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The Brexit or Invoking the Law of Unintended Consequence.

By David Hattersley - Topics: BREXIT, Spain, Uncategorised, United Kingdom
This article is published on: 28th October 2016

28.10.16

Since the Brexit vote most news has been about potential Trade deals, and Sterling’s fall. However it perhaps has gone unnoticed, that from a variety of differing scenarios with outcomes by no means certain, a Constitutional crisis could be gathering steam.

It all stems back to the European Referendum Act 2015, that didn’t consider the variety of outcomes and was legally non binding. In addition, the power of the Royal Prerogative that was curbed when King John signed the Magna Carta in 1215 is being used by the Government, and in essence his successor Theresa May, to make or break treaties with other countries including the EU, in this case invoking Article 50 without the need for it to be passed into law via an Act of Parliament.

Critics of this say that the 1972 Act (based on the UK joining the Common Market) ceded power from the UK Parliament and allowed EU law to pass into UK law. This gave the British people protection under a new constitution based on EU law (based on Napoleonic Law). The UK has never had a written constitution that protects it citizens and gives them certain rights. It is being argued by a variety of bodies via legal challenges against the PM for using the Royal Prerogative to take away rights bestowed to Parliament. Some go as far to say “enforced removal” of citizenship rights from 65 million people would be “completely unprecedented “in modern democracy. Expat campaigners are also arguing that the “rights enjoyed by British citizens beyond these shores are so fundamental that legislation is required to take them away”.

The legal challenge has been mounted to the process of withdrawing the UK from the EU without a vote in Parliament and is going to the High Court, to be heard within the next two weeks. If the government lose due to Judges imposing their will (note unelected!), it would then be ironic for this eventually being heard by the European Court of Justice, the UK’s next step .

If the UK government win this current legal challenge on the basis “ Respecting the outcome of the referendum and giving effect to the will and the decision of the people “, that too could lead to further challenges for whom the right to vote was taken away i.e. a large percentage of Ex Pats and those Europeans citizens in the UK.

Additionally, working on that basis could give credence to Scottish Independence should they have a 2nd referendum and vote to remain in Europe. The same could be said of Northern Ireland, which has its own Parliament as well, and perhaps even Gibraltarians, as they overwhelmingly voted to remain.

The other major crisis in the making is the “Great Repeal Bill” debate that is due to be put to the House next year. A number of scenarios could occur. Many M.P.’s supported remain and the government still has deep divisions within its ranks. With only a majority of 10 seats in the House, a loss could force a vote of confidence, an early election, and a greatly disenchanted and potentially a disenfranchised electorate that voted to leave.

If they win then it passes to the House of Lords, who overwhelmingly wished to remain in the EU, and should they vote against it, take note Leave campaigners, an unelected body voting against the wishes of the majority!!

The Law of Unintended Consequence reigns supreme, or quite simply chaos. It makes Spain’s recent political turmoil insignificant, and I wonder how many of those that voted to leave or indeed did not vote at all, would have wanted these potential outcomes.

What would be even more ironic would be that the UK Government, in its current format, with many of the Ministers that supported the Leave campaign in positions of power, having to go to the European Court of Justice to overrule either singularly or both the UK Judges or the House of Lords to push through the Brexit, whilst at the same time preside over the breakup of the Union.

The UK referendum on the EU – Lose your vote or use it!

By David Hattersley - Topics: europe-news, Uncategorised, United Kingdom
This article is published on: 20th January 2016

20.01.16

In the words of Edmund Burke, “The only thing necessary for the triumph of evil is for good men, to do nothing.”

For the sake of equality I will add women as well! But, perhaps this is the greatest test of democracy that my generation has faced, and some of us, either through neglect or lack of knowledge, do not realise what we can do, as expat individuals. To simplify matters, detailed below are the facts. It is up to each individual to take the required action. I am including links to the relevant websites so you can get the full details if you require.

From the Electoral Commission’s website, it clearly states that British citizens living abroad for more than 15 years are not eligible to register to vote in UK elections.

www.electoralcommission.org.uk/faq/voting-and-registration/can-i-still-vote-if-i-move-overseas

On the aboutmyvote.co.uk website it states that registered overseas voters will be able to vote in the upcoming referendum on the UK’s membership of the European Union. The date of the referendum has not been announced yet but it is scheduled to happen before the end of 2017.”

www.aboutmyvote.co.uk/register-to-vote/british-citizens-living-abroad

If you visit www.gov.uk/voting-when-abroad, this site gives clear guidelines on how to register your vote as an overseas voter under British Citizens moving abroad, provided that this is done within 15 years of leaving the UK.

Alternatively, one can register on the following site. It only takes 5 minutes, but you will need your old address including post code, passport number and National Insurance number.

www.registertovote.service.gov.uk/register-to-vote/country-of-residence?_ga=1.161822076.117065480.1450435369

Renewing you registration will then need an Annual Declaration. This is based on the Electoral Commission document dated March 2010 and can be viewed as below. The specific section is;

www.electoralcommission.org.uk/__data/assets/electoral_commission_pdf_file/0011/43958/Part-F-Special-category-electors-March-2010.pdf

“2.21 Consequently, entries may be made or registration renewed after the end of the 15-year period where the applicant meets the application deadline as set out above. Accepted applications last for a full 12 months in all cases unless: they have been cancelled by the elector; the elector is added as an ordinary Parliamentary elector or in pursuance of a declaration other than as an overseas elector; or it is found that the elector should never have been registered through the above procedures (i.e. as a result of an objection or review).”

For those that are less fortunate than myself and many others, an alternative for those that do not qualify can register their protest on the following website;

petition.parliament.uk/petitions/111271

This is not only about us as individuals, but about the freedom of choice for our children and grandchildren.

Do not waste your voice !

Why a Pension audit is vital for your wealth. (Part 2)

By David Hattersley - Topics: Costa Blanca, Pensions, QROPS, Renta Vitalicia, Retirement, Spain, Uncategorised
This article is published on: 2nd December 2015

02.12.15

In the previous article, I referred primarily to Pre-Retirement Planning. This article is devoted to Post-Retirement Planning ie. when you are already drawing your pension and are tax resident in Spain. For those that are lucky enough to be in receipt of a Defined Benefits Scheme (ie Civil Service / Company Final Salary Pension) most of this article will not apply to you. The same applies to those taking income from a SIPP/ Drawdown plan. This will be covered in a future article.

Primarily this article deals with “Money Purchase Arrangements” ie. Group or Personal Pensions, Stakeholder Pensions and Contracting Out of SERPs, where benefits are being taken and the tax free lump sum has been paid.

It is important to understand the taxation of income in Spain. Unlike the UK, “Earned Income” and “Capital Gains and Investment Income” are not added together to determine the highest rate of tax payable. They are kept separate with “Earned Income” taxed at the highest marginal rate, and “Capital Gains and Investment Income” capped at rates of between 20%, 22% and 24% for the tax year 2015. When one considers a person that has a State Basic Pension of £8,000 p.a. and Earned Pension Income of £12,000 (with the current rate of exchange of 1.4) it is quite easy to slip into the next highest rate of marginal tax of 31% for “Earned Income”.

One also needs to consider the rules for Lifetime Annuities by the Spanish Law “Renta Vitalicia” and its subsequent tax treatment of said income.

So why the need for a Pension audit when one is already receiving it and declaring it to the Hacienda? Are you paying too much tax as a result of the word Pension?

So does this apply to you? Possibly, and the likely reason why, is that your pension provider at retirement converted your pension to an annuity. You may have taken all the pension pots, used an open market option and transferred this to another annuity provider that offered better rates?

It is also vital to understand both the documentation sent by the UK provider on an annual basis and the treatment of pensions and annuities by the UK HMRC. Unlike the Spanish, the UK HMRC treats both pensions and annuities as one, and they are taxed under income tax rules. It is vital that this is understood. Even if you have previously informed the provider that you are living in Spain and are receiving your pension gross, due to UK HMRC rules, you will still receive a “P60 End of Year Certificate” from the provider. This clearly states under the heading “Pension and Income Tax details”.

In these cases you could be paying too much tax without realising it! As an honest citizen, one presents the P60, without having the original policy document translated into Spanish, to your local Abagado / Gestor, who in turn presents the documentation to the Hacienda. It is hard enough for them to fully understand English, let alone the tax laws relating to the UK re. pensions and how they differ to Spain. The same could be said if one is receiving advice from a UK based adviser or an “Offshore Adviser”, who are very unlikely to understand or be able to assist with the complexities of Spanish Tax law.

And the reason for this is that Spain’s tax rules treat the purchase of a Lifetime Annuity as “Investment Income” even when a “Pension Pot” is used. The full income tax law is LEY35/2006 de 28 de noviembre, del Impuesto sobre la Renta de las Personas Físicas (LEY IRPF) The specific part relating to the taxation of Annuities is found in Articulo 23 as follows:

  1. The taxation of lifetime annuities– Articulo 25.3 a) 2º LEY IRPF
  2. The taxation of temporary annuities – Articulo 25.3 a). 3º LEY IRPF

 Instead of being taxed on the full income amount, a discount is applied based on the age of the recipient when the original annuity was purchased. So for someone between the ages of 60 to 65 at the time of purchase, this represents 76%. Therefore referring to the above example the taxable “Investment Income” is only £12,000 x 24% = £2,800. The £2,800 will then be subject to the lowest “Investment Income” rate of 20% (assuming no other income) ie. tax payable of £576 p.a. A very substantial saving when compared against being taxed under “Earned Income” rules. For ease, I have not calculated the rate applied if one moves into the next highest rates of marginal tax!

I have come across a number of clients in this exact situation and I am in the process of correcting this error. Already one client has had a rebate, backdated 4 years (due to the statute of limitations) and now pays substantially less tax as a result. But it is both time consuming and hard work having to track down the likes of Pearl, Equity and Law, Equitable Life, Commercial Union, Scottish Equitable, Sun Life, Clerical Medical and Eagle Star (to name but a few) who were the major providers of pensions in the 80’s and 90’s, and then confirm it was a Lifetime Annuity that was purchased.

This is further complicated by those in Final Salary Schemes like the Teachers Superannuation Scheme, who at the same time contributed to the Group AVC, and considers that the pension income comes from one source. There is the possibility that the AVC under a default process purchased an Annuity offered by the same provider.

This is a service provided for existing clients, although at some stage they will need an official translator to translate the documents into Spanish if the UK provider will not do so.

In some instances though, either because of a lack of understanding by 3rd parties ie. the Hacienda or a Gestor, some people are claiming their pension income from a QROP/ SIPP as a temporary annuity whilst still retaining control over the investment and have not actually used cash to purchase an annuity ie it is still a pension in drawdown.

This is incorrect and will be explained why in a later article. Further articles will also include “The Treatment of Small Pension Pots”, “Pensions Flexibility” and “Pensions in Drawdown”. What I have learned time and time again over the course of many years experience in the pensions industry is that the “Devil is always in the detail” and why a pensions audit is vital.

As Financial Advisers we are not professional tax advisers, but we work closely with said professionals, and in this instance the tax advice has been provided by HCS Accounting of Denia

Why a Pension audit is vital for your wealth Part 1

By David Hattersley - Topics: Costa Blanca, Inflation, Pensions, QROPS, Retirement, Spain, Uncategorised
This article is published on: 25th August 2015

25.08.15

I have been trained in the UK and have been specialising in Pensions since 1987. As well as keeping up to date with the subsequent (and numerous) changes in legislation, I also have a good understanding of the variety of pensions offered since then. In this article I am concentrating on Pre-Retirement Planning ie. those people that have yet to take their pensions. With ever changing careers in private industry and the end of the idea of “jobs and pensions for life”, which was part of the revolution in the late 70’s, most people acquire a number of pensions and different types of pensions over a period of 30 to 40 years. In some cases, they are not even aware of their entitlement, in particular, Defined Benefits Schemes to which the rules changed from the late 80’s (my Father in Law being a case in point who was not aware he was entitled to benefits under such a scheme until well into his retirement) and Contracting Out of SERPs plans.

Since the Finance Act of 2004 pensions have come under that legislation. The general wording of this legislation was “Pensions Simplification”. As advisers at the time, we knew full well that this would not be the case and we have been proven correct, with the subsequent attacks on pensions by a variety of governments seeking to raise revenue and reduce tax advantages at the same time.

Since moving here to Spain, I have come across many clients who were not aware of the benefits that they were entitled to. It has required a vast amount of work tracking down both providers and employers that no longer exist. In some instances it has proved to be fruitless, but others have benefited from plans that they are not aware of. That is the first stage of my role as a Financial Adviser, which is to question a potential client’s work history and seek full details. That however is the easy bit as the options available at retirement have been given greater flexibility, but the irony is that independent advice is hard to come by in the UK unless you are prepared to pay a fee on a time cost basis.

The first question is, do you plan to become tax resident in another European country? For those that plan to still maintain a home in the UK (even as a holiday home), that is further complicated by ever changing rules regarding residency in the UK vs tax residency in the chosen country.

What do you need to do before you leave the UK and become tax resident in an EU country? A simple question perhaps, but the tax free lump sum available in the UK now referred to as “Pension Commencement Lump Sum” or PCLS (one can see the tax free status of that being restricted in the future) is liable to be taxed certainly in France and Spain once you become tax resident. There are legitimate rules reducing this, but once again, these need advice. How does one therefore get your PCLS to take advantage of the current UK tax free status, without having to take the pension too? Perhaps you want to stagger your pension income as a result of continued part time work or “consultancy”. Many of my generation want to still work past normal retirement age, but at a slower pace.

Currency also has an impact, within the last 5 years the £ to the € has gone from 1.07 to 1.42 Euros. If one thinks that will be maintained, consider that in 2002 when the Euro was launched the £ to Euro was as high as £1 to 1.56 Euros. The impact to those that budgeted on that basis over the ensuing 8 years was detrimental to their wealth, so how does one hedge against currency fluctuation?

Does all your pension come from a UK source or have there been earnings and pension entitlements from overseas employment? Do you have a mixture of Final Salary schemes and personal money purchase pots? Is there a need to consolidate these, or treat each individual arrangement on its relative merits?

With recent legislation, trustees of Final Salary schemes (Defined Benefits), with the exception of transfers less than £30,000, now need the involvement of a fully qualified UK financial adviser who has passed his recent exams. This is all very laudable but how can that adviser be aware of the tax rules in your new country of residence? In any analysis carried out by a Spectrum Partner, it is vetted and checked by a Spectrum Fully Qualified Chartered Financial Planner, and if need be by a UK Financial adviser if part of your pots are as above. It is important to note that no UK Government funded pension eg. Civil Service can be transferred.

Then there is the reduction in the Lifetime Allowance, the passing of your pension pot to your chosen heirs and beneficiaries, the correct selection of good quality properly regulated funds and fund managers dependant on an individual needs, regular reviews as needs change, and the changes to the amount one can take on an annual basis due to recent pension flexibility rules. These are all areas that are vital to consider.

Even after the audit, and a decision to potentially transfer part or all of one’s pots, care needs to be taken in the selection of the QROP/SIPP Trustee and the jurisdiction that it comes under.

Having mentioned the above it may be in some cases that not all your pension pot should be considered for a transfer.

It may be beneficial to consider the purchase of a Lifetime Annuity from a UK provider as these have substantial tax advantages over pension payments in Spain. This will have to be carried out before one moves abroad on a permanent basis and, as stated earlier, for every potential client advice is given on a case by case basis.

In many cases, a lifetime of pension saving can result in funds being equal to or greater than the value of a property purchased abroad. Should one not take the same planning, care, advice and due diligence when planning your retirement for an income that may have to last 30 years? That is where we can be of help.

FACTA: the unintended consequence for Expatriate US citizens

By David Hattersley - Topics: Spain, Uncategorised
This article is published on: 13th May 2015

13.05.15

I have an affinity with the USA, my first manager during a part time job with a UK insurance broker in the 1970’s was an American, a Malcom J Clifford who drove around in a red E.Type. Then, my first full time sales roles in the UK was a happy 8 years spent with SC Johnson, the US company based in Racine in Wisconsin. My first client in Spain was and is an American lady married to an Englishman who both worked offshore before retiring here. And now I have my first grandchild, born in the US, of English parents with my son-in- law working there.

It seems that there are an awful lot of “firsts” that I have to be grateful for, that emanate directly and indirectly from ties with the USA.

On a recent business trip to San Sebastian to look for potential expat clients, the majority seemed to be from the US, not an Englishman in sight. So for a potential niche market a seed was planted.

That was until I researched FACTA and began to understand its complexities, and in many ways its injustices to the individuals that retire or work abroad as US expatriate citizens.

The United States is the only OECD country in the world to tax its citizens based on their citizenship, not residence. It also, as an OCED country, has the fewest percentage of citizens living abroad (according to the US State Department, 7.6 million US citizens work or live abroad out of a population estimate in 2015 of 320,206 million which is only 0.023%). Help might be on its way though via the US Senate Committee on Finance. Hatch and Wyden released the Public Input on Bipartisan Tax Reform (see link below).

www.finance.senate.gov/newsroom/chairman/release/?id=3b14e94b-69f9-41e2-9fd3-

The interesting thing to note was that up to the final submission date of the 29th April a total 1,400 submissions were made of which 347 submissions were submitted in relation to “International Tax”. This came second only to an “Individual Income Tax” figure of 448.

Whilst the principle was fine, especially in relation to those that tried to dodge paying tax of any kind, anti terrorism, trafficking et al, the majority of middle class US citizens abroad were, and are, honest citizens, paying tax in their country of permanent residence whilst still trying to desperately retain their American citizenship. The rules are both complex and numerous, and it is easy to fall foul of these, and be penalised. There is a major differential between “large body Corporate” that gets many tax breaks vs the individual and or small company.

The majority of submissions started with “I live in or have lived in for a number of years and paid my taxes in”.

On reading reports on the impact on this legislation I have come to realise that the

“unintended consequences” have been numerous, which is strange for a country that promotes that it is part of the global economy, and believes in freedom of movement etc, democracy and fairness.

There are many different scenarios so I will just highlight a few that have major consequences for individuals living abroad;

  1. Married couples where one is a non US citizen and not recognised by the US, paying taxes in the country of residence, and the US citizen having to consider giving up their US citizenship because of the losses sustained by being taxed by the US as a single person.
  1. Onerous paperwork via FACTA, that is not fully understood with very few choices of locally based small accountancy firms that understand it, yet still paying legitimate taxes in the country of residence and having to pay for the filing of local resident taxes too.
  1. The ability to save for retirement, because local pensions do not comply with US regulations on pensions, and could be subject to tax both on the way in and on exit.
  1. Currency “ghost gains” applied by the US IRS on a capital gain. Whilst large companies can use a “functional currency”, individuals have to report in US$. If an American bought a primary residence for 200,000 Euros when the exchange rate was 1 EURO = $1.50 ( ie 133,333.33 US$ ) and they sell the same home for 200,000 Euros when1 Euro = $1.00, ( ie 200,000.US$ ) they would have a US taxable gain of $66,666.66 in phantom profit. This same example applies to mortgages and a variety of other investments. In many cases Americans have to pay taxes on these exchange rate gains but cannot use the losses if they occur.
  1. The substantial reduction in the number of foreign institutions in the country of residence offering banking, savings and investments, that are compliant to the country of residence. This is due to the increase in both legal and compliance costs of these institutions of complying with FACTA. But, a US citizen who is resident in a foreign country cannot open a US sited bank account or investment either.

These are just a few examples, and whilst we cannot change the rules or the reporting procedures, we can at least provide limited financial advice, a range of products and services appropriate to the country of residence to which we operate in, and investment advice that is locally compliant, written in English and available in multi currencies.

Scottish Independence: A major faultline exposed in the UK?

By David Hattersley - Topics: europe-news, Spain, Uncategorised
This article is published on: 15th September 2014

15.09.14

Whatever the outcome of the referendum on September 18th, the willingness of people to take risks to free themselves from Centralised Government (ie. in this case, Westminster) has exposed the growing dissatisfaction with large centrally controlled government. This would still apply to the UK, even without Scotland. No doubt there will be intense negotiations over the coming months in relation to the outcome of the referendum.

With the UK elections due soon, this could give rise to the same dissatisfaction in the UK, particularly if it is seen that the Scots get greater freedom. As a result, the UKIP could gain some seats based on their anti-EU stance, or there could be a change in the balance of power in key seats. The potential then arises of a coalition, but how will that be formatted? Will there then be a referendum on an exit from the EU?

So, where does this leave investors? The UK has been seen as a “safe haven“ for investors and this is bound to change, at the very least just in perception. Markets do not like uncertainty and this inevitably leads to greater volatility. Currency, bonds, gilts, property and equities will all be affected.

A globally diversified portfolio, in a wide range of asset classes, will help spread the risk compared to a UK-biased selection. This is where Independent International Financial Advice is vital! Protection of wealth can only be achieved where all asset classes are considered as part of a portfolio.

Spectrum Economic Forum Davos 2014

By David Hattersley - Topics: Spain, Spectrum-IFA Group, Uncategorised
This article is published on: 20th January 2014

20.01.14

Having spent four days on a wonderful Spectrum IFA Group Annual Conference I have now had time to read again the scripts of the presentations and reflect on their impact on investment strategies. Apart from the fact it was by consensus of the other Partners one of the best conferences to date, helped by the friendliness of the staff at the Sheraton Hotel, and the stunning location, the presentations by the investment managers we use were of great interest.

When you consider the diversity of styles and approaches from the likes of Jupiter, BlackRock, Henderson / Gartmore, JP Morgan and Kames, it became very apparent that they all held similar views with regard to the markets and the potential area’s for growth for 2014 and beyond. This was enforced by a question and answer forum near to the end of meetings with all of them present to answer a variety of questions. The major message was that any investment holding substantial cash was no longer an option both now and for the foreseeable future. Whatever a client’s attitude to risk was, and their requirement for either real income, capital growth or both, a solution was available. But rather than a single asset class, spread of assets on a global basis was vital, and that was the key message that came out.

It was also of interest talking to the CEO of Prudential International, Michael Leahy , not so much about investment, but his view of the future for Prudential as a company and why. In some ways it matched the views of the fund managers, still focusing on the developed world e.g. the UK, but expanding, in Europe where opportunities existed, the Far East and other global opportunities.

Finally it was good to have a presentation from “Best Invest”, voted by the readers of Investors Chronicle, the UK Wealth Manager of the year and Best Wealth Manager for Investments in 2013 by the Financial Times. They can provide a solution for those clients of ours that may be returning to the UK or who are not resident in Europe, but work abroad, have holiday homes here and hold ISA’s, PEP’s and need advice on their UK pensions if a QROPS is unsuitable.

After all the hard work, it was great to wander through the snow, take in the bracing fresh air and explore Davos, with its variety of bars and restaurants. It was also interesting to see how the arrival of the World Economic Forum transformed and affected such a small resort. As a non-skier, and I am pleased I am a non skier having seen how steep the slopes were, it was more relaxing for me. Next year we are off to Bordeaux, warmer climes and although Swiss Air was brilliant, a pleasant drive there is already being planned.

Who do you bank with?

By David Hattersley - Topics: Investments, Le Tour de Finance, Spain, Uncategorised, wealth management
This article is published on: 30th October 2013

30.10.13

Following the recent “Le Tour de Finance” seminar at the Marriott Hotel in Denia, one of the attendees approached me with interesting tale. The Lady was a British expatriate and long term resident in the Javea area. Like many retried expatriates she had been concerned about the security of her assets following banking issues in both UK and Spain, post 2008. She told me she had always felt safe banking with British household names whether at home or abroad. She was shocked to learn that Lloyds Bank’s Spanish operations had been sold to Banco Sabadell.

She felt this had not been properly publicised and she had not had clear information about the change from the bank. She visited her local branch and was surprised that the staff knew little about the change of ownership.

I was able to explain the €100,000 per account deposit guarantee scheme, guaranteed by the Spanish Government in the same way as UK bank deposits are guaranteed by the British Government to the tune of £85,000. This Lady had clearly done her homework and pointed out that the guarantee is per banking group and not per account. We agreed that bank accounts were necessary for emergency funds even when, given current interest rates they were guaranteed to lose money in real, spending power terms. We also agreed that for longer term investing, especially for income, there were much better options out there, one particular proposition from the Prudential, (fully Spanish compliant) had been highlighted during the “Le Tour” seminar.

Our motto is “With Care, You Prosper”, we urge our clients to take a very active interest in their finances, we are here to help our clients help themselves.