A Taxing Future?

22.02.10

Please note that this article is over six months old. While Blevins Franks takes care to make sure that information is accurate on the date of publication, some content may change over time. You should not rely on the accuracy of legislation and tax information in this article; take professional advice for your circumstances.

Throughout Europe economies are buckling under the weight of swollen budget deficits. Besides the costs of the financial stimulus measures introduced during the financial crisis, the economic dow

Throughout Europe economies are buckling under the weight of swollen budget deficits. Besides the costs of the financial stimulus measures introduced during the financial crisis, the economic downturn drastically reduced tax revenue, exacerbating the situation as did the lost tax on bank interest.

Governments throughout Europe are therefore under pressure to cut spending and raise taxes to rein in their deficits. The UK has introduced various measures to increase tax revenue, with more added in the latest Budget; Spain has increased tax on savings income and will increase VAT later this year; France has reduced the social tax breaks available and Portugal is increasing the highest rate of income tax and will remove some tax breaks. As we move through 2010 and into the following years we can expect to see tax increases of one form or another spreading throughout Europe.

While Eurozone members are meant to keep their deficits to 3% of gross domestic product or less, this is currently proving an impossible task. Spain?s deficit for 2009 was 11.4%, with 9.8% forecast for this year. The Portuguese deficit rose to a record 9.3% last year, while in France it was also a record at 7.9%, with 8.2% forecast for this year. In Cyprus, last year?s deficit was lower at 6%, but the finance minister has warned that unless measures are taken to contain it, it will be 7% this year and hit 10% in 2013.

While the French government is opposed to increasing taxes, in its 2010 Finance Bill, it went for the option of reducing the ?social? tax breaks available as a less direct way of increasing tax revenue. There is no guarantee that we will not see direct tax increases in France in the not too distant future, particularly those aimed at higher earners.

In Portugal, prime minister Jose Socrates said that the austerity programme ?has been established along the principles of justice and equity in the redistribution of wealth?, whereby there will be no increase in tax? except for those earning over ?150,000 (who will see an increase from 42% to 45% on the top tax band).

The Spanish government?s 2009-2013 Stability Programme aims to reduce the country?s deficit down to 3% by 2013 ? a very ambitious task. The government has said that higher taxes and a drive against tax evasion will contribute to the reduction.

Aside from the economic downturn, there is another key issue facing governments throughout Europe. In France, president Sarkozy also touched on this in his New Year?s Eve address, when he said:

?In 2010 we will need to consolidate our pensions system, whose future financing I have a duty to secure, and face the challenge of how to care for the elderly, which in the decades ahead will be one of the most painful problems faced by our families.

This is not a concern for France alone, and echoes a warning in a paper by the Centre for European Reform in 2008, which read:

?Europe stands on the cusp of a demographic revolution. Europe?s changing demographic profile poses political, economic and social challenges that are as important as climate change, security and globalisation.?

The post war ?baby boomer? generation is starting to retire. Birth rates have been dropping off so that the EU has one of the lowest fertility rates in the world. Octogenarians currently represent 4.4% of the EU population, increasing to 12.1% by 2060. This will result in an increasing ?dependency ratio? – the number of retired people as a proportion of those working and paying income tax. Spending on pensions, healthcare and long-term care is estimated to hit 27.5% of GDP by 2035.

This is a not insignificant threat to the fiscal stability of EU countries. Countries have a duty to fund care for their elderly, but it begs the question – where will this funding come from, particularly at a time of high public sector debt? In Spain the government has proposed increasing the official retirement age from 65 to 67 (to be phased in between 2013 and 2025), but the major unions have condemned the plan. Even if it goes ahead, it will not be enough. The number of people aged over 64 is set to double over the next 40 years.

Last year the European Commission forecast that unless the UK government cuts state pension costs and healthcare bills, its public debt will jump from 60% of GDP to 160% by 2020 and 406% by 2040. Such forecasts illustrate the fast approaching problems to be faced by the UK and other governments.

In his latest Budget, the UK Chancellor froze the inheritance tax threshold for a further four years, to increase tax revenue to help care for the elderly.

To add to these issues, a surge in inflation as a result of the fiscal stimulus packages could also force governments to review their taxation policies. Over recent decades policymakers have mainly used Monetarist polices of interest rate increases to curb inflation, but the current fragile state of their economies means that interest rate increases would have to be used sparingly for fear of driving their economies back into recession. Governments may have to resort to the earlier Keynesian practice of increasing taxes and cutting government spending to reduce money supply and cool inflation. And here in the Eurozone governments do not have the luxury of setting their own interest rates even if they would prefer to take that route. Tax rates and government spending, on the other hand, are something they can control, even if their electorate will not thank them.

Nonetheless, it is still often possible, particularly for higher earners and those with savings and investments, to lower your tax liability to much lower levels than you may expect. So while higher taxation is a threat, with suitable approved arrangements in your country of residence you may still be able to reduce your tax bill.

Besides looking at ways to lower tax on your savings and investments, you can also review any deferred UK private pension funds or pensions in ?income drawdown?. As an expatriate you may be able to transfer them into a QROPS (Qualifying Recognised Overseas Pension Scheme) and potentially enjoy improved tax efficiency on your income and avoid the UK charges on death.

At the same time as tax planning for your current country of residence, do bear in mind that if you are a British expatriate you may return there one day or, if you do not, your money may return if inherited by UK residents. The tax burden in the UK is only going to increase, but provided you take action while still non-UK resident you will be able to organise your wealth in a more tax efficient manner for your return, or on your wealth being passed to your heirs, than UK residents are able to achieve.

The old adage “nothing in life is certain save death and taxes” is not entirely true if you plan effectively for the latter ? seek advice from an experienced tax and wealth management adviser such as Blevins Franks to establish the best tax mitigation strategies for you.

By Bill Blevins, Managing Director, Blevins Franks

8th February 2010, updated 26h March

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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