The UK referendum on the EU – Lose your vote or use it!
By David Hattersley
This article is published on: 20th January 2016
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.
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.”
http://www.aboutmyvote.co.uk/register-to-vote/british-citizens-living-abroad
If you visit https://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.
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;
“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;
https://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 !
Automatic Exchange of Information (AEI)
By John Hayward
This article is published on: 11th November 2015
Did you know that recently, approximately 100 countries have signed up to a new initiative by the OECD’s updated Common Reporting Standard (CRS) whereby a global information-sharing system is to be put in place amongst individual tax authorities. This means that information on taxpayers with offshore assets will be shared between the participating countries.
This transparency is meant to be a deterrent to taxpayers’ using offshore accounts and assets as a means of avoiding domestic tax. The participating countries are committed to applying this procedure in order to tackle tax evasion.
This “automatic exchange of financial account information” (AEI) will commence from 2017 on an annual basis between participating countries and is set to become the most comprehensive and powerful tool to date used by worldwide tax authorities.
The first AEI of 2017 will relate to all account information of 1st January 2016 and reporting will involve individuals who own or control accounts either directly or via financial institutions, be it banks, brokers, investment vehicles, insurance companies or other financial organisations.
The Automatic Exchange of Information (AEI) is facilitated by having financial institutions in each participating country reporting relevant information regarding clients, who are resident in another participating country, to their local tax authorities. Local tax authorities will then automatically exchange this information with their counterparts in other participating countries on an annual basis.
The account information generally includes account number, balance and gross earnings in respect of any payments through the account including any investment income, income earned from assets etc. The information on each person generally includes name, address, country of residence, nationality, national insurance and tax identification numbers, place and date of birth.
So if you live in Spain and have overseas assets and/or investments that you previously thought were non-declarable to the Spanish authorities, then this may be something that you need to address.
The UK’s future membership of the EU
By Spectrum IFA
This article is published on: 13th October 2015
As the media hype heats up over the question of the UK’s future membership of the EU, clients are already asking what will happen if the outcome of the referendum is to leave the EU?
The simple answer is that we do not really know because a country has never left the EU. What we do know is, as British expatriates ourselves, we will be affected in the same way as our clients.
The more complicated answer is that it will depend upon whether it is a ‘soft exit’ or a ‘hard exit’.
A soft exit would be, for example, remaining as an EEA State (in the same way as Norway, Iceland and Lichtenstein). As such, the UK would still have access to the single European market and full freedom of trade within the EU. However, in addition, the UK would be free to negotiate bilateral trade agreements with countries outside of the EU, something that is not possible with full EU membership. The UK would still have to adhere to EU product and financial regulations, as well as social and employment rules. EU budget contributions would still be required, although at a reduced level. Ability to restrict inward EU migration would not be allowed.
A ‘hard exit’ would take the UK outside of the EEA, resulting in it having no automatic access to trade within the EU, but it could continue to negotiate trade agreements with non-EU countries. There would be no more EU budget contributions and also no requirement to adhere to EU Regulations. Inward EU migration could be restricted.
With a ‘hard exit’, as British expatriates living in France, we would need to apply for a Carte de Séjour, but if already resident in France for 10 years, may be granted a Carte de Résidence. Certificates S1 would become a thing of the past and so British expatriates would have to pay cotisations for French health cover. Equally, EU nationals living in the UK, would no longer have an automatic right to live and work there.
The referendum is to take place by the end of 2017, but it is more likely now that it will be in 2016. What we can be certain about is that in the period leading up to the referendum, there will be uncertainty – in capital markets (particularly in the UK) and in currency markets (Sterling is likely to be under pressure).
As if the referendum was not enough to think about, we also have to continue playing the guessing game with central bank policy! It was widely expected that the Fed would start to increase US interest rates in September, but that was not to be. Whilst an increase is not entirely ruled out before the end of this year, no-one can be certain. It is unlikely that the UK will move on interest rates before the US.
In times of such uncertainty, it is more important than ever to seek advice on how to protect your wealth. At the Spectrum IFA Group we have a range of solutions to offer clients, depending upon attitude to investment risk and objectives. For example, have a range of capital protected investments and other low volatility multi-assets funds available. Hence, clients’ portfolios can easily be adjusted to protect their wealth, as and when necessary, something that is particularly appropriate during times of volatile markets.
Even when markets are not volatile, the benefits of diversification gained through investing in global multi-asset portfolios cannot be overstated. If this is combined with using investment management firms that have the size and capability to carry out extensive research into global markets, and investment risk is managed effectively, this considerably increases the chances of the clients’ investments performing better than the average over the medium to long-term.
Some people may be afraid to invest in capital markets during times of uncertainty. However, sitting with large amounts of cash in a bank is not risk-free. Apart from institutional risk, there is the real enemy of inflation, which can erode the real purchasing power of your capital, particularly since interest rates continue at ‘all-time lows’. Holding cash in the bank should really only be for short-term needs which of course includes any short-term capital projects that you might have planned, as well as a cushion for emergencies. Bank deposits are not usually appropriate for medium to long-term investment.
The investment solutions that we recommend to our clients are all carried out within tax-efficient products, which are also highly beneficial for inheritance planning in France. Everyone is different and that is why it is very important that we carry out a full review of a prospective client’s situation to find the right solution for them. It is equally important to ensure that this is kept under review and to not be afraid to make adjustments, when necessary.
The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action on the subject of investment of financial assets or the mitigation of taxes.
The Spectrum IFA Group advisers do not charge any fees directly to clients for their time or for advice given, as can be seen from our Client Charter at spectrum-ifa.com/spectrum-ifa-client-charter
Don´t slip up with over “Greece”ing
By John Hayward
This article is published on: 15th July 2015
The original cash machine?
With events in Greece taking prime news position, certainly the east side of the Atlantic, the main question that I am being asked is, “How will the Greek debt problem and referendum affect my investments?”.
It is said that, back in the BC years, Greece invented finance and all the baggage that it carries. It had the first financial crisis, with bad debt. Debt was subsequently written off and the currency devalued. Unfortunately this has not been an option for Greece now as they are part of the Euro.
Greece has defaulted on loans many times before, yet this never brought the rest of the world crashing to the floor. The word contagion is used an awful lot as the assumption by many is that the rest of the PIIGS (Portugal. Ireland, Italy, (Greece) and Spain) will follow suit. If this was to happen and Spanish banks, in our case, had problems, then there would be major concerns for those who had money with them. Bank risk in Spain has been around for a while and keeping a whole lot of money in a Spanish bank makes little sense. Here are some reasons:-
- Little or no interest paid.
- High charges for little or no gain.
- Inheritance tax liability for Spanish residents.
- Even greater inheritance tax liability for non-Spanish residents.
For those who are brave enough, a financial crisis is a brilliant opportunity to make money. Many are not prepared to be so brave with hard earned savings and, for these people, we have a proven solution with a household name. Very few people like volatility. In reality, volatility means that your money can go down in value, sometimes sharply. With the right approach, we can do away with volatility. Take a look at this graph illustrating the difference between the truly managed approach, the average cautious fund, and the FTSE100. See how consistent the managed fund has been compared to the roller-coaster ride of the others.
Greece is the word at the moment but this shouldn’t mean that all our lives should be dependent on what happens there. Living in Spain, being part of the Euro is the one that I want.
The Effect of a Greek Default
By Spectrum IFA
This article is published on: 23rd June 2015
It is difficult to say exactly what the outcome will be if Greece defaults on its debt. Many people believe that this would lead to Greece exiting from the Eurozone and possibly also from the EU. However, there is still some opinion that there will not be a ‘grexit’.
The fact that Greece has missed a repayment to the IMF earlier this month is not actually considered to be a default. This is because the IMF agreed to bundle all its loans to Greece together, so that the various payments that were due during this month are now due at the end of the month. This has provided Greece with some much needed time, during which it can try to reach an agreement with its creditors.
If Greece does not make the payment due to the IMF by end of June, it will then be classified as being in arrears and could be locked out of further IMF funding. This potential default scenario would present a number of challenges – not least the fact that it seems likely that Greece will anyway need a third bailout package, but this could be difficult with IMF involvement.
Should we be worried about our investments in Euros (or any other currency for that matter)? What about our Euro bank deposits – are these safe?
The uncertainty with the Greek situation has created some short-term volatility in stock markets, but this is not the only factor causing this. Whilst important, the Greek situation is probably less of a long-term investment issue than the prospect of increases in interest rates (and the effect on bond yields), as well as issues surrounding the oil price and the still existing possibility of a continuing slowdown in Chinese growth.
If there is a Greek exit, there may be some immediate selling-off of risk assets but longer-term, the economic impact to the rest of Europe should be limited. In the main, this is because most of the Greek debt is now held by ‘official creditors’ (for example, the ECB, the IMF and the EU). We have a different situation now compared to 2011 and the exposure of banks to any Greek debt should be cushioned by the stronger capital requirements that are now in place under international banking regulations.
There is some concern about possible contagion into the peripheral Eurozone countries, which could result in some pressure on those countries’ bond yields. However, it is important to know that public finances in these countries have improved compared to a few years ago and a number of reforms have been implemented that have improved the underlying economies. So any adverse effect on the countries’ bond yields is likely to be short-term. In reality, a bigger potential effect on bond yields is the prospect of increases in interest rates.
During the last month, there has been large amount of deposit withdrawals from Greek banks and again, there is some concern that this could spill over into the peripheral Eurozone countries. The question has also been raised that if there is a Greek exit from the Eurozone, could this lead the way for other countries to do the same?
You may recall the famous Mario Draghi speech back in July 2012, when he said ……
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough”.
“To the extent that the size of the sovereign premia (borrowing costs) hamper the functioning of the monetary policy transmission channels, they come within our mandate.”
There is great belief in Mario Draghi’s ability to ‘pull the rabbit out of the hat’ when it seems that all is lost, despite the fact that he often has to battle against some other members of the ECB Governing Council to put in place a solution to a problem. However, it is his final point above that is actually key to what might be needed now for Greece.
If Greece defaults on its debts technically, the ECB could classify Greece as insolvent and this should really prohibit Greek banks from receiving further support from the Emergency Liquidity Assistance (ELA) programme, since it is government bonds that are used as collateral. However, the ECB has the power to keep the ELA lifeline open, especially if it considers this to be in the best interests of the Eurozone.
If necessary, the ECB can also increase liquidity in the banking system by increasing the amount that is injected via the Quantitative Easing (QE) program. Of course, it will need to ensure that this does not drive inflation too quickly (since this is its primary mandate), but coming from a base of such low inflation, there is a lot of room.
I am writing this article over the weekend between the Eurozone Finance Ministers’ meeting of 19th June and the emergency EU Summit that on Greece is taking place on 22nd June. By the time that you read this article, maybe a deal will have been reached. In the meantime, the ECB has already increased ELA funding to Greece, following a further increase in deposit withdrawals from Greek banks. What seems clear to me is that this is to avoid a collapse in the Greek banking system and the risk of this spreading – perhaps even beyond the Eurozone.
My personal opinion on this is that a deal will be reached – maybe not at the emergency summit, but by the end of the month. What choice does Greece have but to give some way on the issues that are proving to be the barrier – pensions and VAT. After all, if the funding lifeline to Greece is cut off, where is Greece going to get the money from to pay its pensions at all? Other countries have already had to swallow the bitter pill that the Troika gave out, but they have suffered the pain and come out the other side on the road to recovery.
However, it may be that the Troika must also give a little for the sake of reducing the risks for the broader international financial markets and banking community. If a deal can be reached, there will be a third bailout package for Greece, but whether or not the same discussions will be taking place in another six months’ time remains to be seen.
As for our own investments, having a multi-asset approach with broad geographical diversification can protect against some of the movements that we may see in the period ahead. Choosing the right investment manager, particularly one who considers risk management to be a key part of the process, is also very important. Part of our role at Spectrum is to help our clients achieve both of these objectives.
The Greek situation is putting pressure on the Euro and if a deal is reached, this should help the Euro to recover a bit in the short-term. Beyond this, the effect of the QE program should depreciate the value of the Euro. On the other hand, there is also a potentially growing issue around Sterling to consider, and that is that the media is hyping up the possibility of the UK exiting the EU (‘brexit’ as well as ‘grexit’?)’. As this gathers momentum, we can expect it to put pressure on Sterling.
A final point is that markets generally only react to uncertainty, which is what we are seeing now. However, we should remember that the investment decisions we make are usually being made for the long-term and so whilst there may be short-term issues that we have to navigate around, we should try not to lose sight of our long-term goals.
The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action on the subject of investment of financial assets or the mitigation of taxes.
The currency exchange rate
By Spectrum IFA
This article is published on: 17th February 2015
Time to revisit an old friend this week, the exchange rate. Long term sufferers of my monthly missives will possibly recall that in my dim and distant past I used to be an international banker, and for part of that time a foreign exchange dealer. It was so long ago that we used to have exotic currencies such as the French Franc; Italian Lire, and even the Deutschmark. Heady days indeed! By the time I escaped from the banking world in 2002 these currencies were dead or, perhaps more accurately, held in a cryogenic state, ready to be reheated if need be. The exchange rate between Sterling and the new super-currency, the Euro, was in the mid 1.60s in 2002, and had declined to the mid 1.50s when I finally got to France in 2003. By the time I bought property here in 2004, I averaged 1.45.
The trend was set, but few people were prepared for it. During the financial meltdown in 2007 and 2008 ‘la merde a vraiment frappé le ventilateur’, and the pound plummeted almost to parity with the Euro by the end of 2008. In 2009 I stupidly agreed to start a weekly column for an internet magazine, giving my predictions for the week to come. I struggled with this millstone for nearly three years. My basic message was that large F/X movements like this are always exaggerated. Parity was plainly nonsense, and the pound ought to recover to between 1.25 and 1.30. It takes some ingenuity to deliver this basic message 130 times, and in 2012, with the pound at 1.25, I called it a day. I still remember the sense of relief when I realised I wouldn’t have to sit down at 4pm on any more Fridays to write about why the previous week’s forecast had been so wrong.
It was a good time to stop, as the rate fell again during the second half of 2012 to 1.15 before slowly resuming its upward trend. Interested parties, and by that I mean all expats, probably didn’t take too much notice as we clawed our way back up through 1.20s and on to 1.25 once more. Then, at the start of November last year, a big market move started, and people began to sit up and take notice. Two months later, and as I write, we are at a shade under 1.35. So what is going on?
Politics and economics are of course the answers. They govern supply and demand, which is the final arbiter of the exchange rate. Germany, the powerhouse of Europe, now has a stagnating economy, and Greece, not the powerhouse of Europe, is stirring up political trouble. None of this bodes well for the Euro. So we can all sit back and relax. The pound is heading back to 1.60. Hundreds of thousands of Brits will be pouring into France waving their new cheap wads of Euro, buying up all the property in sight and sending up the values of our houses at the same time.
Does anyone really think that? I certainly don’t. There is no such thing as a safe bet in the currency markets. You must never forget Murphy’s law. Whenever you really want something to happen, Murphy’s law dictates that the opposite will occur.
I think that we are approaching the time when we need to think about selling Sterling. I don’t think we’re there yet, but we need to be careful. We live, after all, in the Euro zone, and thus most of the money we spend is Euros. We may have pensions or indeed other income in Sterling, but that won’t buy your morning croissant. Until you change it into Euro; it is largely useless while you live here. Of course there is nothing you can do about your UK State pension, if you are in receipt of that princely sum. You will just have to be savvy about when and how you convert it. You can however do a great deal with an occupational pension, and you can do a great deal with your savings and investments. There is no better time than now to take a long hard look at your UK pension pot. Savings and investments held in non-French tax efficient bonds are a nonsense. Come and talk to me about them now!
For years now The Spectrum IFA Group have been advising clients on pensions and investments and I have been keen to point out that clients who have Sterling assets do not need to convert them to Euro to make use of the products available to them outside the UK. Those clients who have transferred their assets in Sterling are most probably quite pleased that they did not convert, but what about now? What if we hit 1.40, or 1.45? For my money the only way is down from there, back to my preferred levels. If we do get to 1.40, I will certainly be looking long and hard at my Sterling funds, with my finger hovering over the deal button.
French Tax Changes 2015
By Spectrum IFA
This article is published on: 5th January 2015
During December, the following legislation has entered into force:
- the Loi de Finances 2015;
- the Loi de Finances Rectificative 2014(I); and
- the Loi de Financement de la Sécurité Sociale 2015.
Shown below is a summary of our understanding of the principle changes.
INCOME TAX (Impôt sur le Revenu)
The barème scale, which is applicable to the taxation of income and gains from financial assets, has been revised as follows:
| Income | Tax Rate |
| Up to €9,690 | 0% |
| €9,691 to €26,764 | 14% |
| €26,765 to €71,754 | 30% |
| €71,755 to €151,956 | 41% |
| €150,957 and over | 45% |
The above will apply in 2015 in respect of the taxation of 2014 income and gains from financial assets.
WEALTH TAX (Impôt de Solidarité sur la Fortune)
There are no changes to wealth tax. Therefore, taxpayers with net assets of at least €1.3 million will continue to be subject to wealth tax on assets exceeding €800,000, as follows:
| Fraction of Taxable Assets | Tax Rate |
| Up to €800,000 | 0% |
| €800,001 to €1,300,000 | 0.50% |
| €1,300,001 to €2,570,000 | 0.70% |
| €2,570,001 to € 5,000,000 | 1% |
| €5,000,001 to €10,000,000 | 1.25% |
| Greater than €10,000,000 | 1.5% |
CAPITAL GAINS TAX – Financial Assets (Plus Value Mobilières)
There are no changes in respect of the taxation of capital gains arising from financial assets. Therefore, gains arising from the disposal of financial assets will continue to be added to other taxable income and then taxed in accordance with the new progressive rates of tax outlined in the barème scale above.
However, the system of ‘taper relief’ still applies for the capital gains tax (but not for social contributions), in recognition of the period of ownership of any company shares, as follows:
- 50% for a holding period from two years to less than eight years; and
- 65% for a holding period of at least eight years.
This relief also applies to gains arising from the sale of shares in ‘collective investments’, for example, investment funds and unit trusts, providing that at least 75% of the fund is invested in shares of companies.
In order to encourage investment in new small and medium enterprises, the higher allowances against capital gains for investments in such companies are also still provided, as follows:
- 50% for a holding period from one year to less than four years;
- 65% for a holding period from four years to less than eight years; and
- 85% for a holding period of at least eight years.
The above provisions apply in 2015 in respect of the taxation of gains made in 2014.
CAPITAL GAINS TAX – Property (Plus Value Immobilières)
With effect from 1st September 2014, the taper relief applicable to gains arising from the sale of building land has been brought in line with that applicable to other property gains, as follows:
- 6% for each year of ownership from the sixth year to the twenty-first year, inclusive; and;
- 4% for the twenty-second year.
Thus, the gain will become free of capital gains tax after twenty-two years of ownership.
However, for social contributions (which remain at 15.5%), a different scale of taper relief applies, as follows:
- 1.65% for each year of ownership from the sixth year to the twenty-first year, inclusive;
- 1.6% for the twenty-second year; and
- 9% for each year of ownership beyond the twenty-second year.
Thus, the gain will become free of social contributions after thirty years of ownership.
An exceptional reduction of 30% of the taxable capital gain, arising from the sale of building land only, has also been introduced, subject to the following double condition that:
- a compromis de vente has been signed between 1st September 2014 and 31st December 2015; and
- the completion of the sale of the land must take place by 31st December of the second year following the signing of the compromis de vente.
The exceptional reduction applies for both the capital gains tax and the social contributions liabilities. However, it is not available for land transferred between spouses and PACS partners, nor to ascendants or descendants.
It should also be remembered that there is still an additional tax applicable for property sales, when the gain exceeds €50,000, as follows:
| Amount of Gain | Tax Rate |
| €50,001 – €100,000 | 2% |
| €100,001 – €150,000 | 3% |
| €150,001 to €200,000 | 4% |
| €200,001 to €250,000 | 5% |
| €250,001 and over | 6% |
Where the gain is within the first €10,000 of the lower level of the band, a smoothing mechanism applies to reduce the amount of the tax liability.
The above taxes are also payable by non-residents selling a property or building land in France. However, at some point during 2015, the European Court of Justice (ECJ) will most likely rule on the outcome of the European Commission’s infringement procedures against France, regarding the application of social contributions on income and gains arising in France for non-residents. Following the delivery of the legal opinion of France’s Advocat General to the ECJ, it is widely expected that non-residents will become exempt from social charges on gains and income arising from French property.
One other point worth mentioning concerns the rate of capital gains tax for non-residents. To date, this has been at the rate of 19% for residents of EU/EEA countries and at 33.33% for non-residents of other countries, except for those of ‘non-cooperative territories’, who have been liable to a 75% capital gains tax rate.
In October 2014, the French Conseil d’Etat, which is the highest court in France for tax matters, decided that the higher rate of capital gains tax for non-residents is illegal, in certain circumstances. The basis for its decision was that it considered this to be a disincentive for non-residents from outside of the EU/EAA to purchase property in France. As such, the court considered this was a restriction on the free movement of capital and thus, contrary to EU law.
Arising out of this decision, the government proposed to harmonise the capital gains tax rate at 19%, but not for those residents of ‘non-cooperative’ States, for whom it decided that the 75% rate should be maintained. However, when considering the proposed legislative changes, the Constitutional Council ruled that a capital gains tax rate of 75% is excessive, when taken into account with the social contributions of 15.5% and so ruled that this is contrary to France’s Constitution.
The Constitutional Council’s decision is somewhat of a surprise, since the 75% tax rate plus social contributions has already been the practice. One assumes, therefore, that as and when France is instructed not to apply social contributions to gains arising for non-residents, then the 75% capital gains tax rate will no longer be considered unconstitutional!
Finally, one other good point for some non-residents is that for those who are resident in the EU (and in some cases in the EEA), it will no longer be necessary to appoint a tax representative in France to deal with the calculation of the capital gains tax, when the property is sold.
GIFT TAX (Droits de Mutation à Titre Gratuit)
In order to promote the release of building land and revive housing construction, a temporary exemption from gift tax has been introduced for donations made in the following situations:
- for full transfers of building land (i.e. the donor cannot retain life use), for which the acte authentique is signed between 1st January and 31st December 2015, on the condition that the recipient builds a new property destined for housing, within four years of the date of receiving the gift.
- for full transfers of new residential properties, for which a building permit is granted between 1st September 2014 and 31st December 2016, on the condition that the deed evidencing the gift must be signed no later than three years of the date of the building permit and that the building has never been used or occupied at the time the gift is made.
In both of the above situations, the following exonerations from gift tax will be given, limited to the declared value of the asset:
- €100,000 for transfers between descendants or ascendants in direct line, or between spouses and PACS partners;
- €45,000 between siblings; and
- €35,000 between any other person
It is also indicated that the total of the donations made by the same donor cannot exceed €100,000. However, what is not clear from the drafting of the legislation is whether or not this limit applies separately for each of the above situations or if this limit is applied globally. Therefore, we will have to wait for further precision on this.
Other Changes:
- Charitable Donations & Bequests:
France exempts from inheritance duties donations and bequests made to certain charities that are registered in France. However, charities established in other States of the EU are generally subject to a 60% tax (after an allowance of €1,594) on the value of the gift or bequest received.
The European Commission considers the above to be an unjustified obstacle to the free movement of capital and so referred France to the European Court of Justice (ECJ) in July 2014. Anticipating a condemnation by the ECJ to be almost inevitable, France has changed its law so that there is no discrimination between the charities registered in France and those in the rest of the EU/EEA.
- Additional Tax on Second Homes:
With the objective of reducing the housing shortage in areas where there is a marked imbalance between supply and demand, provision has been made within the law for an additional tax on ‘second homes’, i.e. for furnished properties not designated as a principal residence.
The decision as to whether or not the tax will be applied will be made by the municipal council of the municipality concerned. The rate has been fixed as 20% of the municipality’s share of the taxe d’habitation and the revenue from the additional tax will be allocated to the municipality.
Tax relief should be given from the additional tax in the following situations:
- by those who need a second dwelling near to their place of work because their principal residence is too far away; and
- if the owner is living permanently in a nursing home or other care facility and the property was their former principal residence.
Others may also receive the tax relief where they can no longer designate the property as their principal residence for circumstances outside of their control.
EU Directive on Administrative Cooperation in the Field of Direct Taxation:
Although not directly related to France’s tax changes, it is worth mentioning that with effect from 1st January 2015, under the terms of the above EU Directive, there will be automatic exchange of information between the tax authorities of Member States for five additional categories of income and capital. These include income from employment, director’s fees, life insurance products, pensions and ownership of and income from immoveable property. The Directive also provides for a possible extension of this list to dividends, capital gains and royalties.
2nd January 2015
This outline is provided for information purposes only. It does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action to mitigate the effects of any potential changes in French tax legislation.
UK Pensions Reform Overview
By David Odonoghue
This article is published on: 31st December 2014
This year brings about major changes in UK pension rules. Under the reform of ‘Freedom and Choice in Pensions’, people will be provided with more choice about how and when they can take their benefits from certain types of pension arrangements.
Following proposals first made in March last year, subsequent consultation resulted in the Pensions Taxation Bill being published in August, with further amendments being made in October. Additionally, some provisions were clarified in last month’s UK Autumn Budget Statement. Therefore, subject to there not being any further changes before the eventual enactment of the legislation, we can be reasonably certain of the new rules.
To understand the reform, you need to understand the two main different types of pensions. The first is the defined benefit pension (DBP), where your employer basically promises to pay you a certain amount of pension, which is calculated by reference to your service and your earnings. DBPs are a rare breed now, as employers have found this type of arrangement too costly to maintain. This is because the liability for financing the scheme falls upon the employer (after anything that the individual is required to contribute) and if there is any shortfall in assets to meet the liabilities – perhaps because of poor investment returns – the employer must put more money into the scheme.
The second type of pension is what is known as a money purchase plan (MPP). You put money into an MPP, perhaps your employer does/did also, as well as the government in the form of tax rebates and in the past, national insurance contribution rebates. Maybe your ‘MPP’ was not through an employer at all and you just set up something directly yourself with an insurance company. They are several different types of MPP arrangements, but they all result in the same basic outcome, i.e. the amount of the pension that you get depends on the value of your ‘pension pot’ at retirement and so the investment risk rests with you. There is no promise from anyone and therefore, no certainty of what you might receive.
The proposed reform is all about the MPP, although there is nothing to stop a person from transferring their private DBP to a MPP, if they have left the service of the former employer.
The majority of the changes will be effective from 6th April 2015 and these will apply to ‘money purchase’ pension arrangements only. Therefore, people with deferred pension benefits in funded defined benefit plans, who wish to avail themselves of the changes, must first of all transfer their benefits to a money purchase scheme. Members of unfunded public sector pension schemes will not be allowed to have such a transfer.
Under the new rules, people will be able to take all of their ‘pension pot’ as a one-off lump sum or as several separate lump sum payments. For UK resident taxpayers, 25% of each amount will be paid tax-free and the balance will be subject to income tax at the marginal rate (the highest tax rate being 45%).
Alternatively, it will be possible to take 25% of the total fund as a cash payment (again, tax-free for UK residents) and then draw an income from the remaining fund (taxed at marginal rate). The commencement of income withdrawal can be deferred for as long as the person wishes. Furthermore, there will be no minimum or maximum amount imposed on the amount that can be withdrawn in any year.
The Annual Allowance, which is the amount of tax-relieved pension contributions that can be paid into a pension fund, is currently £40,000 per annum. For anyone who flexibly accesses their pension funds in one of the above ways, the Annual Allowance will be reduced to £10,000 for further amounts contributed to a money purchase arrangement.
However, the full Annual Allowance of up to £40,000 (depending upon the value of new money purchase pension savings) will be retained for further defined benefit pension savings.
The ‘small pots’ rules will still apply for pension pots valued at less than £10,000. People will be allowed to take up to three small pots from non-occupational schemes and there is no limit of the number of small pot lump sums that may be paid from occupational schemes. 25% of the pot will be tax-free for a UK resident. Accessing small pension pots will not affect the Annual Allowance applicable to other pension savings.
The required minimum pension age from which people can start to draw upon their pension funds will be set as age 55, in all circumstances (except in cases of ill-health, when it may be possible to access the funds earlier). However, this will progressively change to age 57 from 2028; subsequently, it will be set as 10 years below the State Pension Age.
The widely reported removal of the 55% ‘Death Tax’ on UK pension funds has been clarified. Thus, whether or not any retirement benefits have already been paid from the money purchase fund (including any tax-free lump sum), the following will apply from 6th April 2015:
- In the event of the pension member’s death before age 75, the remaining pension fund will pass to any nominated beneficiary and the beneficiary will not have any UK tax liability; this is whether the fund is taken as a single lump sum or accessed as income drawdown; or
- If the pension member is over age 75 at death, the beneficiary will be taxed at their marginal rate of income tax on any income drawn from the fund, or at the rate of 45% if the whole of the fund is taken as a lump sum. From April 2016, lump sum payments will be taxed at a beneficiary’s marginal tax rate.
There will be more flexibility for annuities purchased after 6th April 2015. For example it will be possible to have an annuity that decreases, which could be beneficial to bridge an income gap, perhaps before State pension benefits begin. In addition, there will no longer be a limit on the guarantee period, which is currently set at a maximum of 10 years.
French residents can take advantage of the new flexibility and providing that you are registered in the French income tax system, it is possible to claim exemption from UK tax under the terms of the Double Taxation Treaty between the UK and France. However, there are French tax implications to be considered, as follows:
- you will be liable to French income tax on the payments received, although in certain strict conditions, it may be possible for any lump sum benefits to be taxed at a fixed prélèvement rate;
- if France is responsible for the cost of your French health cover, you will also be liable for social charges (CSG & CDRS) of 7.1% on the amounts received;
- the former pension assets will become part of your estate for French inheritance purposes, as well as becoming potentially liable for wealth tax (i.e. if your net taxable assets exceed the wealth tax entry level).
Therefore, as a French resident, it is essential to seek independent financial advice from a professional who is well versed in both the UK pension rules and the French tax rules before taking any action. Such advice should also include examining whether or not a transfer of your pension benefits to a Qualifying Recognised Overseas Pension Scheme (QROPS) could be in your best interest.
Note, that for those expats who already have transferred pensions to a QROPS or are thinking of doing so? the Pension Taxation Bill makes provision for the proposed UK pension reform to follow through to such schemes.
However, a complication exisits, due to the fact that the separate UK QROPS Regulations do not necessarily allow people to fully cash in their pesion funds in all circumstances.
The Pensions Taxation Bill does already make some provision for the proposed UK pension reform to follow through to Qualifying Recognised Overseas Pension Schemes (QROPS). However, a complication exists, due to the fact that the separate UK QROPS Regulations do not necessarily allow people to fully cash in their pension funds, in all circumstances.
Therefore, before the new flexible rules could apply to QROPS, the UK Regulations must be amended and it is understood that there is on-going work in this regard. Whether this work will be completed before 5th April 2015 is not known.
However, even if the UK does amend the QROPS Regulations, it will then fall to individual QROPS jurisdictions to make the necessary changes to their own internal pension law. For the well-regulated jurisdictions, it cannot be ruled out that their own Regulators may not agree entirely with the UK’s ideas of flexibility! In effect, there could be a preference to ensure that pension funds are used only for the purpose of providing retirement income for life, with the possibility of income continuing to a member’s dependants.
In any event, the taxation outcome of someone fully cashing-in their pension fund (whether whilst still in a UK pension arrangement or if later allowed, from a QROPS) is likely to be a sufficient practical deterrent for anyone actually wanting to do this. Therefore, for someone who has left the UK, a QROPS should continue to be a viable alternative to retaining UK pension benefits, particularly since the advantages of a QROPS have not changed. However, everyone’s situation is unique and this is why seeking advice from a competent professional is essential.
EU SUCCESSION REGULATIONS – the perfect solution?
By Spectrum IFA
This article is published on: 10th November 2014
The EU Succession Regulations (also known as Brussels IV) were adopted on 4th July 2012. The UK, Ireland and Denmark opted out of the Brussels IV, but residents of these countries are still affected, particularly if they have cross-border succession interests.
The default position is that the law of “habitual residence at the time of death” will apply to the succession of the entire estate of persons who die on or after 17th August 2015. However, a person may choose the law of the country of his “nationality” to apply by specifying this in a will. If the person has more than one nationality, he can choose whichever he wishes.
Therefore, except for residents of the UK, Ireland and Denmark, a foreigner (not necessarily an EU national) living in any of the other 25 EU States can elect the country of his nationality to apply to the succession of his estate. Interim measures are already in place to make such a ‘nationality election’ now in a will, but it will not be effective until 17th August 2015.
There is considerable misunderstanding about the Regulations and whilst it is true that people will be able to choose the succession rules of their country of nationality this will not change the inheritance tax rules that apply. Therefore, if at the time of your death you are French resident or you own property in France, even if you have chosen the succession rules of another country, it is still the French inheritance tax rates that will apply. This means that the amount of French inheritance tax that your beneficiaries will have to pay will depend upon their relationship to you.
Unfortunately, I am finding that people who are purchasing property now and are planning to live in France may not be seeking adequate inheritance planning solutions. They believe that they can rely on the EU Succession Regulations to protect the survivor, but sadly they are not aware of the potential inheritance tax issues that can exist.
For example, the most common scenario that we come across is one that involves there being children from a previous marriage. Currently, unless the couple buy the property ‘en tontine’ or the children enter into a family pact with their natural parent, the surviving step-parent will not have full control over the property. The EU Succession Rules achieve the same effect as these techniques, if the couple elect for the succession rules of their country of nationality to apply and that country does not have any concept of children being ‘protected heirs’.
A perfect solution? Maybe, if the only objective is to protect the surviving step-parent, but if the step-parent wishes to leave the property to the step-children, then there will still be a 60% inheritance tax bill, so perhaps not quite the perfect solution!
Actually, I have greater concern about some expatriates who are resident in France now, who are already making new French wills, choosing the law of nationality to apply to their succession. This may be fine if there is a ‘stable family relationship’ and the couple only have children of their marriage, particularly as it is likely to cost less in legal fees than the alternative of changing their marriage regime to one of “Communauté Universelle avec une clause d’attribution intégrale de la communauté au conjoint survivant”, which would achieve the same effect.
However, many people have already undertaken inheritance planning (and paid for this), which has achieved the objective of protecting the survivor and mitigating the potential inheritance tax bills of their heirs, as far as possible. Depending on the situation (value of estates, stable family relationship or not), it is highly likely that the planning already undertaken will be better for the majority of cases and making a new will now might turn out to be a costly mistake for the potential beneficiaries.
Like all aspects of financial planning, every case should be looked at on its own merits and what seems clear is that there will be some cases where the ‘French way’ may still be best. For example, take my own situation where as a British citizen who is in a French civil partnership (PACS) with someone who has dual US and British citizenship, as well as him having two daughters and two grandchildren living outside of the EU, we will not be rushing ahead to request that English succession rules apply to our estates. Instead, we will definitely continue to depend upon our French family pact and assurance vie because in that way, we know that when the time comes, the survivor will be fully protected and the potential inheritance tax bills of our heirs have been mitigated.
Hence, as can be seen, tried and tested solutions already exist for dealing with property, plus assurance vie will continue to be an effective succession planning tool for financial assets. You can find out more about the ‘French way’ by reading my article on ‘Inheritance Planning in France’ on our website at https://spectrum-ifa.com/inheritance-planning-in-france/ or by contacting me directly for a copy.
Brussels IV aims to harmonise the approach to succession across the EU with the intention that the civil rules of only one jurisdiction apply to the succession of a person’s estate, i.e. habitual residence or nationality. However, due to the opt-out of the three Member States, this has already created uncertainty. In addition, it is not clear how the Regulations will work at a practical level, in particular, how the courts in one country will administer the succession of both moveable and immoveable assets in another country. Hence, even some international legal experts are not yet drafting transitional provisions into wills that involved a cross-border succession, as there is still too much uncertainty. We can only hope that there is further clarification before August 2015.
The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action on the subject of investment of financial assets or on the mitigation of taxes.