Don?t let the investment tail wag the tax dog


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It may not be absolutely clear at the moment whether stockmarkets and other asset classes have now hit the bottom and are starting to recover or whether the recent G20 summit demonstrated that

It may not be absolutely clear at the moment whether stockmarkets and other asset classes have now hit the bottom and are starting to recover or whether the recent G20 summit demonstrated that the world does not seem to be moving towards the Armageddon scenario that has been priced into most investments. Nevertheless, most industry specialists are in agreement that assets classes – and in particular equities and bonds – are cheap.

We are advised that when markets are cheap, we should look to buy and we should hold if we are already invested. On one side of the coin people are recognising this and are investing; on the other side the financial crisis has left people too nervous to invest at the moment. History has shown us that unfortunately by the time these people have the confidence to invest they have missed a significant part of the potential upside gains. According to Global Financial Data, since the 1930s, the average ?Bull? market that has followed a ?Bear? market has lasted 57 months and has generated a total return of 164% from the bottom of the market, with 45% of the growth coming in the first 12 months.

That said, statistics also demonstrate that at the bottom of ?Bear? markets many people are too nervous to invest.

Locally authorised and approved investment bonds are used by a great number of expatriates in Europe to protect themselves from tax. I?m not talking about hiding money in tax havens, but in a similar fashion to ISAs in the UK these products are recognised as legitimate tax efficient investments by each country.

Whereas the tax benefits of ISAs protect investors from tax on their income and on gains, locally authorised investment bonds can offer far more advantageous tax breaks, particularly in France and Spain.

For example, with careful planning in Spain locally approved investment bonds offered by EU based, non-Spanish companies will not only protect your wealth from tax on your investment income and gains but can also be structured in a manner that immediately removes your assets from what can be pernicious succession tax or Spanish inheritance tax.

In France locally authorised investment bonds are known as assurance vie, however, they are not exclusively offered by French companies. If you choose an assurance vie which is offered by an EU based non-French company, then you will be able to maximise potential wealth tax savings in addition to increased allowances for French succession tax. If you are in a fortunate position to establish your assurance vie before becoming French tax resident and you are under age 70 at that time, your assurance vie will always be totally exempt from succession tax.

A further non-tax benefit of assurance vie is that on your death it will not be governed by the Napoleonic code and therefore you can choose to leave it to whoever you wish, whereas the distribution of non-assurance vie assets is strictly governed under French law. This is a very important issue for many couples who wish to leave their assets to their surviving partner on their death.

Investment bonds are widely used throughout Europe and therefore are very effective from a tax perspective in the event that you choose to move to another country. They are also particularly useful vehicles in the event that you are UK resident, or that you are UK resident and planning to become non-resident, or you are currently non-UK resident but will become UK resident.

In essence, the tax benefits of these vehicles can extend well beyond purely protecting income and gains from local taxes, but this is dependent on the country that you are tax resident in.

The dilemma for people who are too nervous to invest at the current time is that they could end up paying significantly more tax than they need to in the event that one or both spouses dies before they have the confidence to invest in the investment bond structure.

Is there a solution? Many investment bonds are known as ?open architecture?, which means that you can choose from a myriad of funds and asset classes. This means that investors who may not have the confidence to invest in stockmarkets or bonds at the moment can work with their adviser to put together an investment programme that they do have confidence in and immediately benefit from the tax advantages available from these products.

If you already have an investment portfolio but you are waiting for the markets to improve before moving it into the investment bond to generate the tax advantages, the ?open architecture? approach can also help as it enables you to replicate most investment strategies so that you are able to dispose of your portfolio and move into the investment bond and immediately generate the tax benefits without being out of the market when the asset classes recover.

Predicting currency movements can be as difficult as predicting the British weather, however, with Sterling having weakened against the Euro, many expatriates are currently unwilling to transfer their investments into Euros in the hope that Sterling does strengthen. By deferring the decision to invest in the hope that Sterling strengthens can put many into a position where they are exposed to more tax than they need to be.

There is a misconception that by transferring into locally authorised investment bonds you need to transfer into Euros. Although that is the case with some products, it is certainly not the case with all of them and you can elect to invest in Sterling, Euros or indeed most other major currencies. It is also possible to invest in Sterling and switch to Euros later or vice-versa.

To summarise, if you are delaying your tax planning strategies because of nervousness about asset classes or current exchange rates, there are solutions available to help you, however, you need to speak to an experienced and qualified adviser such as Blevins Franks.

by Bill Blevins, Managing Director – Blevins Franks

7th April 2009

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.