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Inheritance Tax in Catalonia

By Chris Burke - Topics: Barcelona, Catalonia, Catalunya, Inheritance Tax, spain
This article is published on: 11th October 2018

11.10.18

In the circle of life, it’s an unfortunate occurrence that parents or relatives pass on from this world we live in and leave an inheritance, whether that is property, money, investments or other assets. The value of this inheritance may or may not be the kind you are used to having or looking after, and that is where we/ I come in, to make sure this your inheritance is safe and looked after, taking into account your life situation both now, and in the future.

How is this inheritance taxed in Catalonia though? I hear many stories or ideas among people I meet but no one seems to know for sure, or get it right anyway. One of the reasons for this is that it depends on where the money comes from, i.e. which country and what asset is being received. Many of my clients are from the UK, how does it also work there? In the UK it is usually very simple, if someone dies being resident in the UK and leaves you assets up to £325,000,there is usually no Inheritance Tax (Paid by the estate); anything over this is taxed at 40%. However, in Catalonia it is not that simple (Surprise surprise, I hear you say!) and alongside what is declared and maybe tax payable in the UK, you must also declare and pay the relevant tax here

Firstly, Inheritance tax in Catalunya is paid for by the receive, not the estate, and very importantly, you have 6 months to declare this inheritance, EVEN if you haven’t received it yet (this is from the date of decease) or you will be fined the following way, on the amount of tax you are liable to pay:

  • 5% in the following 3 months (i.e. months 6-9 since death)
  • 10% from 3 months to 6 months
  • 15% from 6 months to 12 months
  • 20% plus interests after 12 months

The good news is that there are discounts on inheritance tax in Catalonia, and most people are surprised by the amount of tax they have to pay, in a good way. To start with, there is usually no tax to pay on the first €100,000 being received if you are a child or spouse of the deceased. If you are a parent of the deceased, the allowance is €30,000 and any other relative receives a €50,000 nil tax amount including grandchildren.

From this point on, there are further reductions between 97-99% and there are also other factors to be taken into account, such as are the children under 21, disabled or if from a family business. The quickest and simplest way, I feel, to give you an idea of what tax you would pay is if I use the most common example, of a parent living outside of Spain, leaving their child whom is living in Catalonia an amount of money/asset not including property (there would potentially be extra tax deductions for receiving this):

Example (guideline) of someone tax resident in Catalonia, inheriting from a parent in the UK:

Amount to be inherited Tax due in Catalonia
€100,000 €0
€250,000 €383.82
€500,000 €4,300.05
€750,000 €16,866.68
€1,000,000 €40,473.29

These are approximate and we always suggest getting in touch to confirm exactly what the amount would be, and for help declaring it. For the assets themselves, it is worth knowing that many assets overseas are not always efficient to have while living in Catalonia. For example, investments or Isas in the UK are declarable and tax payable on any gain in Spain annually, EVEN if you do not take any of the money, unlike in the UK. This is where we help our clients to get organised efficiently and manage the assets if needed.

If you have any questions relating to any of these points, or anything similar, don’t hesitate to get in touch.

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Inheritance Planning in France

By Sue Regan - Topics: France, Inheritance Tax, Le Tour de Finance, Wills
This article is published on: 3rd August 2018

03.08.18

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.

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 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.

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:
• any French property, plus his/her total financial assets, would be taxed in accordance with French law; and

• the UK property would be taxed in accordance with UK law, although in theory, the French notaire can take this asset into account when considering the fair distribution of all other assets to any ‘protected heirs’ (i.e. children).

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:
• how to protect the survivor; and
• how to mitigate the potential French inheritance taxes for other beneficiaries.

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.

However, the UK opted out of the Regulations and therefore, it is not yet certain how effective the EU Regulations will be until there have been some test cases. I would always recommend that you discuss this in more detail with a notaire who can advise you on the subject of French wills.

If, after taking the advice of a notaire, it transpires that this is the best course of action for you to achieve your inheritance objectives, it is important to note that the French inheritance tax rules will still apply. Therefore, even though you have the freedom to decide who inherits your estate, this will not reduce the potential inheritance tax liability on your chosen 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.

Inheritance planning for French residency can be very complex, especially where there are children from previous relationships. This is often the starting point of my discussions with a prospective client. Most couples with children that I come across want their spouse or partner to inherit everything upon first death and for the children to inherit on second death. This isn’t possible under standard French Succession law, but it can be achieved by putting in place strategic planning, which is something on which we can provide advice.

If you would welcome a confidential discussion about your own inheritance planning, the mitigation of inheritance taxes for your chosen beneficiaries or a general chat about your overall financial situation, please feel free to contact me by e-mail at sue.regan@spectrum-ifa.com or by telephone on 04 67 24 90 95.

In addition, you can meet me and other members of the Spectrum team at the Tour de Finance, which is once again coming to the stunning Domaine Gayda in Brugairolles 11300. This year’s event will take place on Friday 5th October 2018. Places are by reservation only and it is always well attended so book your place early by giving me a call or dropping me an email. Our speakers will be presenting updates and outlooks on a broad range of subjects, including:

Brexit
Financial Markets
Assurance Vie
Pensions/QROPS
French Tax Issues
Currency Exchange

So, if you are concerned about your investments and pensions in a post-Brexit world why not join us at this very popular event where you can meet the team in person and listen to a number of industry experts in the world of financial advice.

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 www.spectrum-ifa.com/spectrum-ifa-client-charter/

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 to mitigate the effects of French taxes.

Preparing ‘THE’ folder

By Gareth Horsfall - Topics: Estate Planning, Inheritance Tax, Italy, Wills
This article is published on: 10th April 2018

10.04.18

Living in a foreign country is never easy, but have you thought how complicated it would be for your family if you die suddenly?

I am writing this E-zine after my weekly food trip to the Mercato Trionfale in Rome.  I believe it to be the largest indoor market in Rome.  It certainly has a massive choice of fruit, veg, meats, fish and much more.  For any foodies out there, it is well worth a visit.  However, my motivations for going this particular morning were not necessarily the food, but to go and have a natter with the people on the ‘bancarelle’.  As is the norm at markets you tend to have your favourite stalls and you get to know the people and whilst buying the groceries you can stop and put the world to rights, talk about the weather etc.   I love it because it is a break from the everyday routine and it provides me with that connection with people outside work.

So, when I got a call from a lawyer recently to tell me that one of my clients had died, (after a tragic and prolonged illness) I felt I had to go and have a dose of that life infusion once again.

This E-zine is never an easy one to write but I like to throw it out there once a year because I think its important.  Ensuring that your papers are in order in the event of your sudden death is incredibly important when living in another country.  It will provide you with peace of mind that your loved ones will not have too much difficulty in administering your estate, and your family  will be thankful that you did it for them.

The big problem is that as ‘stranieri’ we often have documents spread across multiple locations.  The office, a house in another country, with family members and in that old box that no-one dare look in.

The purpose of this Ezine is to outline a proven way of organizing your affairs to reduce stress in the event of your death.

So what is THE folder?

It is a single file (digital or physical) where you keep all of your important personal and financial information together. It allows easy access to these documents in the event that you’re no longer around to help. It is really important to have it in place where one family member takes the lead on the family finances (as I do in our household). That includes paying bills, managing accounts and storing documents.

Is it worth the effort?

Well, I think it is worth the effort. A time of loss can be stressful enough without having to try and piece together the deceased’s financial affairs. This can be a really difficult time for family members.

However, preparing THE folder is much more than avoiding stress; if you leave behind a administrative nightmare you could delay access to inheritors’ access to funds and potentially cost a small fortune in legal fees.

To give you an example of this, the UK Department of Work and Pensions estimate that there is currently more than £400 million sitting in unclaimed pensions pots in the UK.

Which is best…..physical or digital?

This comes down to personal preference. It can be done by either creating an electronic file that survivors can access in the event of death. This file can then be stored on your main computer, in the cloud or on an external hard drive. Alternatively you can use a physical folder to keep all of the important information together.

For what it’s worth, I decided to do both when building mine because my wife prefers paper and so is happier with hard copies of everything. I prefer digital. I have also shared the digital folder with some trusted family members.

Birth, marriage and divorce

  • Personal birth certificate
  • Marriage licence
  • Divorce papers
  • Birth certificate/adoption papers for minor children

Life insurance and retirement

  • Life insurance policy documents (including beneficiary nomination forms)
  • Details of any employer death in service benefits
  • Personal pension documents
  • Employer pension details
  • Annuity documents
  • Details of any entitlement to state pensions

Bank accounts

  • List of bank accounts with account numbers, login details, passwords etc
  • Details of any credit cards
  • Details of safe deposit boxes

Assets

  • Property, land and cemetery deeds
  • Timeshare ownership
  • Proof of loans made
  • Vehicle ownership documents
  • Stock certificates, brokerage accounts, investment platform details, online investment account details
  • Details of holdings of premium bonds, government bonds, investment bonds
  • Partnership and corporate operating/ownership agreements (including offshore companies)

Liabilities

  • Mortgage details
  • Proof of debts owed

Details of gifts

  • Dates and amounts/values (potentially helpful when calculating any inheritance tax liability)

Income sources

  • Make a listing of all your sources of income, especially ones that your family might not know too much about
  • Employer details
  • A copy of your most recent tax return or accounts

Monthly expenses

(so they can be maintained if necessary or cancelled if not. Essentially list the fixed costs which would need to continue after death)

  • Utilities
  • Insurance
  • Rent/mortgage
  • Loans
  • Subscriptions/memberships

Email and social media account details

  • Facebook
  • LinkedIn
  • Twitter,etc……..

Essentials

  • Will/testament + details of the legal firm that helped create it, if applicable
  • Instruction letter
  • Trust documents
  • Burial/cremation wishes

Contact details

  • List of names and contact numbers for: Financial adviser, doctor, lawyer/solicitor, accountant, insurance broker,

How often should ‘THE’ folder be reviewed?

Firstly, it is sensible to note the date that it was last reviewed so that anyone using it has an idea of how up-to-date the details are.

Going forward, reviewing the file on an annual basis should be sufficient.

Online passwords

If you are not comfortable keeping these in your folder, consider using a password management program. A password manager allows you to save all account usernames and passwords in one place. They are then protected using one master key. There a number of them available. I personally use LastPass – www.lastpass.com

This might be a step too far for you given the data breaches that seem to be happening almost daily, notably Facebook. I appreciate that and if you are not comfortable in using such an app then its important to have a physical record some where that can be accessed in the event of your death.

And finally…

Be sure to tell someone about it. There is little point going to the effort of creating such a folder if know one knows of its existence/where to find it…..

Proposed French Tax Changes 2018

By Sue Regan - Topics: France, Income Tax, Inheritance Tax, Tax, tax advice
This article is published on: 25th October 2017

25.10.17

Since my last article the October Tour de Finance event has taken place at the Domaine Gayda in Brugairolles, near Limoux. As always, it was a huge success and very well attended. It was great to see some familiar faces as well as make some new contacts. Over 70 guests in all came along to listen to a number of industry experts speak about highly topical issues such as the proposed changes to the French tax system, pensions, assurance vie, discretionary fund management and, of course, the “B” word!

In this article I will concentrate on our understanding of some of the proposed changes to the French taxation regime, as published in the Projet de Loi de Finances 2018. Of particular interest to many of our clients are the proposed changes to Wealth Tax, the increase in Social Charges and the new 30% Flat Tax on revenue from capital. At the time of writing, these, and other proposed changes have still to be agreed in Parliament and then referred to the Constitutional Council for review before entering into French law. So we won’t know for sure the exact changes that will take place until the end of the year. However, below is a brief summary of the main proposals as we understand it.

WEALTH TAX (Impôt de Solidarité sur la Fortune)
The government proposes to abolish the current wealth tax system and replace this with Impôt sur la Fortune Immobilier (IFI).

IFI would apply only to real estate assets and the principal residence would still be eligible for the 30% abatement against its value. Therefore, taxpayers with net real estate assets of at least €1.3 million would be subject to IFI on taxable assets exceeding €800,000, as follows:

Fraction of Taxable Assets Tax Rate
Up to €800,000 0%
€800,000 to €1,300,000 0.5%
€1,300,001 to €2,570,000 0.7%
€2,570,001 to €5,000,000 1%
€5,000,001 to €10,000,000 1.25%
Greater than €10,000,000 1.5%

This is good news for French residents with substantial financial assets, including those held within assurance vie. However, there have already been some protests to the scope of the new form of ‘Wealth Tax’ being levied only on real estate, with luxury items such as yachts and gold bullion being exempt. Thus, I don’t think we have heard the last of this!

SOCIAL CHARGES (Prélèvements Sociaux)
It is proposed to increase the Contribution Sociale Généralisée (CSG) by 1.7%. This will result in investment income and property rental income being liable to total social charges of 17.2% and, where France is responsible for the cost of the taxpayer’s healthcare in France, at a rate of 9.1% on pension income.

FLAT TAX on revenue from capital
It is planned to introduce a Prélèvement Forfaitaire Unique (PFU) at a single ‘flat tax’ rate of 30% on investment income, made up as follows:

➢ a fixed rate of income tax of 12.8%; plus

➢ social charges at the rate of 17.2% (taking into account the proposed increase).

The PFU will apply to interest, dividends and capital gains from the sale of shares.

How does this affect Assurance Vie contracts?
Based on information currently available and, of course, the finer details may change before being passed into law, it is our understanding that for premiums invested totalling €150,000 or less per person (so €300,000 for a joint life policy) the existing system of withholding tax (prélèvement forfaitaire libératoire PFL). Taking into account social charges at the increased rate of 17.2%, this results in gains on amounts withdrawn, continuing to be taxed, as follows:

➢ during the first 4 years at 52.2%

➢ between 4 years and 8 years at 32.2%

➢ post 8 years at 24.7%

The first draft of the bill proposed that the new ‘flat tax’ will replace the existing PFL system but will only apply to gains on premiums invested after 27 September 2017, that exceed the thresholds above. However, the National Assembly has already decided that it is illogical to have different tax rates, depending on how long the premium has been invested, for new investments made from 27 September 2017. Therefore, an amendment to the bill has already been proposed that all new investments made should be subject to the ‘flat tax’.

It is proposed that all taxpayers will have the possibility to opt for taxation at the progressive income tax rates of the barème scale, plus social charges. Therefore, any potential gains on capital, including withdrawals from assurance vie policies, should be assessed on an individual basis to determine in advance as to which method of taxation would be most appropriate.

There is no change to the inheritance tax treatment of assurance vie contracts and the post 8-year abatement of €4,600 for a single taxpayer, or €9,200 for a couple, will be maintained. Thus, despite the proposed tax changes, the assurance vie will continue to be a very useful vehicle for sheltering financial assets from unnecessary taxes. In addition, as assurance vie policies fall outside of your estate for inheritance tax purposes, you can leave your investments to your chosen beneficiaries without being subject to the French Succession Laws of “protected heirs”.

The abolition of taper relief
The reform also proposes the abolition of the taper relief on capital gains from the sale of shares, in respect of gains from disposals from 2018.

So, if you are sitting on a portfolio of shares which are not sheltered in a tax wrapper, then now is the time to have a look at any gains you may have and, possibly make use of the taper relief of up to 65% on the total gain, while it is still available. Don’t delay in speaking to your financial adviser who should be able to identify whether the restructuring of your investments is in your best interests.

Wealth Tax in Catalunya

By Barry Davys - Topics: Barcelona, Catalunya, Estate Planning, Inheritance Tax, spain, Succession Planning, Wealth Tax
This article is published on: 3rd August 2017

03.08.17

We understand the need to pay tax. It gives us hospitals to treat our family, care in later life and many other services. Yet it is also easy to feel unhappy about some taxes. Some seem just downright unfair.

Wealth tax is the first of these. Having worked hard and paid tax on our earnings, we have then also paid tax on our savings. Despite this we have managed to build our savings, have become less of a burden on the state and yet we are now taxed again with Wealth Tax for having saved. Fortunately, it is possible to pay what is due but also to manage the amount due.

Wealth Tax in Catalunya – How it works
Wealth tax ( Patrimonial ) is applied if your worldwide assets are more than 500,000€ with an additional allowance of up to 300,000€ for your main residence. The tax is based upon your net wealth; assets minus liabilities.

In Catalunya the rates of tax start at 0.21% and rises to 2.75% depending on your wealth. Each year!

Your wealth as at 31st December is declared as part of your Declaración de la Renta, your annual tax return and the payment of the tax made on the 30th June in the following year.

How to manage the amount due
There are some assets that are excluded from Wealth tax. Surprisingly, some of these are mainstream investments. It may be possible to reduce your Wealth Tax by using an exempt investment.

In addition, the amount of tax due is capped at 60% of your income tax base, subject to paying at least 20% of the total tax based on your wealth. It is often possible to adjust your income so that you are limited to the 60% of your income tax base. Typically, this is done by using investments which are not assessed for tax each year. However, there are several methods of planning to achieve a reduction in Wealth Tax.

Who would inherit your Assets if you die without a will?

By Chris Burke - Topics: Barcelona, Estate Planning, Inheritance Tax, spain, Succession Planning, Wills
This article is published on: 26th May 2017

26.05.17

You might be surprised to know that 59%, that’s over half of UK adults, have not written a Will. And if you are over 55 there is a 36% chance you haven’t either. The main reason for this…….most people believe they are not wealthy enough to need a Will, or they are too young to make one. But what would happen to your assets if the worse did happen?

Is there a living husband, wife or civil partner?

If you are married, or have a civil partnership then it’s actually very straightforward and they would inherit your entire estate. But would you want that? And how about if by some awful miracle both of you departed this happy land, what would happen to your assets then? But let us put those to one side for now; imagine you have children, whom decide where they will be raised and who with? If you are living away from the UK this makes it even more complicated. If you don’t have a Will, you are leaving all of this to the authorities and not planning to protect yourself and your loved ones for the sake of a simple document.

Imagine you have a partner, but are not married and not in a civil partnership, would you be surprised to know they have no right to your assets? How would that affect them?
Let’s imagine, as more people these days are for various reasons not having children, that down the family line to Great Aunts/Uncles there is no one related to you. You might not be very happy to know that ‘The Crown? Inherits your assets, that is the Royal Family. In fact fewer people in the UK have Wills than a year ago.

Back in August 2015 the Wills laws changed in Europe, with the main different being you can CHOOSE which laws you wish your Will to follow. The choice is either your country of domicility (usually where you were born/hold a passport for) or the country you reside in now. If you are British most people choose the UK as the laws are easier, you have more control and less complex than those in Spain.

Find out here who would inherit your assets by clicking on this link:
www.gov.uk/inherits-someone-dies-without-will

To enquire about making a Will, don’t hesitate to get in touch and we can arrange for you to talk this through with a Will writer so you know:

  • The process involved
  • The costs
  • How it works
  • There is no charge for this peace of mind

Sources:
HMRC website
*unbiased.co.uk research conducted by Opinium Research between 19 to 23 August 2016, among 2,000 nationally representative UK adults aged 18+

Inheritance Tax Planning

By Derek Winsland - Topics: Estate Planning, France, Inheritance Tax, Succession Planning, Tax
This article is published on: 18th April 2017

18.04.17

In my everyday dealings with prospective clients and ex-pats looking for advice generally, I’m finding myself dealing with increasingly more complex personal and family situations. From re-structuring of UK investments such as general investment accounts and Individual Savings Accounts (ISA) to make them French tax-friendly, analyzing occupational pensions to assess the suitability of transferring way from the UK and into QROPS, through to financial planning for the future, every case is varied and different, requiring bespoke advice.

One area I find particularly common is how best to address the impact French succession laws have on those of us used to the fairly flexible UK Inheritance Tax laws. In the UK, its fairly simple: you can leave everything you own to your spouse free from inheritance tax. On the surviving spouse’s subsequent demise, the first £325,000 of that person’s estate can be passed on without tax liability. Since 2007, the deceased partner’s allowance can also now be used by the surviving spouse, thereby ensuring that £650,000 of the combined estate is free from taxation. In addition, there is an additional property nil rate band that can boost the tax exemption even further. Furthermore, with the exception of the spouse, there is no discrimination in who benefits in terms of tax treatment. The tax rate in UK is 40% on the excess over the £325,000 threshold.

In France, assets passing to the spouse have also been tax free since 2007, but this is where the similarity ends in terms of potential taxation. Taking its lead from Code Napoleon, French succession laws put the children of the deceased at the forefront when determining who inherits, giving them Protected Heirs status. Who inherits, and that person’s relationship to the deceased, also determines what tax free allowance is available and following on from that what tax is payable.

Sons and daughters, both natural and adopted, can receive €100,000 each from the deceased’s estate free from tax, thereafter there is a sliding scale based on the amount inherited. But here’s the rub: step-children are not blood related, so the children’s allowance doesn’t apply to them and they fall into the category of ‘unrelated person’. As such they can only inherit €1,594 free from inheritance tax. The balance is taxed at the eye-watering rate of 60%.

Protected Heirs are entitled to receive the major share of the deceased’s estate, at the expense of the spouse, so structures need to be put in place to protect the spouse, such as wills, marriage regimes, family pacts etc. Generally, these relate to the property, but can also include more liquid assets such as bank deposits and investments.

When addressing the issue of shielding step-children from the severest level of taxation, at the same time ensuring the surviving spouse is properly looked after, one weapon in our armoury is the assurance vie, or life assurance investment bond. On the death of the bond holder, any beneficiary can inherit without discrimination. In the holder of the assurance vie was below age 70 when the policy was taken out, each beneficiary can inherit €152,500 without a tax liability. For amounts above €152,500 the tax rate is 20% or 31.25% if the amount inherited is above €700,000. This is per beneficiary and not per assurance vie. But what if I don’t want my money to pass to my children or step-children on my death, but rather to go to my spouse?

This is where it gets clever! By inserting a Demembrement Clause within the assurance vie policy, your spouse can be granted usufruit or life interest in the assets held in the policy, thereby ensuring protection to him or her.

And there’s more. By drawing capital out of the deceased’s policy, the spouse is creating a debt that will be repaid on the spouse’s subsequent death, paid for out of his or her estate, thereby further reducing the amount of any inheritance tax liability. This is what we call true financial planning, and this forms the bed-rock of what we do here in Spectrum.

If you have personal or financial circumstances that you feel may benefit from a financial planning review, please contact me direct on the number below. You can also contact me by email at derek.winsland@spectrum-ifa.com or call our office in Limoux to make an appointment. Alternatively, I conduct a drop-in clinic most Fridays (holidays excepting), when you can pop in to speak to me. Our office telephone number is 04 68 31 14 10.

Spanish Succession Tax (Inheritance tax)

By Chris Webb - Topics: Catalunya, Estate Planning, Inheritance Tax, spain, Succession Planning
This article is published on: 16th March 2017

16.03.17

If you are a resident of Spain it is important to understand that there will be liabilities due to the Spanish government in the event of a death. Whether it’s you that is inheriting part of an estate or it’s your estate being distributed the taxman is going to want his share.

Many British nationals don’t realise that depending on the asset and its location there may also be a claim from the UK taxman. Just because you are a non UK resident it does not eliminate the requirement to settle taxes in both the UK and Spain. Spanish succession tax will be due either when the assets being inherited are located in Spain, such as a property, even if the recipient of the asset lives outside of Spain OR if the assets are based outside of Spain but the recipient lives in Spain.

For example: if you leave your Spanish property to your children who are now UK residents they will be liable to pay succession tax to the Spanish government. On the flip side if you receive an inheritance from the UK and you are a Spanish resident then again you have to pay tax in Spain.

As mentioned above, if you are a British national and are resident in Spain you could be liable to UK inheritance tax as well as Spanish succession tax. In the UK they require all worldwide assets to be declared, as you will be considered “UK domiciled” by the government. It is almost impossible to be considered as anything other than UK domiciled, even if you haven’t lived in the UK for some time.

There is no double tax treaty signed between the UK and Spain when it comes to inheritance, however if tax has been paid in the UK the amount is usually deductible against the Spanish liability.

To complicate matters further, Spain have a standard set of “State Rules” which lay down the rates and allowances for succession tax as well as individual “Autonomous rules” which means things are different from one community to another. Detailed below are these state rules:
The tax rates differ depending on the value of the amount inherited. These range from 7.65% on the first €7,933, up to 34% on €797,555 and over.
Beneficiaries are graded into four different groups and the more remote the beneficiary’s relationship is to the deceased the lower the tax allowance and the higher the tax rates. These four groups are:

  • Natural and adopted children under 21
  • Natural and adopted children aged 21 and over, grandchildren, parents, grandparents, spouses
  • in-laws and their ascendants/descendants, stepchildren, cousins, nieces, nephews, uncles, aunts
  • all others including unmarried partners

Allowances are available between husband and wife or direct line ascendants/descendants, but this is set at just short of €16.000. If an inheritor is also a direct line descendant under the age of 21, there is an additional allowance of €3,990 for each year they are under 21. The total of this additional allowance is restricted to €47,858 per child or grandchild.

For more distant relatives (e.g. cousins) the exemption is set at €7,933. There is no exemption for beneficiaries who are not related.

A main home in Spain may be virtually exempt from Spanish succession tax provided the beneficiaries are either your spouse, parents or children and they continue to own the property for ten years from the date of death.

The exemption can also apply where the beneficiary is a more distant relative over the age of 65 and they have lived with you for at least two years before death. If these conditions are met, the value of the house can be reduced by 95% in calculating the tax base liable, subject to a maximum reduction in value per inheritor of €122,606. It is important to note that this is only applies principal private residence and is owned by a Spanish resident.

Some examples of where the Autonomous rules differ from the state rules:

In Valenciana, spouses and children receive an allowance of €100,000 each. They can also benefit from a 75% reduction in the amount of succession tax payable.

In Murcia, the taxable inheritance for children under 21 is reduced by 99%, while older children and spouses get a 50% reduction.

In Andalucía, spouses and children can benefit from a 100% exemption for inheritances up to €175,000, provided they are not worth more than €402,268.

Cataluña offers a 99% allowance for spouses. Other Group I and II relatives receive a relief depending on the amount of their inheritance. Personal reductions are €100,000 for spouses and children (more for those under 21), €50,000 for other descendants, €30,000 for ascendants and €8,000 for other relatives. The 95% main home relief is up to a property value of €500,000, with the amount pro-rated among the beneficiaries (minimum €180,000 limit each). The property need only be kept five years rather than the 10 year state rule.

To summarise the key points of succession tax:

  • Tax is paid by each recipient, rather than by the estate
  • Spouses are not exempt
  • Allowances under the state rules are very low – just €15,957 for spouses, descendants over 21 and ascendants, €7,993 for other close relatives and nil for everyone else
  • Under state rules, tax is applied at progressive rates from 7.65% (for assets under €7,993) to 34% (for assets over €797,555). However, multipliers depending on the relationship between the two can increase this rate
  • If you leave assets to your spouse, who then passes them on to your children when he/she dies, succession tax will be due again on the second death
  • Succession tax also applies to pension funds
  • Tax is paid at the time of the inheritance, even if the funds are not accessed at the time. There is a six-month period to pay the tax after the death, although it is possible to apply for an extension in certain cases
  • Succession tax is governed by both state and local autonomous community rules; each community has the right to amend the state rules
  • Whether the state or the local autonomous community rules apply for each case, depends on where the beneficiary and the donor are resident and where the assets inherited/gifted are located
  • If you are UK domiciled you need to consider both the UK inheritance tax rules as well as the Spanish succession tax rules

Whilst the Spectrum IFA Group are not tax advisers, we can help to put you in touch with the right people. It is important to understand the various succession tax rules and how they apply to your situation, as well as how they affect any UK liability. You need specialist advice to understand the intricacies of the two tax regimes, and how to lower both tax liabilities and potentially save your heirs a considerable amount of tax. You can often combine your estate planning with your personal tax planning.

*Sources: Advoco, LegalforSpain, Globalpropertyguide, GovUK, AILO

French Tax Changes 2017

By Daphne Foulkes - Topics: Estate Planning, Exchange of Information, France, Income Tax, Inheritance Tax, Offshore Disclosures Facility, Tax, Uncategorised, wealth management, Wills
This article is published on: 3rd January 2017

03.01.17

During December, the following legislation has entered into force:

  • the Loi de Finances 2017
  • the Loi de Finances Rectificative 2016(I); and
  • the Loi de Financement de la Sécurité Sociale 2017

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 €9,710 0%
€9,711 to €26,818 14%
€26,819 to €71,898 30%
€71,899 to €152,260 41%
€152,261 and over 45%

The above will apply in 2017 in respect of the taxation of 2016 income and gains from financial assets.

Tax Reduction

A tax reduction of 20% will be granted when the income being accessed for taxation is less than €18,500 for single taxpayers, or €37,000 for a couple subject to joint taxation. These thresholds are increased by €3,700 for each additional dependant half-part in the household.

For single taxpayers with income between €18,500 and €20,500, and couples with income between €37,000 and €41,000 (plus in both cases any threshold increase for dependants), a tax reduction will still be granted, although this will be scaled down.

Prélèvement à la source de l’impôt sur le revenu

Currently, taxpayers complete an income tax declaration in May each year, in respect of income received in the previous year. From the beginning of the year, on-account payments of income tax are made, but pending the assessment of the declaration, these are based on the level of income received two years previously. In August, notifications of the actual income tax liability for the previous year are sent out and taxpayers are sent a bill for any underpayment or income tax for the previous year, or in rare situations, there may be a rebate due, typically in the situation where income has reduced, perhaps due to retirement or long-term disability.
Hence, at any time, there is a lag between the tax payments being made in respect of the income being assessed. Therefore, with the aim of closing this gap, France will move to a more modern system of collection of income tax, by taxing income as it arises. This reform will apply to the majority of regular income (including salaries, pensions, self-employed income and unfurnished property rental income), which will become subject to ‘on account’ withholding rates of tax from 1st January 2018.

Where the income is received from a third-party located in France, the organisation paying the income will deduct the tax at source, using the tax rate notified by the French tax authority. The advantage for the taxpayer is that the income tax deduction should more closely reflect the current income tax liability, based on the actual income being paid at the time of the tax deduction.

For income received from a source outside of France, the taxpayer will be required to make on-account monthly tax payments. The on-account amount payable will be set according to the taxpayer’s income in the previous year. However, if there is a strong variation in the current year’s income (compared to the previous year), it will be possible to request an interim adjustment to more accurately reflect the income actually being received, at the time of the payment of the tax.

Transitional payment arrangements will be put in place, as follows:

    • in 2017, taxpayers will pay tax on their 2016 income
    • in 2018, they will pay tax on their 2018 income, in 2019, they will pay tax on their 2019 income, and so on
    • in the second half of 2017, any third party in France making payments will be notified of the levy rate to be applied, which will be determined from 2016 revenues reported by the taxpayer in May 2017
    • from 1st January 2018, the levy rate will be applied to the income payments being made – and
    • the levy rate will then be amended in September each year to take into account any changes, following the income tax declaration made in the previous May

Taxpayers will still be required to make annual income tax declarations. However, what is clear from the transitional arrangements is that the income of 2017 that falls within the review will not actually be taxed; this is to avoid double taxation in 2018 (i.e. of the combination of 2017 and 2018 income). Therefore, to avoid any abuse of the reform, special provisions have been introduced so that taxpayers – who are able to do so – cannot artificially increase their income for the 2017 year.

Furthermore, exceptional non-recurring income received is excluded from the scope of the reform in 2017; this includes capital gains on financial assets and real estate, interest, dividends, stock options, bonus shares and pension taken in the form of cash (prestations de retraite servies sous forme de capital). Therefore, taxpayers will not be able to take advantage of the 2017 year to avoid paying tax on these types of income.

At the same time, the benefits of tax reductions and credits for 2017 will be maintained and allocated in full at the time of tax balancing in the summer of 2018, although for home care and child care, an advance partial tax credit is expected from February 2018. Charitable donations made in 2017, which are eligible for an income tax reduction, will also be taken into account in the balancing of August 2018.

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)

Gains arising from the disposal of financial assets continue to be added to other taxable income and then taxed in accordance with the 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 2017 in respect of the taxation of gains made in 2016.

CAPITAL GAINS TAX – Property (Plus Value Immobilières)

Capital gains arising on the sale of a maison secondaire and on building land continue to be taxed at a fixed rate of 19%. However, a system of taper relief applies, 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 additional tax continues to apply for a maison secondaire (but not on building land), 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.

SOCIAL CHARGES (Prélèvements Sociaux)

As has been widely publicised, on 26th February 2015, the European Court of Justice (ECJ) ruled that France could not apply social charges to ‘income from capital’, if the taxpayer is insured by another Member State of the EU/EEA or Switzerland. Income from capital includes investment income on financial assets and property rental income, as well as capital gains on financial assets and real estate.

Fundamental to this decision was the fact that the ECJ determined that France’s social charges had sufficient links with the financing of the country’s social security system and benefits. EU Regulations generally provide that people can only be insured by one Member State. Therefore, if the person is insured by another Member State, they cannot also be insured by France and thus, should not have to pay French social charges on income from capital.

On 27th July 2015, the Conseil d’Etat, which is France’s highest court, accepted the ECJ ruling, which paved the way for those people affected to reclaim social charges that had been paid in 2013, 2014 and 2015. This applied to all residents of any EU/EEA State and Switzerland, who had paid social charges on French property rental income and capital gains, but excluded residents outside of these territories.

However, to circumvent the ECJ ruling, France amended its Social Security Code. In doing so, it removed the direct link of social charges to specific social security benefits that fall under EU Regulations. The changes took effect from 1st January 2016.

Hence, if you are resident in France, social charges are applied to your worldwide investment income and gains. The current rate is 15.5% and the charges are also payable by non-residents on French property rental income and capital gains.

Whilst the French Constitutional Council validated the changes in the French Social Security law, it remains highly questionable under EU law. One hopes, therefore, that this may be censored again by the ECJ, at some point.

EXCHANGE OF INFORMATION UNDER COMMON REPORTING STANDARD:

As of December 2016, there are now already over 1,300 bilateral exchange relationships activated, with respect to more than 50 jurisdictions. Many jurisdictions have already been collecting information throughout 2016, which will be shared with other jurisdictions by September 2017.

However, there are many more jurisdictions that are committed to the OECD’s Common Reporting Standard (CRS) and so it is anticipated that more information exchange agreements will be activated during 2017.

In the EU, the CRS has been brought into effect through the EU Directive on Administrative Cooperation in the Field of Taxation, which was adopted in December 2014. The scope of information exchange is very broad, including investment income (e.g. bank interest and dividends), pensions, property rental income, capital gains from financial assets and real estate, life assurance products, employment income, directors’ fees, as well as account balances of financial assets.

No-one is exempt and therefore, it is essential that when French income tax returns are completed, taxpayers declare all income and gains – even if this is taxable in another country by virtue of a Double Taxation Treaty with France.

It is also obligatory to declare the existence of bank accounts and life assurance policies held outside of France. The penalties for not doing so are €1,500 per account or contract, which increases to €10,000 if this is held in an ‘uncooperative State’ that has not concluded an agreement with France to provide administrative assistance to exchange tax information. Furthermore, if the total value of the accounts and contracts not declared is at least €50,000, then the fine is increased to 5% of the value of the account/contract as at 31st December, if this is greater than €1,500 (€10,000 if in an uncooperative State).

2nd January 2017

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.

Dread and Brexit

By John Hayward - Topics: BREXIT, Costa Blanca, Inheritance Tax, spain, Uncategorised, United Kingdom
This article is published on: 24th October 2016

24.10.16

Fear causes thousands to hold off making decisions pre-Brexit

Uncertainty over what will happen once the UK has left the European Union has led people to make one important decision. Not do anything until it happens. This means delaying actions for around two and a half years. This could be a really disappointing, if not dangerous, decision to make. As much as we intend being around in two and a half years, there is no guarantee we will be. Who knew two and a half years ago what was going to happen next week?

Brexit is another event in our lives. None of us, not even the politicians, know exactly what is going to happen but you can plan for all eventualities. If there is a full-on Brexit, then you need to be in a position whereby your money is not exposed to future monetary restrictions. You need to do this BEFORE the shutters come down. Waiting two and a half years may be too long and too late.

If there is a “soft” Brexit, as I suspect there will be, with deals being done over a gin and tonic in Le Chien et Le Canard, it will still be important that your investments are recognised as being tax compliant in the country you live in. It will also be important that any financial planning advice you are receiving is coming from a company registered in your country. Some financial advisers in Spain are allowed to operate using a UK licence because the UK is in the EU. The professional indemnity insurance which they (may) have could become invalid.

Another change likely to cause a big problem post-Brexit is Spanish inheritance tax. UK inheritors are benefiting from Spanish rules introduced in 2014. These rules only apply to EU residents. Therefore, it is now time to look at how to distribute wealth in readiness for these changes.

Interest rates are low and will stay that way for some time to come, probably for at least two and a half years. The pound has collapsed in value meaning that income in euro terms has reduced dramatically. Banks have little or nothing to offer. We can help you with this NOW. We do not charge for a chat, or even for investigating what you have. We tick all the boxes regarding licences and compliance and we live in Spain.