, you could pass funds on to other chosen beneficiaries, often without the need to go through probate.
Maximising real returns
In this global climate of economic uncertainty and prolonged ultra-low bank interest rates, effective tax planning also plays a part in helping returns outpace the cost of living.
Ultimately, what counts when assessing the value of investments are actual returns – after all tax, expenses and inflation are taken into account. Property, for example, is often lauded for producing relatively high returns over the long term, but with stamp duty, local rates, capital gains and potentially wealth taxes applied, the tax burden can be very large compared to other assets.
With investments, the starting point should always be making sure your portfolio is well diversified and specifically designed to suit your situation, needs, goals, time horizon and risk tolerance. But without suitable tax planning, you could find returns diminished by taxes that could have been avoided or at least significantly reduced.
How to get the best results
It is easy to get DIY tax planning wrong, especially with the regulatory goalposts changing all the time. Expatriates have the added complication of having to deal with the tax rules of more than one country at a time when global tax scrutiny is at its highest. Getting it wrong can not only lead to an unwelcome and unexpected tax bill for you or your heirs, you could end up facing a tax investigation.
It is important to make sure your tax planning is not done in isolation or as an afterthought – it should be a fundamental part of your investment, pensions, estate planning and overall wealth management approach. Be sure to schedule regular reviews so you can adjust your arrangements to keep up with any life changes or tax reforms that may affect you, including new opportunities.
For the best results, talk to an adviser with in-depth understanding of cross-border taxation, including how the Portuguese tax regime interacts with UK rules. As well as offering peace of mind that your tax and wider financial planning is compliant in Portugal, they can ensure it meets your income needs and goals in the most tax-efficient way today, without burdening your family with unnecessary tax headaches in the future.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should take personalised advice.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com
By Dan Henderson
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Dan Henderson is a Partner of Blevins Franks in Portugal. A highly experienced financial adviser, he holds the Diploma in Financial Planning and advanced qualifications in pensions and investment planning from the Chartered Insurance Institute (CII). | www.blevinsfranks.com