THE complexity of tax should not be overlooked and becomes even more of a challenge when you live overseas.
Often the accountants we use here in Spain have limited knowledge of UK investment products and pensions, and the advice we are given can often be ‘lost in translation’
So how can we trust that the advice we are given is correct? How do we know if by trying to save tax we are actually committing tax evasion? Let me try and simplify it and give some basic examples of tax avoidance and tax evasion.
Firstly, I should point out that tax avoidance is the legal use of tax laws to reduce one’s tax burden and can be particularly fruitful when investing. For example, a £500,000 investment which has been structured appropriately (e.g. held within a Spanish Tax Compliant Bond) which grows by 5% (£25,000) there would be no tax due until you actually withdrew money from the bond. Therefore the £25,000 would be reinvested at 100% as opposed to being subject to savings tax at 19% (£2,250). Over a five year period you could have over £10,000 more invested than what you would have if it was taxed at source. A great tax saving!
Now let’s look at an example of tax evasion. For this example, I’m actually going to use a product which we are seeing recommended more and more in Spain, a QNUPS – Qualified Non-UK Pension scheme.
This product is an overseas pension scheme in which cash and assets that are not eligible for UK tax relief can be contributed. QNUPS are generally designed for individuals who have reached their pension lifetime allowance, currently £1,073,100, and wish to have an additional retirement savings plan. One key benefit to a QNUPs is that they are free of UK inheritance tax, and it is this factor that has led to many people being mis-advised and potentially committing tax evasion. We also see them commonly used (and often illegally) in an attempt to avoid Spanish Wealth Tax.
Let’s have a look at a scenario:
Mrs Harvey is aged 70 and has been retired for 20 years. She has UK assets worth a total of £2 million. She has been told if she transfers money into her QNUPS, it will immediately be outside of her estate for IHT and Spanish Wealth Tax purposes. She wants to transfer £1million into her QNUPS and she wishes to take benefits straight away.
In this scenario, it is clear that the QNUPs isn’t being used as a retirement savings plan and HMRC would not consider it reasonable. The individual would be committing tax fraud. Remember, it is not the person who gave the advice (e.g. a Financial Adviser) who would be held responsible, it would be the client.
In addition to committing tax fraud, moving your savings (which you would have already paid any tax due on) into a QNUPs would instantly mean that any income your take from the QNUPs would be considered as pensionable income and taxed up to 45% here in Spain. So on the example I gave above, moving £1million into a QNUPs and taking an annual income of £100k per year, would lead to an unnecessary tax bill of up to £45k per year. Over 10 years you’d be giving away nearly half of that £1 million to the taxman! You may also be promised that a ‘special’ annuity arrangement will help you save substantial amounts of tax, but remember, if this isn’t a real annuity, then you are making a false declaration to the tax authorities, and that is a criminal offence!
Added to these issues is that in our experience QNUPs contain layers of unnecessary fees, and are often accompanied by an unnecessary high cost life insurance policy with a long tie-in. Even if you were lucky enough to not be caught by the tax authorities, any tax you are hoping to save would be eaten away by fees.
Regardless of what you may be told in a meeting or phone-call about amazing tax mitigation opportunities, the UK and Spanish tax authorities are nearly always one step ahead and it is essential to always remember the old adage, ‘if it sounds too good to be true…’.
A solid financial plan from an honest and ethical adviser can help offer you maximum tax benefits as a Brit living here in Spain but trying to evade taxes altogether is a far greater risk to you and your family than it is worth.
If you want a financial adviser who will always put you first, please contact me direct on firstname.lastname@example.org, call 693 107044 or visit www.chorusfinancial.es for more information.