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Finance > Taxes > Scrooge Hasn’t Got It All Yet!
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Article rating : 0.00, 0 votes. Author : Mark Mountney
It’s the season of goodwill when ordinary folk tend to give more than they receive and, apparently, the Brits are the most generous of Europeans when it comes to spending on gifts for our friends and family. But it would be nice, wouldn’t it, if we could get a break to recoup some of the endless tax that we seem to pay!
Earlier in the year, the EU, that most bureaucratic of bureaucracies, seemingly as mean, if not moreso, than Scrooge himself, gave us an early reverse Christmas present by trying to tax us even further by closing some of the benefits of investing offshore. Read ‘offshore’ as any one of a number of states or tax havens where tax breaks have existed on investments. The EU Directive, effective from 1st August 2005, introduced mandatory withholding and reporting of offshore income purely for the benefit of their EU members’ tax authorities to allow them to capture more revenue.
But Scrooge hasn’t got it all, at least, not just yet!
There remain certain states that refuse to play ball and will continue to thwart the attempts of such moves to close loopholes. Their intent is to survive for, without this ability to provide tax incentives, they will lose their very reason for being! Good luck to them for they will need it!
Even within these established tax havens not all doors to save on tax have been closed. For example, a common tool is the life assurance ‘wrapper’. This belies its name really as it is not a life assurance policy as we all know it, but rather a protective umbrella which allows for earnings on investments held within the wrapper to be rolled up. Drawings, or ‘income’ if that is what you want from it, is deemed a capital reduction rather than taxable income per se. It sounds like a play on words, and that is really exactly what it is. They give you part of your money back as an ‘income’ but replenish the pot from the true income that the underlying investment is making. But critically dear old Scrooge cannot tax you on your drawings. So those of us that have been fortunate enough to build some reserves for our future now need to think about reorganising the holdings to ensure that the EU Directive does not result in mote tax and reduced income.
On a slightly different note, Chancellor,Gordon Brown, in his pre budget speech earlier this month, made a surprise announcement that his plans to allow personal real estate properties to be moved into a SIPP (Self Invested Personal Pension) for tax efficiency were to be withdrawn. This came as quite a surprise to a lot of people especially as it was the Chancellor that came up with the idea in the first place! I bet Scrooge, or the Inland Revenue, was rubbing his hands in glee at that announcement as it has saved him an absolute fortune in lost taxable potential.
It comes down hard on individuals who had plans to use a SIPP to provide a pension fund for themselves and their families. Much of the money invested into such property has come from earned income, all taxable, and it would have been of great benefit to be able to protect against future Capital Gains Tax under a SIPP. No such luck!
So the real estate industries, both here in Spain, back home and throughout Europe, who saw the potential of marketing the concept to would be buyers, now have to think again! The expected surge in interest would have taken a serious hit as a consequence of the decision.
That opportunity may have passed on but there are still ways of investing in property and minimising the effect of tax. For example, if you are buying with a view to build a portfolio here and intend to keep turning the properties over every so often to take your gain, the use of an SL registered company has its potential. An SL company, a limited company here in Spain, has Capital Gains Tax capped at 15% whereas buying as a non resident individual has a potential tax of 35%. The ‘break even’ or threshold for considering an SL kicks in at a profit per annum of Euros 35,000. So if your profit is likely to exceed this number, an SL would seem the better route for ownership. But it has to trade! By that I mean that Scrooge (the Revenue here) will expect to see properties bought and sold as a business and not simply held within the SL company and doing nothing else year after year.
And then you have the benefit of gearing or leveraging a purchase by using someone else’s capital i.e. banks. It doesn’t diminish tax per se but it can do, especially when used via an SL where investment income (rents) can be offset against mortgage interest payable. And then you have the differential of borrowing in Euros at say 4% per annum versus tax free income on capital invested wisely through structured products offshore. If your capital base is in Sterling, returns in excess of 6% are readily achievable without too much risk. Hence, a 2% return there every year as well.
It mighty not be as glamorous a route as investing via a SIPP, but the Spanish Haciendas view on SIPPs was always likely to be questionable anyway. They simply do not like Trusts and that is exactly what a SIPP is. The SL route is also frowned upon but, if used correctly, is tried and tested.
When it comes to attempts by the tax authorities of the world to close all doors for ordinary folk to earn a penny without having to pay them a percentage, be assured that, where the authorities employ banks of boffins to come up with ideas to generate more tax, there an equal number of experts who are also working just as hard, if not harder, to find ways through the maze to keep your money yours!
Merry Christmas Mr Scrooge!
Mark Mountney is a partner in Rose Financial Services, a specialist mortgage brokerage and Independent Financial Advisor based in the Parque Comercial, Mojacar. He is a fully qualified mortgage and financial adviser in the UK with some 10 years experience in managing his own firm. Mark was also a founder of The Association of Mortgage Advisors, the trade association for mortgage intermediaries with 13,000 members.
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