By Occitanie
This article is published on: 6th September 2021
Following the summer break, welcome to the latest edition of our newsletter “Spectrum in Occitanie, Finance in Focus” brought to you by your Occitanie team of advisers Philip Oxley, Sue Regan, Derek Winsland, together with Rob Hesketh now consulting from the UK.
Following our last newsletter on the subject of inheritance planning, we thought we would turn our attention to the significant column inches in the financial press currently devoted to the growing risks of inflation.
What is inflation?
Inflation is essentially the decrease in the purchasing power of your money as a consequence of a sustained increase in the price of goods and services. Therefore, in an environment of rising inflation, unless your income increases at a similar level you may not be able to maintain the same standard of living.
Inflation is typically measured using a wide variety of items that many people would typically purchase. For example, the Office for National Statistics (ONS) is continually monitoring the price of about 600 goods from around the UK. These monitored price increases are weighted based on popularity and value. Also, the items measured are under constant review with hand sanitiser having been added since the onset of the pandemic.
What is happening to inflation now?
Inflation has been rising at a pace in recent months and this level of higher inflation is predicted to remain in the short term, and possibly the medium term. In France, the UK and the US, inflation increases since the beginning of the year can be seen below:
| January 2021 | July 2021 | |
| France | 0.6% | 1.2% |
| UK | 0.7% | 2% |
| USA | 1.4% | 5.4% |
What causes inflation?
There are several economic theories behind the causes of inflation, the primary ones being the following:
i) Demand Pull: This occurs where demand for goods and services outpaces supply and consumers are prepared to pay more for some items. This scenario is often experienced in circumstances where an expansionary economic policy is present – often evident where there are low interest rates, which encourages borrowing, or recent tax cuts resulting in additional funds in the pockets of consumers.
ii) Cost Push: Often caused by a shortage of supply and/or increases in the costs of production, such as the price of raw materials or increased labour costs which are passed onto the consumer by way of higher prices. A simple example of this is when the price of crude oil increases, this is passed onto consumers at the pumps in the form of higher petrol and diesel prices.
For many businesses, labour costs are a large component of their cost base. When the economy is growing strongly and unemployment is low, labour shortages can arise and companies may be prepared to pay more to secure skilled, well-qualified employees. These costs can also be passed onto the consumer in the form of higher prices.
iii) Increase in the Money Supply: I am sure some of you will remember the 1980’s, a time during which Mrs Thatcher dominated the political scene in the UK and a bedrock of her economic principles was monetarism (the theory or practice of controlling the supply of money as the chief method of stabilising the economy). This economic theory was underpinned by the principle that excessive growth in the supply of money was the primary cause of inflation. In more recent times, Quantitative Easing (QE) has been a policy employed by central banks to stimulate the economy, firstly following the 2008-9 financial crisis and again since the onset of the Coronavirus pandemic. This policy involves central banks purchasing government bonds and other financial assets which injects large amounts of money into the economy to stimulate growth and this could certainly be one of the factors behind increasing inflation rates this year.
Why does inflation matter?
If you know anyone who lived in Zimbabwe in the years 2007-2009, they will tell you why. Inflation peaked at close to 80,000,000,000% meaning prices were doubling every day and there were scenes in the news of people using wheelbarrows to carry their money around! The central bank published bank notes of ever-increasing value and at one stage it was reported that a loaf of bread cost the equivalent of $35million!
A colleague of ours who is based in Italy, professes to have a 100 trillion dollar note issued by the Reserve Bank of Zimbabwe in his office.
Of course, this is an extreme example (although not unique), but there are multiple reasons why governments and central banks become a little jittery when inflation starts to increase beyond their targets, not least because of inflation’s tendency to be self-perpetuating. For example, inflation is increasing therefore workers demand higher pay increases. Higher pay increases lead to businesses clawing back these extra wage costs in the form of higher prices for their goods/services. Consumers notice that prices are rising and demand higher pay increases and so on. This is a little simplistic, but hopefully illustrates the point.
In the past, governments and central banks (often through interest rate increases) have acted quickly and decisively to try and control this inflationary process. Currently however, governments and central banks seem a little more relaxed about the matter – at least in the short term. One of the many reasons for this is down to the pandemic-ravaged economies around the world which are recovering, but still fragile..
How long will this period of higher inflation last?
This is a difficult one to answer.
Here is what two of our investment partners say on the matter:
“We do not agree with theories of runaway inflation, currently a hot topic among market commentators. To summarise briefly, the main reason for the spikes we are seeing today is that prices were abnormally low a year ago, and the rate at which they have risen since has been exacerbated by COVID-related dislocations in spending, employment, production and logistics. We believe – as US Federal Reserve Chairman Jerome Powell has been at pains to note – that unusually high US inflation will be transitory. But it’s worth clarifying what we mean by transitory. We don’t mean that inflation will be back on target by year end. Instead, we see it peaking in the next month or two, before falling back toward 2% throughout 2022.” Julian Chillingworth, Chief Investment Officer, Rathbones – 7th July 2021.
“Lower for longer’ was a term used to describe the post-credit crunch interest rate environment, a period in which interest rates languished near 0%. The promise of rates being lifted as the global economy strengthened never really materialised: rates stayed lower for much longer than originally planned – a decade – and then came Coronavirus. We’re now seeing a similar story take shape, this time on the subject of inflation. The Central Banks reiterate that accelerating inflation is ‘transitory’ and not a cause for concern, but it’s the Manager’s advice that investors prepare themselves for a different truth entirely: inflation is going to be higher for longer.” VAM Funds, Monthly Market Outlook – July 2021.
And from other sources:
“Higher Inflation Is Here to Stay for Years, Economists Forecast.” The Wall Street Journal, Headline on 11th July 2021.
“The ‘inflation is transitory’ argument is starting to wobble…the debate about temporary or problematic inflation will continue for months and will grow more heated.” Greg McBride, Chief Financial Analyst at Bankrate.com
Is it possible to protect your savings from the impact of inflation?
Yes – to some extent.
If you chose to keep all your savings in bank accounts in the UK, France or elsewhere the chances are that any interest you will receive will be a very small fraction of 1%.
If your cash is in a French bank account, balances up to €100,000 per person, per banking group (€200,000 for joint accounts) are protected. In the UK, cash deposits are protected to a limit of £85,000 per person, per banking group (£170,000 for joint accounts).
These guarantees undoubtedly provide some comfort in relation to the security of your funds, but over time the effective value of your savings will diminish, and this will occur more rapidly in a higher inflationary environment.
For example, if inflation were to average 2.5% for the next 10 years, £100,000 of savings today, would be worth only £78,120 in today’s terms, in 2031. To consider this in a different way, for £100,000 to keep pace with inflation, in 10 years’ time it needs to have grown in value to £128,008. This erosion of value is even more marked over longer timescales.
The simple truth is that there is no certain way of keeping up with or indeed beating inflation, without accepting a degree of risk. Thus, we have a choice, leave our savings in a bank account, and accept the certainty that inflation will erode our wealth if we don’t do something about it, or talk to someone who has the expertise to invest money in a manner that will give the possibility of a positive return within the parameters of your personal objectives and appetite for risk.
It is advisable to hold at least six months of your average monthly outgoings as a contingency fund for unexpected needs. With bank interest rates and inflation at their current levels, it makes sense to look at alternative homes for the excess cash over and above your ‘emergency fund’.
As most readers will know we at Spectrum are big advocators of diversification and the multi-asset approach to investing. We place our trust in our preferred investment partners to look after our clients’ money to help them achieve their financial objectives. Their investment teams are constantly monitoring the global economic, environmental, and political factors that may affect portfolios and act accordingly to produce the best outcomes for clients.
Whether you are a cautious investor or an adventurous investor, or somewhere in between, we are here to discuss the most appropriate investment solution for you. So, if you would like a review of your situation, please don’t hesitate to give us a call.
What next?
If you would like to discuss anything we have covered in this month’s newsletter, please do get in touch at Occitanie@spectrum-ifa.com or contact your Spectrum adviser directly.
We would love to hear from you with any comments and/or questions, as well as suggestions as to future topics for discussion. Finally, please feel free to pass this on to any friends or contacts who you think might find it interesting.
By Occitanie
This article is published on: 18th May 2021
Welcome to the latest edition of our newsletter ‘Spectrum in Occitanie, Finance in Focus’, brought to you by your Occitanie team of advisers Sue Regan, Philip Oxley, Derek Winsland, together with Rob Hesketh now consulting from the UK.
As a very important part of any financial planning review, we thought we would re-visit the subject of inheritance planning in this newsletter for the benefit of newcomers and as a reminder for those of you who are already settled in this fabulously diverse and beautiful region of France.
Despite the importance of making sure one’s affairs are in order for the inevitability of one’s demise, very few actively seek advice in this area and, as a result, are unaware of the potential difficulties ahead for their families and heirs, not to mention potential tax bills which can be quite substantial for certain classes of beneficiary.
The basic rule is, if you are resident in France, you are considered also to be domiciled in France for inheritance purposes and your worldwide estate becomes taxable in France, where the tax rates depend upon the relationship to your beneficiaries.
Fortunately, there is no inheritance tax between spouses, PACSed or civil partners, and the allowance between a parent and a child is reasonably generous, currently €100,000 per child, per parent. For anything left to other beneficiaries, the allowances are considerably less. In particular, for stepchildren and non-related beneficiaries, the allowance is a measly €1,594 and the tax rate on anything above that is an eye-watering 60%!
There are strict rules on succession and children are considered to be ‘protected heirs’ and, as such, are entitled to inherit a proportion of each of their parents’ estates. For example, if you have one child, the proportion is half; two children, one-third each; and if you have three or more children, then three-quarters of your estate must be divided equally between them.
You are free to pass on the rest of your estate (the disposable part) to whoever you wish through a French will and, in the absence of making a will, if you have a surviving spouse he/she would be entitled to 25% of your estate.
You may also be considered domiciled in your ‘home’ country and if so, this could cause some confusion, since your home country may also have the right to charge succession taxes on your death. However, France has a number of Double Taxation Treaties (DTT) with other countries covering inheritance. In such a case, the DTT will set out the rules that apply (basically, which country has the right to tax what assets).
For example, the 1963 DTT between France and the UK specifies that the deceased’s total estate will be devolved and taxed in accordance with the person’s place of residence at the time of death, with the exception of any property assets that are sited in the other country. By the way, the UK–France Treaty is not affected by Brexit.
Therefore, for a UK national who is resident in France, who has retained a property in the UK (and does not own any other property outside of France), the situation would be that:
If a DTT covering inheritance does not exist between France and the other country with which the French resident person has an interest, this could result in double taxation if the ‘home’ country also has the right to tax the person’s estate.
Hence, when people become French resident, there are usually two issues:
European Succession Regulation No. 650/2012
Many of you will no doubt have heard about the EU Succession Regulations that came into effect in 2015 whereby the default situation is that it is the law of your place of habitual residence that applies to your estates. However, you can elect for the inheritance law of your country of nationality to apply to your estate by specifying this in a French will. This is effectively one way of getting around the issue of protected heirs for some expats living in France.
There are a number of other ways in which you can arrange your affairs to protect the survivor, depending on your individual circumstances, such as a change to your marriage regime (yes, France matrimonial law provides for couples to select a particular type of contract under which their assets will be devolved on divorce or death) and we would always recommend that you discuss succession planning in detail with a notaire experienced in these matters.
Mitigation of Inheritance Tax
On whichever planning you decide, it is important to remember that the French inheritance tax rules will still apply. So, even though you have the freedom to decide who inherits your estate, this will not reduce the potential inheritance tax liability on your beneficiaries, which, as mentioned above, could potentially be very high for a stepchild. Hence, there may still be a need to shelter financial assets from French inheritance taxes.
By far and away the most popular vehicle in France for sheltering your hard-earned savings from inheritance tax is the assurance vie. The assurance vie is considered to be outside of your estate for tax purposes and comes with its own inheritance allowances, in addition to the standard aIllowance for other assets. If you invest in an assurance vie before the age of 70 you can name as many beneficiaires as you like, regardless of whether they are family or not, and each beneficiary can inherit up to €152,500, tax-free. The rate of tax on the next €700,000 is limited to 20% – potentially making a huge saving for distant relatives or stepchildren.
The more beneficiaries nominated (e.g. grandchildren, siblings, etc) the greater the potential inheritance tax saving, depending on the value of the policy at the time of death. Beneficiaries can be changed or added at any time during the life of the assurance vie. Remember also, that beneficiary nominations are not restricted to family members, so, whoever you nominate gets the same allowance.
The inheritance allowance on premiums paid to assurance vie after age 70 are less attractive, at €30,500 of the premium (capital investment) paid plus the growth on the capital shared between all named beneficiaries, and the remaining capital invested is taxed in accordance with the standard inheritance tax bands. Nevertheless, an assurance vie is still a worthwhile investment after the age of 70 as, in addition to the inheritance tax benefits, assurance vie offers personal tax efficiencies to the investor such as gross roll-up of income and gains whilst funds remain in the policy and an annual income tax allowance of €4,600 for an individual, or €9,200 for a couple, after 8 years.
So, in order to ensure that your inheritance wishes are carried out some planning may be required and there are investment opportunities to mitigate the inheritance tax for your chosen beneficiaries. Please contact us if you would like to discuss your particular circumstances.
Inheriting From a Non-French Resident
The tax position of a French resident beneficiary inheriting from the estate of a non-French resident is worthy of a more detailed explanation.
The good news for UK nationals is that, due to the aforementioned DTT on inheritance between France and the UK and providing the deceased did not have any assets situated in France at the time of death, then there is no French inheritance tax payable if you are resident in France.
Where there is no specific tax treaty on inheritance in place between France and the country of residence of the deceased, then the obligation to pay French inheritance tax is determined by how long you have been fiscally domiciled in France at the time of death. You are considered domiciled fiscally in France if you are resident in France and have been for at least six years out of the last ten years preceding the death. If you fall within scope for inheritance tax then the allowance and tax rate will be in accordance with your relationship to the deceased.
If you have received an inheritance, then you may well need some advice on what to do with it and how best to shelter it from both personal taxes for you and inheritance taxes for your beneficiaries. We can help you with that.
Pension Funds and Inheritance Tax
Death benefits from bona fide pension schemes are excluded from your estate for inheritance purposes and are therefore not subject to French inheritance tax. Generally speaking, it is possible to leave your pension fund to the beneficiary of your choice, although some defined benefit (final salary) schemes will only pay death benefits to certain beneficiaries.
It is important to bear in mind that if you are considering encashing your whole pension pot under ‘Pensions Freedom’, once the funds are removed from the pension wrapper, they will be included in your estate for inheritance purposes. You could subsequently shelter these funds in an assurance vie but we strongly recommend you seek our advice before fully cashing in your pension funds as there may be any number of reasons why this would not be in your best interests.
By Occitanie
This article is published on: 26th March 2021
Welcome to edition number ten of our newsletter ‘Spectrum in Occitanie, Finance in Focus’, brought to you by your Occitanie team of advisers Derek Winsland, Philip Oxley and Sue Regan, with Rob Hesketh now consulting from the UK.
It seems remarkable, to me anyway, that we are already nearly a quarter of the way through the year. We still have the same problems to deal with, namely the fallout from Brexit and the continuing scourge of the Covid 19 virus, where the UK and France seem to be on diverging paths, both in terms of infections and vaccinations. With this in mind, we decided that it might be a good idea to talk today about risk, and how we might learn to live with it.
What is Risk?
Firstly, it is important to realise that risk is everywhere, and in various forms. In a sense it is like oxygen; without it, nothing happens. Sometimes you can see it, but most of the time you cannot. One thing that Covid 19 has taught us is that the very air that we breathe and the everyday items that we touch can kill us, and that is a sobering thought. The real definition of risk is the possibility that something bad might happen, either to you or because of something that you do; or even do not do. That is what makes risk exceedingly difficult to avoid. Often, we think of risk as taking a chance or a gamble, but sometimes a decision not to do something is just as risky.
Can I avoid Risk?
Yes, it is certainly possible to avoid some risks, but sometimes this has unintended consequences. If you do not eat, you cannot get food poisoning, but if you cut out that risk altogether, the end result is not positive. When it comes down to it, you have to accept risk. The real trick is calculating those risks and evaluating the likelihood of something bad happening. In investment terms, if you do not invest (and take some level of risk), you eventually run out of money. Unless of course you have a never ending and regular source of income – wouldn’t that be nice?
What is Financial Risk?
Basically, the danger of losing some or all of your money. And it comes in all shapes and sizes. There is a bewildering array of types of risk that analysts use to make them sound clever. There are however some really big ones that you need to look out for, and here are what I consider to be the most important. Have a think about how you would rate them in order of importance.
Specific and Market Risk
Here we have in fact two slightly different risks. Specific Risk is the danger of investing in one individual share, fund, or bond. If you limit yourself in this way, you put yourself at far greater risk of loss. All your eggs are in one basket. Market Risk is the danger of losing money even if you have spread out your investments more widely. Whole sectors can suddenly dip and turn against you.
Institutional Risk
You may have the best investment portfolio in the world, but what if your chosen investment company goes bust due to mismanagement, or maybe a rogue trader? Think Equitable Life, or Nick Leeson at Barings Bank.
Foreign Exchange Risk
One day we may have just one global currency. Then we will be able to forget the pitfalls of F/X risk. Until then we need to be very wary, especially we UK expatriate residents in the eurozone. In just twenty-one years the exchange rate between the pound and the euro has fluctuated between 1.75 and 1.02. That is a massive trading range. Big enough to put a huge dent in even the best investment performance. Worse still, it was not a linear move. It keeps on going up and down.
Inflation Risk
Remember 23% inflation rates in 1975? I do. Great for reducing the value of debt very quickly, but equally adept at destroying the value of savings and investments.
With all these dangers lurking at every corner, you may well be considering the mattress as a suitable home for your money. Forget it. Inflation risk will kill you, even if your house doesn’t burn down, taking the mattress and your savings with it.
The plain fact is that we all need to accept some level of risk. There is a risk/reward ratio; there is no gain without some degree of risk. The more risk you take, the more chance you have of seeing exceptional returns, but there is also more chance bad things can happen to your investment. The trick is to evaluate your true appetite for risk, and that is not as easy as it sounds. Left to his or her own devices, a single investor will tend to overestimate an appetite for risk and end up with a more aggressive portfolio than he or she feels comfortable with when a market ‘realignment’, sometimes referred to as a crash, happens a few months or years later.
The truth is that we need someone to hold our hand and lead us through this risk minefield. If we try to navigate the minefield ourselves, we are likely to lose a financial limb or two, or even worse. There are various levels of help available to us
The most effective, in theory anyway, is the DFM, the Discretionary Fund Manager. He (or she) will sit down with you at the outset and ask you lots of clever questions which are designed to reveal your real appetite for risk (not just what you thought it was). You then pay a fee of around 1% of your portfolio each year for the DFM to invest your money for you and produce as good a return as possible without exceeding your risk pain threshold.
If you decide that you cannot afford a DFM, or maybe you have not got quite enough money for a DFM to offer his services to you, the next best thing is MAP, which stands for Multi-Asset Portfolios. They are offered by insurance companies or investment services providers. These funds are specifically designed to offer you investments that are graded for risk and ensure that your investments are spread out over many markets and sectors, thereby reducing your ‘specific’ risk. Both DFM and MAP investments can be held in what are known as ‘open architecture’ bonds within assurance vie policies in France.
Many of you will also be acquainted with the ‘closed architecture’ assurance vie offered by Prudential International. This assurance vie effectively combines the dual role of the DFM and MAP. Their PruFund range of funds is administered by Pru’s own in-house team of fund managers, and each fund is invested in a wide range of markets and sectors.
In essence then, my message is this; do not take on risk without knowing exactly what you are doing, but do not avoid investments. If you do not know exactly what you are doing, get a professional to do it for you. They are acutely aware of all kinds of risk, and how to use it proportionately. Your friendly local International Financial Adviser (that’s us by the way) is there to act as a conduit to guide you into safer investment waters.
Do not be afraid to ask for advice. It also happens to be free.
Please do not forget that, although we may be restricted on where we can travel at present, we are here and have the technology to undertake your regular reviews and financial health checks remotely. If you would like a review of your situation, please do not hesitate to get in touch with your Spectrum adviser or via the contact link below.
By Occitanie
This article is published on: 4th March 2021
Welcome to the ninth edition of our newsletter ‘Spectrum in Occitanie, Finance in Focus’, brought to you by your Occitanie team of advisers Derek Winsland, Philip Oxley and Sue Regan, with Rob Hesketh now consulting from the UK.
In this our first newsletter of the year, it is appropriate we say a fervent goodbye to 2020 and look forward to what we all hope will be a better and much kinder year. Although we are heartily sick of hearing the B-word, we can’t let the passing of the UK’s exit from the European Union pass without addressing the question “where do we stand now?” We also invite our investment partners to give their views on the markets for the coming year.
Post Brexit Situation
As far as financial services are concerned, it is (at this stage) a no-deal Brexit. Financial services in the UK employs 1.1 million people, yet so far more time has been spent negotiating fishing rights than financial markets access between Europe and the UK. This financial services relationship between the two sides will be discussed and negotiated over the coming months. What does this currently mean for us expats? We have already seen:
These are but a few of the bureaucratic changes brought about by Britain’s exit from the EU.
We have covered some of these Brexit consequences in previous editions of our newsletter, but there is perhaps a more serious implication for those who hold UK investment bonds.
Why are UK Investment Bonds a problem?
Prior to Brexit, as investment bonds issued in an EU country, UK bonds were treated in the same way as assurance vie policies, with only the gain element of the investment subject to income tax and social charges. How quickly your local tax office recognises that this situation has now changed will vary, but in time it is inevitable that questions will start to be asked regarding those withdrawals that you are taking to support your lifestyle.
Why should that bother me?
As a non-EU qualifying bond, your local tax office could, as a worst-case scenario, treat the whole of any withdrawal as taxable income unless the split between capital and gain can be proved. It is more likely, however, that withdrawals from UK bonds will still only be taxable on the gain element, but the taxpayer will no longer benefit from the favourable tax treatment that the assurance vie enjoys, such as the annual tax-free allowance of €4,600 (€9,200 for a couple) after 8 years and the preferential 7.5% rate of income tax. We urge all our readers to assess their current savings and investments, to ensure that they are all France tax compliant. We can help you with those assessments.
What can we expect from investment markets this year?
We have invited one of our investment partners to give us their Investment Outlook for 2021. These are the views of Tilney Smith & Williamson that we would like to share with you.
A review of a tumultuous 2020
The investment landscape in 2020 has been dominated by the COVID-19 virus, lockdowns and unprecedented policy easing by Central Banks and governments around the globe. The US election and UK-EU negotiations provided further risks to markets. The pandemic led to a global economic shock that established new multi-generational records. For instance, UK GDP fell by over 11% in 2020, the biggest decline since the Great Frost of 1709 (1).
In financial markets (2), the MSCI All Country World equity index fell 32% in total return terms (including dividends) once COVID-19 new cases spread outside China, while government bonds outperformed as investors became more risk averse. The low point came on the 23 March prompting the Fed to say that it was prepared to buy US corporate bonds as part of a new round of quantitative easing (e.g., asset purchases). Global equities then went on to rally 63% from the trough, supported by – at various points – fiscal and monetary stimulus, economic recovery and hopes of a successful vaccine rollout, to close out the year up 15%.
The main winners of 2020 were ‘growth’ equities and direct COVID beneficiaries such as Big Tech, following widespread adoption of e-commerce and working from home practices. Long-term government bonds benefited from central bank asset purchases. In turn, gold gained from concerns about the debasement of the fiat currency system from money printing: the US created 21% more dollars in 2020 than existed previously. Despite the virus originating in Wuhan, China was one of the quickest economies to re-open and MSCI China equities rose 28%. China’s economy benefitted from lockdowns in the West, since services were restricted, but buying goods was not. China even managed to boost its share of global merchandise exports, driven by stimulus in the West creating demand. The biggest losing sectors were energy (-32%), real estate (-9%) and banks (-11%), with the COVID-exposed UK and Eurozone the laggards in geographical terms.
Reasons to be optimistic in 2021
We maintain an optimistic outlook for equities for several reasons. First, the rollout of vaccines and a gradual opening up of economies from lockdowns should encourage households to run down savings rates to sustain consumption.
Second, we expect a synchronised broad-based global economic recovery that supports company earnings. The IMF forecasts that a record 79% of nearly 200 economies will experience growth higher than 3% (3) this year. Not only would this recover much of the lost output last year, but it adds support to consensus global Earnings per Share growth of 28% expected in 2021.
Third, central bank liquidity is still projected to remain highly accommodative. The ECB topped up its pandemic emergency purchase program by €500bn in December to €1,850bn and extended the horizon of net bond purchases to the end of March 2022 (4). In a major policy change in September, the Fed made clear that it intended to “run hot” with regards to maintaining easy monetary policy in order to achieve above 2% inflation (5). Morgan Stanley forecasts that the combined balance sheet of G4 central bank assets will rise by $3.4trn by the end of 2021(6).
The UK and Brexit
Despite the widespread recovery in global risk assets, all UK equity indices were laggards, handicapped by the ongoing Brexit uncertainties and a compositional skew towards value orientated economically sensitive businesses. Should current assumptions over a vaccine inspired economic rebound prove correct, it seems probable that this skew, allied to the removal of Brexit trade uncertainties, could give rise to some relative recovery in UK equity valuations. However, with the longer term balance sheet impact of the Covid lockdowns still to be fully understood, remaining focused on the fundamental quality of the businesses selected, even in an ostensibly cheap market remains paramount.
Risks to the outlook
In terms of the risks, we continue to monitor: i) a sudden removal of accommodative policy, perhaps if inflation returns at a pace that exceeds central bankers’ expectations, ii) fears of another COVID-19 surge, or a disappointment in the effectiveness in vaccines/a mutation to a more virulent virus, iii) social unrest in the politically polarised United States, and iv) extended valuations in some sectors triggering a broader market rout.
As a reminder to our readers, Spectrum is a registered French company, regulated in France. We are not passported in from the UK, so for us it’s business as usual.
For those of you who still have investments in the UK, whether they be stocks and shares ISAs, investment bonds, pension funds or other investment portfolios, now would be a good time to review these and discuss with your provider as to whether they will be able to continue advising you in a post-Brexit world. Even if your UK provider will be able to continue advising you, they may not be familiar with the French taxation framework and the investments you hold may not be tax efficient in France. We can advise you on investment products that are suitable and tax-efficient for living in France and provide you with ongoing advice to ensure that your financial plan remains on track as your situation and attitude to risk change over time.
Please do not forget that, although we may be restricted on where we can travel at present, we are here and have the technology to undertake your regular reviews and financial health checks remotely. If you would like a review of your situation, please do not hesitate to get in touch with your Spectrum adviser or via the contact link below.
We would love to hear from you with any comments and/or questions, as well as suggestions as to future topics for our newsletter. Please feel free to pass this on to any friends or contacts who you think might find it interesting.
By Occitanie
This article is published on: 12th December 2020
Welcome to the 8th edition of our newsletter ‘Spectrum in Occitanie, Finance in Focus’, brought to you by Philip Oxley, Sue Regan, Rob Hesketh and Derek Winsland, your Spectrum team of advisers in the Occitanie.
2020 has been a year like no other we can remember. We have had a global health pandemic with tragically unprecedented levels of deaths in peacetime and significant changes for many people in relation to both their work arrangements and social lives, notwithstanding challenges in relation to individuals’ physical and mental health.
In the financial world, economies have suffered deep recessions and economic rebounds within the space of months. All financial markets plunged sharply in March, but many have recovered those losses, and more, with the US Dow Jones index recently breaching 30,000 for the first time ever. In the UK, the recovery of the FTSE 100 has been more muted and even with advances in the last few weeks, the index is still currently down about 15% from its starting point at the beginning of this year, although there are still a few weeks to the end of the year for the market to surprise!
Vaccines
Perhaps the single most positive piece of news in 2020 has been the recent succesful trials of a number of Coronavirus vaccines. With approval granted by the MRHA, the UK’s medicines agency, for the Pfizer/BioNTech vaccine, there are 800,000 doses heading to the UK with care home residents and staff thought
to be at the top of the list of recipients, followed by the over 80s and healthcare workers.
There are many other vaccines in the pipeline with Moderna and AstraZenica/Oxford University vaccines thought to be close behind in the approval process. Vaccines from Johnson & Johnson and Novavax are both in the final Phase 3 of trials, China has at least three and Russia one, which are all undergoing trials currently.
Interestingly the storage conditions and price vary greatly, with the Pfizer/BioNTech vaccine requiring about -70°c conditions, dilution before administering and is thought to cost in the region of £25 per dose. The vaccine from AstraZeneca & Oxford University, however, can be stored at fridge temperatures for up to six months, with an estimated cost of about £3 per dose (because the company has committed to distributing the vaccine at cost, during the course of the pandemic). On the day the company announced the results of its trials, the markets somewhat cruelly knocked nearly 4% off the company’s share price! Some confusion over the vaccine dosage and efficacy results didn’t help, but supplying the vaccine at cost is not going to provide the profits boost that investors might have expected.
Politics
Politically, both Biden and Trump registered more votes each than any other US President in history. Whilst Biden undoubtedly won this contest (despite Trump’s protestations), Trump and his views clearly still resonate strongly with many Americans. Politics aside, the economy, employment and equity markets have actually had a particularly good run under Trump’s stewardship. However, the markets have also taken the Biden victory in their stride. Despite what was said during the heat of the election campaign, Biden is a moderate and the response of the markets shows that also to be the view of most investors. The markets’ reaction was also supported by the likelihood of a Republican Senate (still to be determined) which will act as a check on any of the more radical instincts of the new administration. Much of the world will welcome the likely return of US support for the World Health Organisation (WHO) and the Paris Climate Accord.
Closer to home, Boris Johnson’s stock has plummeted from a comfortable election winner only a year ago, to talk of grumbling amongst his own MPs. There has been speculation of possible moves against him by his own MPs, although if this dissention does snowball, it will probably not be until 2021.
President Macron has been busy on the world stage in recent months; although interpreting the polls would suggest the French people would rather he focused on domestic matters instead. His popularity has improved from lows seen previously, but the numbers who disapprove still outnumber those who approve of his presidency and polling on people’s voting intentions for the 2022 Presidential Election show him only a whisker ahead of Marine Le Pen. But with nearly 18 months to the end of the President’s term, much can still happen.
Brexit
As this article goes to press, negotiations are still ongoing between the UK and the EU. Many areas remain unresolved including fishing rights (which seems to be one of the key sticking points in the deal, particularly due to Macron who,according to press reports, is the chief instigator behind the EU’s tough negotiating stance) as well as many other aspects of the UK’s future relationship with the EU. One item that has been clarified recently, however, is in relation to French residents in possession of UK driving licences. It has been confirmed that these will need to be exchanged for French licences, but those affected have until 31 December 2021 to secure their new licence. UK nationals who have driving licences from another EU country do not need to make this switch.
QROPS
Remaining on the subject of Brexit, one of the “go to” financial products within the expatriate market for pensions has been the Qualifying Recognised Overseas Pension Scheme (or QROPS). Since its inception 14 years ago, HMRC figures indicate there have been over 130,000 transfers and the average transfer value in 2019/20 was £125,000. This useful financial planning product has an uncertain future after the end of this year. From 9th March 2017 transfers to and from a QROPS became liable to an Overseas Transfer Charge (OTC) of 25%, unless one or more of five conditions was met. One of those conditions was that the pension member was resident in a country within the European Economic Area (EEA) and the QROPS was established in a country within the EEA. This meant that whilst the QROPS remained an attractive proposition to many expatriates within the EU, the number of individuals who went ahead with a transfer to a QROPS and paid the OTC in the tax year 2019/20 was only 13, according to an article published by Canada Life. The UK left the EU on 31 January 2020 and also left the EEA (the EEA comprises all EU member countries plus Iceland, Liechtenstein and Norway). The transition period agreed in the Withdrawal Agreement requiring the UK to be treated as an EU and EEA member, and bound by the rules of both, expires on 31 December 2020. It seems that this may mark the effective end of the QROPS, although we wait to have this confirmed. Fortunately, an International SIPP is still available to those looking for favourable solutions for their UK pension schemes and this product can provide many of the advantages afforded by a QROPS.
2021
One of our favourite quotes about predicting the future in relation to the world of finance is from the late J.K. Galbraith, who was for many years the Professor of Economics at Harvard University. He famously said that “The only function of economic forecasting is to make astrology look respectable”. For that reason, we will focus on possible trends rather than predictions!
The positive vaccine news has already seen a surge in value to those stocks in sectors that have been battered for most of 2020 – leisure, transport, hotels, restaurants, cinemas etc. It is also likely that prices in banking stocks will stabilise or possibly recover further. Furthermore, it is probable that a lot of the old traditional stocks such as oil, industrials, consumables etc. will improve as we move into 2021. What is not so clear is whether those technology stocks, seen also as “stay at home” stocks (Facebook, Alphabet, Apple, Amazon, Microsoft, Netflix etc.) which have had a stellar 2020, benefitting from the impact of Coronavirus, will continue to power ahead or take a breather in 2021. With regard to some of those sectors that were hit badly this year (hospitality, cinemas, airlines etc.) it is also unclear whether the change in consumer behaviour seen this year is here to stay, in which case any recovery in these sectors may be limited in scope.
Gold, seen as a safe haven during this year’s turbulence, fell back sharply with news of vaccine progress, but has recently stabilised, whereas Cryptocurrencies have strongly advanced in value over this period. It is difficult to assess the future direction of either of these assets, but as the vaccines get rolled out and economies improve, the predictions earlier this year that gold could reach $3,000 per ounce seem unlikely, in the short term at least. What can be predicted with more confidence is that there will still be volatility in the markets, because whilst they have been buoyed by the vaccine news, in the “real economy”, the fallout has yet to be properly felt.
Unfortunately, rising unemployment is inevitable, as are tax increases at some point, to start to chip away at the mountain of debt that has accrued through increased government spending and falling tax receipts. There has been much talk about the shape of the recovery, e.g. “V”-shaped, “U”-shaped, “W”-shaped (reflecting a double-dip recession) or even a reverse square root (unfortunately not an available button on this author’s keyboard!). The answer seems increasingly that all of these may happen depending on the country, the market sector or the company.
What we would comfortably recommend however, is to stay invested in the markets. To conclude with another well known quote from Warren Buffett, now 90 years of age and considered one of the world’s most successful investors, “The stock market is a device for transferring money from the impatient to the patient”.
We wish all our readers a very happy and healthy Christmas and we hope 2021 will be a better year for all. We will be back in touch again next year.
If you have any comments or questions, as well as suggestions for future topics for our newsletter, we’d love to hear from you at occitanie@spectrum-ifa.com. Please feel free to pass this on to any friends or contacts who you think might find the content of interest.
By Occitanie
This article is published on: 20th November 2020
Welcome to the seventh edition of our newsletter ‘Spectrum in Occitanie, Finance in Focus’, brought to you by Sue Regan, Rob Hesketh, Derek Winsland and Philip Oxley your Spectrum team of advisers in the Occitanie.
As we are approaching the end of 2020, to say that it has been an unusual year would be a gross understatement. Countries across the globe continue to adjust to life with Covid-19 and with the ongoing and ever-changing restrictions that the predicted second wave has brought with it. As this goes to ‘press’ we now find ourselves once again in a national lockdown in France.
Although it had taken a back seat since the virus outbreak, Brexit is once again at the forefront of the minds of UK expats living in the EU. Will there be a trade deal? Are we heading for a cliff-edge ‘No Deal’? It is almost unbelievable that we are still at this point in the deliberations with only eight weeks of the transition period to go.
UK Banks accounts after BREXIT
As the deadline approaches one issue that we are frequently being asked about lately by concerned clients, is that some UK banks have been writing to their customers resident in the EU putting them on notice that their UK bank accounts and credit cards will be closed either at the end of the year or, in some cases even earlier, as a result of Brexit.
Although some banks have already contacted some customers, it is apparent that only some types of account are affected and only in some EU countries. The two main banking institutions that have taken such action so far are Barclays and the Lloyds Banking Group, which includes Lloyds Bank, Halifax and Bank of Scotland. Many other banks have stated that they ‘currently have no plans to close customer accounts, but they are monitoring the situation’. Given that this could potentially affect all of us with ties to the UK banking system, we thought this would be a good topic to focus on this month.
So why are some banks closing UK expats’ accounts?
UK banks and other financial firms are currently allowed to trade as part of the European Economic Area (EEA), as all member countries use the same regulatory framework. This arrangement is known as ‘passporting’, and it is why Brits who have moved abroad have been able to use credit cards and banking services from UK-based banks, even though they’re no longer living in the country. However, once the Brexit transition period ends on 31 December, this passporting arrangement will no longer be in place – that is, unless a specific agreement to carry it on is reached as part of a Brexit deal. With no such deal confirmed, UK banks would have to attempt to negotiate and fulfil the stipulations from every EEA country’s regulator. All of them work differently and a continuation of providing services to UK expats will be more feasible for some banks than others.
The impact on each customer will vary depending on how their bank or financial institution currently operates, the product or service being provided, and the legal and regulatory framework in the country in which they are resident. In effect, this means that the situation is different for each financial service offered by each financial provider in each country; for some banks, offering certain products in certain countries simply won’t work. So, certain services and accounts may be withdrawn in some EU countries but not in others.
We understand that many banks are still trying to figure out a way of working in different EU countries after the Brexit transition period, while also waiting to see if a deal can be agreed between the UK and the EU. The Bank of England and the Financial Conduct Authority (FCA) have written to banks informing them that, if they do decide to close customer accounts, they must have plans in place to service their Europe-based customers properly through the process, taking into account how their actions might impact on customer’s individual circumstances and the alternative products available to them.
What should you do?
DON’T PANIC – there have been some dramatic headlines in the press about the issue, but it is important to stay calm. If you think you will be affected, you should not act in haste and repent at leisure. Give yourself time to work out what your options are.
CHECK THE FACTS CAREFULLY – whether or not you have had a warning letter from your bank, talk to them now and find out what they plan to do on Brexit day. If you still have a UK address, your account may not be closed.
CHECK YOUR SPECIFIC ACCOUNTS – you may find the types of savings products you hold are still permitted in France. Your bank should be able to advise you on this.
ARRANGE FOR PAYMENTS TO BE PAID DIRECTLY TO YOUR FRENCH BANK ACCOUNT – if you are in receipt of the UK State Pension, HMRC will pay this directly to your French account every month and, because of the volume of payments made, the exchange rate is extremely competitive. OK, so the GBP:EUR rate isn’t that great at the moment but at least you will be guaranteed continuity of income if you rely on this to fund your lifestyle in France. Some UK private pension providers will also pay pensions to foreign bank accounts, so it is worth speaking to your provider about this.
OPEN A NEW UK ACCOUNT – find a UK bank that is operating in France (such as HSBC and Santander) and check if you can meet their eligibility criteria for opening a new bank account and that the account will meet your needs. For example, does it require you to have a minimum income or deposit with them?
CONSIDER OPENING A STERLING OFFSHORE BANK ACCOUNT – we have a good connection with a very reputable bank, based in the Isle of Man, that offers accounts in a number of currencies including Sterling and Euros and which will accept regular payments in and direct debits out. If you would like details of the account, please contact your Spectrum adviser.
If you have savings on deposit in the UK that you use for your short-term liquidity or an ‘emergency fund’ and you have been told, or are concerned, that these accounts will be closed, there are a number of tax-free savings accounts available in France, which you should consider maximising, if you have not already done so, including the following:
THE ‘LIVRET A’ – which is currently paying a rate of interest of 0.5% per annum and is available to non-residents. The maximum permitted investment into this type of account is €22,950 per individual.
THE ‘LIVRET DÉVELOPPEMENT DURABLE (LDD)’ – this account is available to residents of France and the maximum investment permitted is €12,000 per individual. It is currently paying an interest rate of 0.5% per annum.
THE ‘LIVRET D’EPARGNE POPULAIRE (LEP)’ – this account is available to residents of France who are on low incomes. The maximum investment amount permitted is €7,700 per individual. The interest rate is currently 1% per annum. For example, in order to open a LEP account in 2020, your ‘revenu fiscal de référence’ in 2018 (as shown on your ‘avis d’imposition’ of 2019) must not have exceed €19,977 for a single person or €30,645 for a two-part household.
But it’s not just bank accounts that might be affected when passporting goes………….
Some UK financial services providers are informing their non-UK resident customers that they will not be able to provide them with advice on their existing UK based investments after 31 December and that ‘you should find a new adviser or cash in your investments’.
As a reminder to our readers, Spectrum in France is a registered French company, regulated in France, and we are not passported in from the UK, so as far as we are concerned, it’s business as usual.
For those of you who still have investments in the UK, whether they be stocks and shares ISAs, investment bonds, pension funds or other investment portfolios, now would be a good time to review these and discuss with your provider as to whether they will be able to continue advising you in a post-Brexit world. Even if your UK provider will be able to continue advising you, they may not be familiar with the French taxation framework and the investments you hold may not be tax efficient in France. We can advise you on investment products that are suitable and tax-efficient for living in France and provide you with ongoing advice to ensure that your financial plan remains on track as your situation and attitude to risk changes over time.
Please don’t forget that, although we may be restricted on where we can travel at the moment, we are here and have the technology to undertake your regular reviews and financial health checks remotely. If you would like a review of your situation, please do not hesitate to get in touch with your Spectrum adviser or via the contact link below.
We’d love to hear from you with any comments and/or questions, as well as suggestions as to future topics for discussion. Please feel free to pass this on to any friends or contacts who you think might find it interesting.
By Occitanie
This article is published on: 9th October 2020
Welcome to the sixth edition of our newsletter ‘Spectrum in Occitanie, Finance in Focus’.
The Covid-19 pandemic is still dominating our thoughts and lives and will probably continue to do so for some time yet. Life must go on though, and we need to make sure that we are looking after our finances, as well as ourselves and our loved ones. Today we are going to take a slightly deeper than usual look at something that we might take for granted – exchange rates.
As a reminder, we are Rob Hesketh, Philip Oxley, Sue Regan and Derek Winsland. Together we form Spectrum’s team in the Occitanie, formerly of course the Languedoc Roussillon and Midi Pyrenees.
What is an exchange rate?
Ok, let’s start with the easy questions. It will get tougher as we go on. Obviously, the exchange rate is the rate at which one currency can be exchanged for another. Currently the rate at which holders of sterling can buy euros is 1.1100. Or is it 1.1000? or maybe 1.0925? It might even be less than 1 if you buy it at the wrong place. Then again, 0.9010 might be a very good rate. How can that possibly be right? How can 0.9010 be better than 1.1000? The answer lies in the fact that there are always two versions of every exchange rate.
We Brits tend to take the view that sterling is more important to us than any other currency, so we always want to know how much of any given currency we can get for £1. The rest of the world however are prone to taking a different view, so if you ask a French bank for the rate to convert sterling to euros you will get a rate that reflects how many pounds you can get for one euro. Confused? I do not blame you. To keep things simple, I recommend that when you see a rate expressed in that way, all you need to do is divide it into one. Thus 1/.9010 = 1.1099
Why so many different rates?
Well, obviously the rate can keep on changing every minute. The law of supply and demand applies here, but there are also many different rates at the same time. That is because volume plays a huge part. An exchange rate is a compromise between two parties, one of whom wants to sell, and the other to buy. Basically, if you are an international bank dealing in hundreds of millions of pounds per deal, you are going to get a very good rate; in fact, the best there is. Players (to many it is in fact a game) can either make a price or request a price. If the latter, they will never say to the market ‘I want to buy euros’. They will always ask for a two-way price, the idea being that the bank being asked for the rate does not know which side of the deal the other bank wants. The spread between the two prices may be a little as 3 basis points. That’s the fourth decimal point to you and me, so the rate quoted might be 1.1000 to 1.1003. The quoting bank sells euros at 1.1000 and buys them at 1.1003. Those three basis points represent the market spread, or profit margin on the deal. Still with me? If you are it will come as no surprise that the profit margin gets wider and wider as the amount you are dealing in gets smaller and smaller. At exactly the same time as a big bank is dealing at 1.1000, you might find that the rate you get for your €500 will be more like 1.0700, and if you go to a kiosk at an airport and ask for €500 cash for your weekend away in Paris, you might well get less than 1:1, so you would end up spending more than £500.
Why should I be wary of exchange rates?
Quite simply because if you do not give them due care and attention, they can cost you a lot of money.
The indisputable fact is that whilst most of us arrive in France (or any other new home abroad for that matter) declaring that wild horses wouldn’t drag us back to the UK, or if they did we’d be in a box, the fact is that many of us end up back where we came from. We might hate the idea, but the facts are there. That means that there are four general phases that we will go through where exchange rates are going to have great bearing on our lives. Firstly the initial move phase, where we need to have enough euros to move here and buy property; secondly the sustenance phase, where we need to invest lump sums or exchange regular income such as pensions based in sterling; thirdly dealing with possible influxes of capital through inheritance or UK property sales, and fourthly the reversal of all of the above if we decide to go back.
What is exchange rate risk?
Best think of this as ‘‘damned if you do and damned if you don’t’’. If I do a currency deal, would I be better off waiting for a better rate?
If I don’t do it now, will it be worse when I have to do it?
Often, the answer is yes to both questions.
The aim should always be to eliminate exchange rate risk, but it is a lot harder to do that than it seems. Yes, if you sell your property in the UK and move to France, you are going to need to convert a sizeable part of the proceeds into euro to buy a property here, but what if there is a good chunk of money left over? What if you were fortunate enough to get £800k for your des-res in Surrey, and managed to find the ideal pied-a-terre in the Aude for €300k? That leaves you with a decision to make about the £530k or so that you have left. Is the answer that you are going to live in euroland so your money should be in euro? – Yes. Is the answer that eventually you may want to go back to the UK so your reserves should stay in sterling? – Yes. Is the answer that the current exchange rate is terrible, and you should at least wait and see what happens? – Yes. So, which ‘Yes’ is the right one? You can have the same conversation about your pension funds if you are looking to consolidate them outside of UK jurisdiction (and political meddling). You can also have that same conversation when or if you decide to sell a second property that is currently let out, or Mum’s house which she left to you.
What is the answer?
Quite simply, the answer is planning; serious discussion with your partner/family about what the future will bring, and where it will be, and then serious discussion with your financial adviser (that’s us by the way) about how to manage the resulting risk. The inescapable fact is that no-one can accurately forecast exchange rate movements. In much the same way that financial/economic projections by experts are notoriously unreliable, so too are those made by F/X forecasters, but do you really want to convert all your assets into euro at 1.10 only to find that in fifteen years’ time you want to relocate to the UK and the rate is 1.50? In case you don’t have a calculator handy, that would result in an f/x loss of over £140k in the above scenario. What you really need is someone to help you decide where your future requirements will lie, not what the exchange rate will be when it happens.
Even funding a house purchase needs planning. In France it can take months before you can finally pay for and move into your new home. The exchange rate can move a long way in that time, and strangely, it usually moves against you! There is a way to eliminate that risk though, and it is called a Forward Contract. If you have a set date for your final payment, your financial adviser may well suggest that you speak to a good Foreign Exchange company who will be able to fix a rate for you, valid for that date, so that you know exactly how much your villa in the sun is going to cost you in sterling terms. These are legal contracts though, and you will have to accept that rate even if the market goes up. What you are doing is buying peace of mind against it going down, which could make your purchase uncomfortably more expensive.
Another product that may be useful to you is the Limit Order. If for example you decided to buy land abroad, and have a property built on it, you might well find yourself needing to make stage payments to your builder. If the rate goes up during this process you will be happy, but if it goes down markedly…?? You can place an order for a set period with your F/X company to buy a set amount at a chosen higher or lower rate. So, you might decide that you want to buy your euro at 1.25 if it gets there, but also if it starts going down, you don’t want to get a rate any lower than 1.05. This is basically a ‘take profit’ and ‘stop loss’ strategy combined, but you can just do one side of it if you choose to.
Part of our service to you is to monitor these companies and make a suitable introduction to you.
Our responsibilities don’t end there though…
We will discuss with you the choices you have regarding the investment of any left-over lump sums. Those discussions should leave you in no doubt that cash left uninvested is a loss-leader. Leaving your surplus cash invested in the UK in non-French tax compliant instruments such as ISAs is not the answer.
In France, the clear leader in terms of tax efficiency for capital gains, income and succession taxes is Assurance Vie, but you can make all those mistakes listed above by investing in the wrong policy. Flexibility is the key, along with portability.
What if we could offer you an Assurance Vie
that could start life in sterling?
Then change into Euro if the exchange rate moved up, and back again if it went down.
What if you could invest in both sterling and euro in the same policy?
And what if that policy could simply change into an ordinary investment bond if you went back to the UK, fully compliant with UK tax law?
Strangely enough…
We’d love to hear from you with any comments and/or questions, as well as suggestions as to future topics for discussion. Please feel free to pass this on to any friends or contacts who you think might find it interesting.
By Occitanie
This article is published on: 13th July 2020
Welcome to the fourth edition of our newsletter ‘Spectrum in Occitanie, Finance in Focus’.
Last month we focused on the important area of inheritance planning and wills, outlining the value of careful planning, including mitigation of French inheritance tax using the Assurance Vie. This month, to follow on from that, we take a broader look at what options are available for generating a financial return on savings and investments in the current environment of such low interest rates globally.
As a reminder, we are Philip Oxley, Sue Regan, Rob Heskethand Derek Winsland. Together we form Spectrum’s team in the Occitanie.
What are current interest rates?
Most of us in developed economies have lived in a low interest rate environment for over 11 years. In the UK, for example, the base rate was 5.25% in March 2008. One year later, after the start of the global financial crisis, it was 0.5% and remained so for over seven years before a further post-Brexit vote reduction to 0.25% in August 2016. Recent years have seen small incremental increases to 0.75% before the impact of Coronavirus resulted in the rate being slashed to 0.1%. It has been a similar story in the US and the Eurozone, where the ECB base rate is currently 0%.
Why have interest rates been so low for so long?
There are numerous reasons. These include the cutting of rates following the global financial crisis of 2008/9 in an effort by central banks to stimulate economic growth (the same reason rates have been reduced during the Coronavirus pandemic). Beyond these economic shocks, there also seems to be evidence that central banks’ firm commitment to maintaining low and stable inflation has been successful. The primary tool central banks use when inflation threatens to take flight is to increase interest rates. In most developed countries, there has been little sign of this threat and therefore inflation and interest rates have remained at low levels.
Who has benefitted from this low interest rate environment?
In a word – borrowers! Consumers with mortgages, credit card debt or car loans, businesses (many of which rely on borrowings for investment or just day to day cash-flow requirements) and finally, governments, who typically rely on the credit markets to some extent to finance their spending.
Conversely, savers have suffered hugely during this low-interest rate environment, working hard to find some level of return on their funds. It has been particularly hard for those who rely on savings for their income, such as the retired and elderly. Similarly, risk averse consumers who avoid stock market investments, preferring a more cautious strategy to nurturing their savings, have been heavily penalised for this careful approach. And worse, there is no sign of any significant increase in rates in the foreseeable future.
In the search for financial returns, many in the UK have invested in tax-efficient products such as ISAs, Premium Bonds and other NS&I products, EISs and VCTs. But for those who have subsequently become a tax resident in France, it is important to understand that all these products are taxable here.
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To produce a tax-efficient income stream later in life (including to supplement pension income in retirement), and to provide significant estate planning benefits (including protection from forced heirship laws), the Assurance Vie should for most people be a central feature of their financial planning strategy.
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By Occitanie
This article is published on: 9th June 2020
Welcome to ‘Spectrum in Occitanie, Finance in Focus’.
The Covid-19 pandemic still dominates the news and will inevitably remain at the forefront of our thoughts for some time. Last month we focused on the financial consequences of this virus and we may well return to this subject in future editions. However, in this issue we are going to focus on the very important, and often neglected, subject of Wills and Inheritance Planning. Succession laws in France differ significantly from those in the UK and careful planning is required to mitigate French inheritance tax.
As a reminder, we are Sue Regan, Rob Hesketh, Derek Winsland and Philip Oxley. Together we form Spectrum’s team in the Occitanie.
As touched on in last month’s Newsletter, now is probably a good time to revisit the subject of inheritance planning – an integral part of any financial planning review.
Despite the importance of making sure one’s affairs are in order for the inevitability of our demise, very few people actively seek advice in this area and, as a result, are unaware of the potential difficulties ahead for their families and heirs, not to mention potential tax bills which can be quite substantial for certain classes of beneficiary. With some sensible planning you could save your intended beneficiaries a great deal of stress and dramatically reduce their inheritance tax bill.
The basic rule is, if you are resident in France, you are considered also to be domiciled in France for inheritance purposes and your worldwide estate becomes taxable in France, where the tax rates depend upon the relationship to your beneficiaries.
Fortunately, there is no inheritance tax between spouses and the allowance between a parent and a child is reasonably generous, currently €100,000 per child, per parent. For anything left to other beneficiaries, the allowances are considerably less. In particular, for step-children and other non-related beneficiaries, the allowance is only €1,594 and the tax rate on anything above that is an eye-watering 60%!
There are strict rules on succession and children are considered to be ‘protected heirs’ and so are entitled to inherit a proportion of each of their parent’s estates. For example, if you have one child, the proportion is 50% of the deceased parent’s estate; two children, one-third each; and if you have three or more children, then three-quarters of your estate must be divided equally between them.
You are free to pass on the rest of your estate (the disposable part) to whoever you wish through a French will and, in the absence of making a will, if you have a surviving spouse, he/she would be entitled to 25% of your estate.
You may also be considered domiciled in your ‘home country’ and if so, this could cause some confusion, since your home country may also have the right to charge succession taxes on your death. However, France has a number of Double Taxation Treaties (DTT) with other countries covering inheritance. In such a case, the DTT will set out the rules that apply (basically, ‘which’ country has the right to tax ‘what’ assets).
For example, the 1963 DTT between France and the UK specifies that the deceased’s total estate will be devolved and taxed in accordance with the person’s place of residence at the time of death, with the exception of any property assets that are sited in the other country.
Therefore, for a UK national who is resident in France, who has retained a property in the UK (and does not own any other property outside of France), the situation would be that:
If a DTT covering inheritance does not exist between France and the other country, with which the French resident person has an interest, this could result in double taxation, if the ‘home’ country also has the right to tax the person’s estate. Hence, when people become French resident, there are usually two issues:
Protecting the survivor
There are various ways in which you can protect your spouse:
European Succession Regulation No. 650/2012
Many of you will no doubt have heard about the EU Succession Regulations that came into effect in 2015 whereby the default situation is that it is the law of your place of habitual residence that applies to your estate. However, you can elect for the inheritance law of your country of nationality to apply to your estate by specifying this in a French will. This is effectively one way of getting around the issue of ‘protected heirs’ for some expats living in France.
Adopting a ‘community pot’ marriage regime or family pact
There are other tried and tested French structures available to fully protect the rights of a spouse, that don’t rely on the notaire having an understanding of the succession laws of other countries.
You could choose to have the marriage regime of ‘communauté universelle avec une clause d’attribution intégrale au conjoint survivant’. Under this marriage regime, all assets are owned within a ‘community pot’ and on the death of the first person, those community assets are transferred to the survivor without any attribution of half of the assets to the deceased’s estate.
However, adopting a ‘community pot’ marriage regime would not be suitable for families with step-children. This sort of arrangement could be subject to a legal challenge by the survivor’s step-children as they could miss out on their inheritance due to the fact that there is no blood relationship with the step-parent.
In this situation, a family pact (pacte de famille) could be the solution, whereby families agree in advance who will inherit and when. Of course, this would only really work where there is an amicable relationship between parents and children, as the children are effectively waiving all or some of their right to inherit.
There are a number of other ways in which you can arrange your affairs to protect the survivor, depending on your individual circumstances, and we would always recommend that you discuss succession planning in detail with a notaire experienced in these matters.
Mitigation of inheritance tax
On whichever planning you decide, it is important to remember that the French inheritance tax rules will still apply. So, even though you have the freedom to decide who inherits your estate, this will not reduce the potential inheritance tax liability on your beneficiaries, which, as mentioned above, could potentially be very high for a step-child. Hence, there will still be a need to shelter financial assets from French inheritance taxes.
By far and away the most popular vehicle in France for sheltering your hard-earned savings from inheritance tax is the Assurance Vie. The assurance vie is considered to be outside of your estate for tax purposes and comes with its own inheritance allowances, in addition to the standard aIllowance for other assets. If you invest in an assurance vie before the age of 70 you can name as many beneficiaires as you like, regardless of whether they are family or not, and each beneficiary can inherit up to €152,500, tax-free. The rate of tax on the next €700,000 is limited to 20% – potentially making a huge saving for remoter relatives or step-children.
Let’s look at a simple example of the inheritance tax position of a married couple with two children, comparing the IHT position with and without investing in assurance vie:
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It is clear to see from this example that by wrapping their medium to long term savings in an assurance vie, this couple have saved each child €30,500 in IHT.
Of course, the more beneficiaries nominated, for example grandchildren, siblings, etc, the greater the IHT saving overall. Beneficiaries can be changed or added to the assurance vie at any time. Remember, also, that beneficiary nominations are not restricted to family members, so, whoever you nominate gets the same allowance.
The inheritance allowance on premiums paid to assurance vie after age 70 are less attractive at €30,500 of the premium (capital investment) plus the growth on the capital shared between all named beneficiaries, and the remaining capital invested is taxed in accordance with the standard IHT bands.
Nevertheless, an assurance vie is still a worthwhile investment after the age of 70 as, in addition to the inheritance tax benefits, assurance vie offers personal tax efficiencies to the investor such as gross roll-up of income and gains whilst funds remain in the policy and an annual income tax allowance of €4,600, or €9,200 for a couple, after 8 years.
So, in order to ensure that your inheritance wishes are carried out, some planning may be required and there are investment opportunities to mitigate the IHT for your chosen beneficiaries.
Please contact us if you would like to discuss your particular circumstances.
The Spectrum IFA Group – Occitainie
occitainie@spectrum-ifa.com
