Effective tax planning provides many benefits for yourself and your heirs. As well as lower tax bills, it can help provide estate planning advantages and boost investment returns.
Tax planning is an integral part of effective wealth management, and taxation should be taken into account when making decisions about your savings, investments and pensions. Whether your main objective is to preserve your wealth, provide an income, or generate growth, tax planning plays an important role in protecting and making the most of what you have.
While the tax tail shouldn’t necessarily wag the investment dog, there are numerous benefits to strategic tax planning, especially for expatriates who have cross-border considerations.
Less tax for you
The most important benefit is probably to reduce your overall annual liability for income tax, capital gains tax, and any other taxes on your savings, investments, assets, and pensions in your country of residence.
We all need to pay tax, but if there is a more tax-efficient way to hold your capital and assets, shouldn’t you explore if it could work for you? Yet many people fail to do just that and unknowingly pay more than they should. This may include income tax on bank interest you are not even withdrawing or capital gains tax when switching between investments.
Much depends on how you hold these assets, so investigate what compliant tax-efficient arrangements are available in your country of residence. You may be surprised by how much tax you can save each year.
Also, consider where you hold your assets and in which country. Many expatriates are also caught out by not reviewing their arrangements after taking up residence abroad. For example, income derived from ISAs and Premium Bonds are tax-free in the UK but usefully fully taxable elsewhere. If you hold onto UK assets, you may miss out on more effective structures in your country of residence, which may provide other benefits like estate planning advantages and currency flexibility.
Less tax for your heirs
Of course, the less tax you pay in your lifetime, the more you have to either spend now or pass on to your chosen heirs.
However, with some investment structures, you may also be able to lower the inheritance tax liability for your heirs. Ideally, you want a solution that will limit inheritance taxes while also providing tax-efficient income and investment growth throughout your lifetime, so take personalised, specialist advice to explore your options.
Estate planning benefits
A significant bonus of strategic tax planning can be that the arrangements you put in place also help make things easier for your family when you are gone. Many investment arrangements that provide tax efficiency also offer more estate planning flexibility and control.
For example, completing a beneficiary nomination form may allow you to bypass succession laws for the assets within the policy. And when you die, the capital can pass to your chosen heirs without the complications and delays associated with probate.
Some UK pensions are only transferable to your spouse on death, but when transferred to a Qualifying Recognised Overseas Pension Scheme (QROPS) or reinvested in a suitable tax-efficient structure for your country of residence, you could pass funds on to other chosen beneficiaries, again often without the need to go through probate.
If you are already a tax resident in Spain, however, note that Spain applies a personal, prohibitive income tax charge to the fund value when a non-EU pension contract is transferred into an EEA pension scheme.
Maximising returns
Effective tax planning also plays a part in helping returns outpace the cost of living. Ultimately, what counts when assessing the value of investments are ‘real’ returns, which is after tax, expenses and inflation are taken into account. If the inflation rate is higher than your bank interest rate, you’re effectively losing money. And that’s before tax is added into the equation.
Property, to give another example, is often lauded for producing relatively high returns over the long term, but with stamp duty, local rates, capital gains and wealth tax applied, the tax burden can be large compared to other assets.
With investments, the starting point should always be making sure your portfolio is well diversified and designed to suit your situation, needs, goals, time horizon and risk tolerance. But without suitable tax planning, returns can be diminished by taxes that could have been avoided or significantly reduced, so this is important too.
And if you own many different investments individually, moving them into a wrapper like a life assurance policy for the tax benefits they provide will also make your life easier since the investments would be consolidated into one policy. Less for you to manage, and less time wasted when completing your annual tax declarations and Modelo 720. It will also be easier for your heirs.
If you are planning a move, or already living abroad, you can download as many of our tax guides as you need – completely free.
Effective tax planning – how to get the best results
It is easy to get DIY tax planning wrong, especially with regulatory goalposts changing frequently. Expatriates have the added complication of having to deal with the tax rules of more than one country, at a time when global tax scrutiny is at its highest. Getting it wrong could lead to an unwelcome and unexpected tax bill not to mention the stress of sorting it out.
Tax planning should not be done in isolation or as an afterthought – make it a fundamental part of your investment, pensions, estate planning and overall wealth management strategic plan. Schedule regular reviews so you can adjust your arrangements to keep up with any life changes or tax reforms that affect you, including new opportunities.
For the best results, talk to one of our advisers, who have an in-depth understanding of cross-border taxation, including how the local tax regime interacts with UK rules. As well as offering peace of mind that your tax and wider financial planning is compliant in your country of residence, we can ensure it meets your income needs and goals in the most tax-efficient way today, without burdening your family with unnecessary tax headaches in the future.
Contact Blevins Franks today.
