I am generally office bound at work, but occasionally I am let out for a day or two! In February, I represented the Sovereign Art Foundation at ARCOmadrid, which is one of Europe’s most important art fairs. The event was well attended by buyers and collectors from around the world, and it was a hugely rewarding experience for an amateur art enthusiast like me.
The fair took place just after Picasso’s “Femme assise près d’une fenêtre” sold for £28.6m at Sotheby’s in London, where a further 18 sale lots raised more than £1m. The pieces at ARCOmadrid may not have been in quite the same league as those executed by Málaga’s favourite son, but I was struck by the “full” prices being demanded. It set me thinking as to why the art market should be thriving even at a time of financial stress.
In Gibraltar we enjoy a very well-established art scene and can boast an impressive number of first class artists. Several art groups – including Gibraltar DFAS with which I am associated – cater to the ever-growing public interest. Despite the downturn, I know several local collectors who continue to acquire art, much of it locally produced. Whilst it’s true that many artists around the world live from hand to mouth, it’s also clear that, here in Gibraltar at least, there is a living to be had from art.
Whilst the economic crisis has affected millions of people globally, there remains a great deal of cash available – if you know where to look for it. Much of this is corporate money, stashed on balance sheets around the world, but rich people – many of whom buy art – are still rich. Some have seen their wealth seriously eroded in recent years but others continue to do very well. Art offers a potentially attractive investment for a proportion of that wealth.
Interest earned on traditional bank deposits remains pitifully low – and some say this is likely to be the case for years to come. Equities are volatile – although several world “bourses” or stock markets have notched up impressive gains in recent months. When you ponder the possible choices available to a wealthy investor, it becomes rather easier to see why art might make an attractive alternative investment.
In a Gibraltar Magazine column a couple of years ago, I set out a few reasons why one might consider entering the art market as an investment. For the wealthy, successful entrepreneur, a lot of what I said then till holds true today – maybe it always has done so. But what about ordinary people like me who are interested in art but don’t have millions at their disposal. Is there scope for us too to combine that interest with investing?
There are some obvious areas to consider at the outset: the artist; the subject; the medium; the cost (not be confused with value); and the extent to which you have market knowledge and a discerning eye. All this may lead you to seek the advice of an art professional. Collecting should be fun but if you are also intending it as an investment, caution should be exercised.
So how do I go about it myself? My budget is limited so the question I ask before adding to my modest collection is always the same. Can I imagine having the piece hanging on my wall for many years to come? A year ago, I was passing the rather excellent Gibraltar Art Gallery and there was a piece in the window that simply had my name on it (not literally of course) or, to be more accurate, my partner’s name. Sure enough, after a couple of days’ deliberation we decided we just had to have it and soon another picture was hanging on our walls. So why did we do it? Was it because it might be worth considerably more in years to come? No. We bought it because we liked the piece and, as the Gibraltarian artist who painted it knows very welI, we have since come to love it.
That’s not to say that amateurs cannot be lucky. Two decades ago at a Fuengirola rastro (or street market), I bought a piece from a struggling artist who has since gone on to find critical acclaim and commercial success. The piece that I purchased for hardly any money – my weekly grocery bill cost more – is today worth the price of a small car. But am I likely to sell it? No fear. It’s part of the family now. Although it could be described as a “marmite” work – you either love it or hate it – everyone who visits us comments on it and we can’t imagine being without it.
So when acquiring art perhaps the first consideration should be “why”? If it’s to enjoy and hang on the wall, then forget the idea of selling it for a quick profit. If on the other hand, one imagines that a particular artist is going to sell very well in the future then acquiring one or more pieces early on in their career is likely to be a good move.
The second consideration should be where to put it. Storage might be the only option but I would always say “on display” for people to enjoy. And if not just for you and any visitors to your house, then you could consider reaching a wider audience in a gallery or on loan to a private or public collection. The latter may of course also help to enhance the provenance and value of the work as well as the reputation of the artist, however you should be careful to ensure that your ownership is watertight before undertaking such a move. Insurance is equally important. Protection from fire or any other catastrophic event is of course necessary, but so is the security risk.
There are also ways to get involved in the art market without necessarily buying the pieces themselves. In the same way that one can get invest in the gold market without purchasing “physical” metal, there are several specialist funds that invest in art. An individual investor is in fact buying into the fund which is itself undertaking the art purchase. I have even come across funds that allow investors to temporarily “borrow” pieces from the fund. It’s obviously not the same as owning the piece outright but, like car clubs, it may give you an opportunity to enjoy something that would usually be beyond your budget and which you can change when the mood takes you.
So is art a sensible investment to consider in uncertain times? As regular readers will know I can only express my personal opinion. Under the right circumstances, art is well worth considering as an alternative asset class, particularly for large investment portfolios. Exposure to the art market may also provide useful diversification.
As an art enthusiast, I’ve always felt that art can teach you so much about the world – a bit like the stamp collecting of my childhood. Owning a piece – any piece – can be a joy in itself. Acquire something you like; if the value increases over time, so much the better. If you are like me you will simply grow to love the pieces and never want to part with them, so the investment side becomes less critical.
A wealthy Hong Kong-based friend is a passionate collector. Even with more than one home, he has run out of space to house his collection. Once I asked, “why not dispose of some pieces?” His withering look by way of reply taught me that even sophisticated connoisseurs get to love their art. There is something out there for everyone on the art scene; I encourage you to take a closer look.
Thursday, March 21, 2013
Offshore Solutions
Sovereign was established in Gibraltar in 1987 and now the company has offices in all the major international finance centers. It has a total of 27 offices till date with offices in Bahrain, Dubai, Gibraltar, Isle of Man, Cayman Islands, British Virgin Islands, etc. Sovereign currently manages over 7,000 structures for a wide variety of clients worldwide. The majority of the clients are individuals, expatriates, entrepreneurs, freelance consultants, private investors, or wealthy persons and their families. Sovereign have developed a wide range of supporting services embracing asset management, corporate finance and fund raising, specialist tax advice, ship and yacht registration, insurance broking, credit cards, as well as trademark and intellectual property registration and protection. Offshore Companies are often demonized in the media, which paints a picture of investors illegally stashing their money away in banks located on an obscure Caribbean island where the tax rate is next to nothing. While it’s true that there will always be instances of shady offshore deals, the vast majority of offshore investing is perfectly legal. In fact, depending on your situation, offshore Companies may offer you many advantages. Such as:
Minimizing Taxation: Offshore companies established in low or zero tax jurisdictions may reduce, delay or even completely eliminate the tax burden on the company.
Holding Company: The offshore company can easily hold shares in Bahraini Companies (As WLL or SPC), and in other companies outside Bahrain at the same time. So it can act as A Holding Company for an individual`s shares in different entities. The following diagram illustrates the example.
Asset Protection: Placing your personal assets into a separate legal entity is generally a good idea whether you place them in a traditional company within your home country or you place them in an offshore company. Offshore centers are popular locations for restructuring ownership of assets. Through trusts, foundations or through an existing corporation individual wealth ownership can be transferred from people to other legal entities.
Simplicity: One often overlooked aspect of offshore company incorporation is the relative simplicity of the process. Offshore company formation in many jurisdictions is a quick and seamless process and Sovereign aims to make your offshore incorporation as simple as possible. Additionally, ongoing requirements for offshore companies are often more relaxed than for “onshore” companies.
Confidentiality: Many offshore jurisdictions offer the complimentary benefit of secrecy legislation. These countries have enacted laws establishing strict corporate and banking confidentiality. If this confidentiality is breached, there are serious consequences for the offending party. An example of a breach of banking confidentiality is divulging customer identities; disclosing shareholders is a breach of corporate confidentiality in some jurisdictions
Which are the most popular offshore jurisdictions? British Virgin Islands (BVI), Ras Al Khaima (UAE), Hong Kong, Seychelles, and Cayman Islands. What makes the British Virgin Islands such prime location for offshore banking? British Virgin Islands (BVI) are a British dependency located in the Eastern Caribbean; the government is stable and promises to remain that way. There is a good commercial and professional infrastructure and the government is actively encouraging the development of the offshore finance business. BVI became the clear market leader for corporate services in the Caribbean after the introduction of the International Business Companies Act in 1984 which created the International Business Company (IBC). This IBC became the industry preferred offshore company.
BVI Company Characteristics - Shareholder: A minimum of one shareholder is required, any nationality.
- Directors: A minimum of one director is required, can be the shareholder.
- No Taxation
- No cash capital required
- No Physical Office required
- Incorporation time 48 hours
- Business activity can be one or more at the same time.
- Very useful tool to hold shares, open a bank account, set-up a representative office in Bahrain, own assists, property, yacht, piece of art etc.
- Total incorporation fees including first year government fees in around: BD700 with no hidden costs
Minimizing Taxation: Offshore companies established in low or zero tax jurisdictions may reduce, delay or even completely eliminate the tax burden on the company.
Holding Company: The offshore company can easily hold shares in Bahraini Companies (As WLL or SPC), and in other companies outside Bahrain at the same time. So it can act as A Holding Company for an individual`s shares in different entities. The following diagram illustrates the example.
Asset Protection: Placing your personal assets into a separate legal entity is generally a good idea whether you place them in a traditional company within your home country or you place them in an offshore company. Offshore centers are popular locations for restructuring ownership of assets. Through trusts, foundations or through an existing corporation individual wealth ownership can be transferred from people to other legal entities.
Simplicity: One often overlooked aspect of offshore company incorporation is the relative simplicity of the process. Offshore company formation in many jurisdictions is a quick and seamless process and Sovereign aims to make your offshore incorporation as simple as possible. Additionally, ongoing requirements for offshore companies are often more relaxed than for “onshore” companies.
Confidentiality: Many offshore jurisdictions offer the complimentary benefit of secrecy legislation. These countries have enacted laws establishing strict corporate and banking confidentiality. If this confidentiality is breached, there are serious consequences for the offending party. An example of a breach of banking confidentiality is divulging customer identities; disclosing shareholders is a breach of corporate confidentiality in some jurisdictions
Which are the most popular offshore jurisdictions? British Virgin Islands (BVI), Ras Al Khaima (UAE), Hong Kong, Seychelles, and Cayman Islands. What makes the British Virgin Islands such prime location for offshore banking? British Virgin Islands (BVI) are a British dependency located in the Eastern Caribbean; the government is stable and promises to remain that way. There is a good commercial and professional infrastructure and the government is actively encouraging the development of the offshore finance business. BVI became the clear market leader for corporate services in the Caribbean after the introduction of the International Business Companies Act in 1984 which created the International Business Company (IBC). This IBC became the industry preferred offshore company.
BVI Company Characteristics - Shareholder: A minimum of one shareholder is required, any nationality.
- Directors: A minimum of one director is required, can be the shareholder.
- No Taxation
- No cash capital required
- No Physical Office required
- Incorporation time 48 hours
- Business activity can be one or more at the same time.
- Very useful tool to hold shares, open a bank account, set-up a representative office in Bahrain, own assists, property, yacht, piece of art etc.
- Total incorporation fees including first year government fees in around: BD700 with no hidden costs
Safeguarding Wealth
Making a will is often a sensible way for an individual to put his or her affairs in order. But the administration of a deceased’s estate can often be costly, can result in long delays and very often involves a large bill, especially in the UAE. Setting up a trust, on the other hand, can eradicate delays, costs and protect assets from future creditors as well as provide anonymity.
What is a trust and how does it work? Setting up a trust is a better alternative to making a will during one’s lifetime. A trust is a financial tool whereby property is transferred from one person (the settler) to another (the trustee), who holds and administers it for the benefit of specific beneficiaries. The assets are managed by the trustee or the team of trustees, as per the terms and conditions of the trust deed, which also lays down the rights and interests of the beneficiaries.
What are the merits of setting up a trust? With a trust, you can make any number of arrangements for the distribution of your assets in a very convenient and flexible way. You may wish to provide a course of income for your spouse or make provision for the education of your children. A trust can also be used to overcome forced inheritance claims, a particular problem in countries of Islamic tradition.
How far does a trust assist in asset protection? A common motivation for establishing a trust is to preserve family assets against mismanagement and spendthrifts. An individual may want to ensure that the wealth accumulated over a lifetime is not dissipated or divided up, but is preserved as one fund. The fund can then accumulate further with provision for payments to the members of the family as necessary, preserving some assets for later generations.
How is the trust structure relevant for family business? Setting up a trust may ensure that the business built by the settler will continue after their death. If the company shares are transferred into a trust prior to the death of the settler, the unnecessary liquidation of the family business can be prevented. In case family members have little business experience, the trustees can be instructed to retain the business, keep the company running and provide payment to members of the family from dividend income.
Will a trust assist in holding international property? A portfolio of international property can be held under one single trust. In some circumstances, depending on local laws, a ‘local company’ may be required to set up under the trust (i.e. it’s common for a Jebel Ali Offshore company to hold Dubai Freehold property, and have a Trust acting as a shareholder of the company).
How does one determine the credentials of trustees? Reputable and well-regulated jurisdictions such as Gibraltar have been found at the forefront of best practices in the area of trusts. Professional trustees are required to be licensed, use the Financial Services Ordinance 1989 and are regulated by the Financial Services Commission (FSC). Sovereign Trust International Ltd is one such licensed professional trustees. The company is regulated and covered by professional indemnity insurance. Vikrant Pangam is a Trust and Estate Planning Specialist and Managing Directory at Sovereign Group’s office in Abu Dhabi. The opinions expressed by the author are his own.
What is a trust and how does it work? Setting up a trust is a better alternative to making a will during one’s lifetime. A trust is a financial tool whereby property is transferred from one person (the settler) to another (the trustee), who holds and administers it for the benefit of specific beneficiaries. The assets are managed by the trustee or the team of trustees, as per the terms and conditions of the trust deed, which also lays down the rights and interests of the beneficiaries.
What are the merits of setting up a trust? With a trust, you can make any number of arrangements for the distribution of your assets in a very convenient and flexible way. You may wish to provide a course of income for your spouse or make provision for the education of your children. A trust can also be used to overcome forced inheritance claims, a particular problem in countries of Islamic tradition.
How far does a trust assist in asset protection? A common motivation for establishing a trust is to preserve family assets against mismanagement and spendthrifts. An individual may want to ensure that the wealth accumulated over a lifetime is not dissipated or divided up, but is preserved as one fund. The fund can then accumulate further with provision for payments to the members of the family as necessary, preserving some assets for later generations.
How is the trust structure relevant for family business? Setting up a trust may ensure that the business built by the settler will continue after their death. If the company shares are transferred into a trust prior to the death of the settler, the unnecessary liquidation of the family business can be prevented. In case family members have little business experience, the trustees can be instructed to retain the business, keep the company running and provide payment to members of the family from dividend income.
Will a trust assist in holding international property? A portfolio of international property can be held under one single trust. In some circumstances, depending on local laws, a ‘local company’ may be required to set up under the trust (i.e. it’s common for a Jebel Ali Offshore company to hold Dubai Freehold property, and have a Trust acting as a shareholder of the company).
How does one determine the credentials of trustees? Reputable and well-regulated jurisdictions such as Gibraltar have been found at the forefront of best practices in the area of trusts. Professional trustees are required to be licensed, use the Financial Services Ordinance 1989 and are regulated by the Financial Services Commission (FSC). Sovereign Trust International Ltd is one such licensed professional trustees. The company is regulated and covered by professional indemnity insurance. Vikrant Pangam is a Trust and Estate Planning Specialist and Managing Directory at Sovereign Group’s office in Abu Dhabi. The opinions expressed by the author are his own.
Sunday, February 17, 2013
Expats and tax: the lowdown on living the high life in Cyprus
CASE STUDY:
Retired
Personal status:
Couple in their early sixties.
Expat status:
Retired to Cyprus five years ago.
Financial status:
UK pensions income about £35,000 per annum. UK investment income £20,000 per annum. Flat in Cyprus now worth £350,000. UK family house worth £500,000. UK investment property worth £500,000 with mortgage of £300,000 and rented out.
This couple will be tax resident in Cyprus and subject to Cyprus tax on their worldwide income. The maximum tax rate in Cyprus is 35pc but there is also a "tax" of up to 20pc as a "Defence Contribution".
The UK pension income would generally be subject to withholding tax in the UK, but the UK and Cyprus have ratified a tax treaty that normally gives the taxing right only to Cyprus. Pension income accumulated from services rendered abroad is taxed at a rate of only 5pc for amounts exceeding €3,420.
Moving the pension to a qualified recognised offshore pension scheme (QROPS) would be advantageous as the special member payment charges that apply to UK-registered schemes would be avoided.
The most punitive charge is the special 55pc death charge imposed on the remaining fund after the member's death. It should also mean that the couple could drawdown a greater level of income from their pensions as the UK's drawdown limits also cease to apply.
Depending on the type, income from investments in the UK might be subject to withholding tax in the UK, but this would generally be credited against tax due on the same income in Cyprus under the tax treaty. Moving the investments offshore should avoid any UK tax. Dividend income is exempt from tax in Cyprus but is still subject to the Defence Contribution at 20pc. Capital gains on qualified securities and funds are also tax-exempt in Cyprus.
The rental income on the investment property would be liable to UK tax but all expenses of maintenance and interest on the loan could be deducted. The couple could elect to be taxed according to the non-resident landlord scheme so the rental income can be received gross. The income after expenses would be subject to UK tax at the individual rates, but the couple would still enjoy their tax-free personal allowance, so the maximum rate would probably be only 20pc. Tax paid in the UK on rental income is allowed as a credit against tax due in Cyprus.
Their main concern should be UK inheritance tax (UK IHT). If they intend to remain in Cyprus for the rest of their lives, they could be domiciled in Cyprus. If so they would not be subject to UK IHT on their worldwide estate. Contrary to popular belief, the fact that they still own UK property would not be a barrier to claiming a non-UK domicile.
Irrespective of domicile, they would still be liable to UK IHT on any UK-situated assets. They each get an allowance in the UK of approximately £325,000, so a total allowance of £650,000. The total equity (value less loans) in their UK properties is £800,000. This would still leave them with a UK IHT liability of 40pc of the balance, being about £70,000. If they were still UK domiciled, IHT would bite on the whole of their estate. This would give them a substantial IHT bill in the UK. The couple should get certainty on their domicile.
There are steps they could take to mitigate IHT. If they are not domiciled in the UK, they could turn their UK investments into non-UK investments by transferring them to offshore companies so their asset was the shares in the non-UK company rather than the UK property itself. The shares would not be subject to UK IHT. The new penal taxes on residential property held by offshore companies apply to properties worth more than £2 million, so won't affect them.
Howard Bilton is chairman of The Sovereign Group and a barrister at law.
Retired
Personal status:
Couple in their early sixties.
Expat status:
Retired to Cyprus five years ago.
Financial status:
UK pensions income about £35,000 per annum. UK investment income £20,000 per annum. Flat in Cyprus now worth £350,000. UK family house worth £500,000. UK investment property worth £500,000 with mortgage of £300,000 and rented out.
This couple will be tax resident in Cyprus and subject to Cyprus tax on their worldwide income. The maximum tax rate in Cyprus is 35pc but there is also a "tax" of up to 20pc as a "Defence Contribution".
The UK pension income would generally be subject to withholding tax in the UK, but the UK and Cyprus have ratified a tax treaty that normally gives the taxing right only to Cyprus. Pension income accumulated from services rendered abroad is taxed at a rate of only 5pc for amounts exceeding €3,420.
Moving the pension to a qualified recognised offshore pension scheme (QROPS) would be advantageous as the special member payment charges that apply to UK-registered schemes would be avoided.
The most punitive charge is the special 55pc death charge imposed on the remaining fund after the member's death. It should also mean that the couple could drawdown a greater level of income from their pensions as the UK's drawdown limits also cease to apply.
Depending on the type, income from investments in the UK might be subject to withholding tax in the UK, but this would generally be credited against tax due on the same income in Cyprus under the tax treaty. Moving the investments offshore should avoid any UK tax. Dividend income is exempt from tax in Cyprus but is still subject to the Defence Contribution at 20pc. Capital gains on qualified securities and funds are also tax-exempt in Cyprus.
The rental income on the investment property would be liable to UK tax but all expenses of maintenance and interest on the loan could be deducted. The couple could elect to be taxed according to the non-resident landlord scheme so the rental income can be received gross. The income after expenses would be subject to UK tax at the individual rates, but the couple would still enjoy their tax-free personal allowance, so the maximum rate would probably be only 20pc. Tax paid in the UK on rental income is allowed as a credit against tax due in Cyprus.
Their main concern should be UK inheritance tax (UK IHT). If they intend to remain in Cyprus for the rest of their lives, they could be domiciled in Cyprus. If so they would not be subject to UK IHT on their worldwide estate. Contrary to popular belief, the fact that they still own UK property would not be a barrier to claiming a non-UK domicile.
Irrespective of domicile, they would still be liable to UK IHT on any UK-situated assets. They each get an allowance in the UK of approximately £325,000, so a total allowance of £650,000. The total equity (value less loans) in their UK properties is £800,000. This would still leave them with a UK IHT liability of 40pc of the balance, being about £70,000. If they were still UK domiciled, IHT would bite on the whole of their estate. This would give them a substantial IHT bill in the UK. The couple should get certainty on their domicile.
There are steps they could take to mitigate IHT. If they are not domiciled in the UK, they could turn their UK investments into non-UK investments by transferring them to offshore companies so their asset was the shares in the non-UK company rather than the UK property itself. The shares would not be subject to UK IHT. The new penal taxes on residential property held by offshore companies apply to properties worth more than £2 million, so won't affect them.
Howard Bilton is chairman of The Sovereign Group and a barrister at law.
Thursday, February 14, 2013
Pensions - consider your options
So it’s one
month into the New Year. Might I be so bold as to ask how your 2013 resolutions
are going? Fear not. Lest you’ve forgotten, this is a finance column – so your
weight, consumption of alcohol and tobacco, and whether you’ve yet made any use
of that trial gym membership you were given for Christmas, are not my concern.
I’m conducting an audit of your financial resolutions.
You know how it goes. Spend less, pay off those credit cards, save more etc. And the resolution that has gained more currency in recent years – organise, or maybe re-organise, your pension arrangements.
Why are pensions taking up so many more column inches these days? After all, you can’t pick up one of those expat freebie newspapers in Gibraltar or the Costas without seeing endless articles and ads for one pension provider or another. I seem to be spending much more of my time these days speaking to individuals and intermediary firms about pensions and I think there are several straightforward reasons for the increasing level of interest.
Put simply, the realisation is dawning (or perhaps it dawned some time ago) that not only is life expectancy increasing, but the population itself is ageing. What I mean of course is that the proportion of older people compared to younger generations is increasing year by year. This is due to the double effect of a reducing birth rate (although there doesn’t seem to be much evidence of this in Gibraltar!) coupled with advances in health care and a better awareness of health issues in general.
There is nothing revolutionary in any of this of course. What has changed in recent years – as always this is just my own personal opinion – is the impact of the financial crisis, which affects everyone in one way or another. Five years on and the global economy shows no sign of bouncing back. One of the consequences is that individuals have to take more responsibility for their financial arrangements to see them through later life after retirement. As we all know, more people are living well into their 80’s, 90’s and beyond, so even retiring at 65 generally means you are making financial preparations for a long time ahead. And, of course, for anyone wishing to retire earlier the situation becomes even more critical.
When considering pension arrangements, the general advice has always been that the earlier contributions are started the better the final result. But in reality do young people in their 20’s actively consider pensions these days? Please don’t write in if you are doing so, but my belief is that not enough people are being encouraged to provide for their financial future. When I was in my 20s the bank for which I then worked forced me to join their final salary scheme – more of which shortly. But these days, I can understand why “twenty somethings” feel that other things take priority. Paying off student loans, saving for deposits on first homes or even just rental contracts are just a few examples. And then life changing events such as marriage and children come along too.
I remember when I was 25 that my projected retirement age of 60 seemed a very long way away. But of course, as my fellow quinquagenarians will attest, it seems to catch up with you very quickly. So it’s rather disconcerting to read in the press of poor investment performance, less than perfect advice being given (or even worse, no advice at all) and the like. Couple these negatives with the apparent complexity of available options and one can see why the whole issue of pensions can appear to be so off-putting.
So let’s turn to a couple of terms you will see in the press and try to demystify these confusing acronyms. I begin with the most commonly seen – QROPS – which stands for Qualifying Recognised Overseas Pension Scheme. These can be used by British expatriates and others who have spent time working in the UK and have built up a pension there. QROPS enables them to transfer the value of such pensions into a non-UK scheme. But why would they do this? The reason is that leaving the pension behind in the UK means that it remains subject to UK pensions law. UK income tax may be deducted at source – regardless of where one might now be living; UK investment restrictions continue to apply; and, on death, succession issues cause real concern.
For a more in depth look at these schemes, readers may wish to look back to my article in October last year (all back issues on are online at www.thegibraltarmagazine.com). The legislation that governs QROPS was introduced in 2004 although it came into effect two years later. Eagle-eyed readers of the financial press may also have seen reference to a similar looking acronym – QNUPS. Again this refers to a pension governed by underlying UK legislation and the acronym itself stands for Qualifying Non-UK Pension Scheme.
You know how it goes. Spend less, pay off those credit cards, save more etc. And the resolution that has gained more currency in recent years – organise, or maybe re-organise, your pension arrangements.
Why are pensions taking up so many more column inches these days? After all, you can’t pick up one of those expat freebie newspapers in Gibraltar or the Costas without seeing endless articles and ads for one pension provider or another. I seem to be spending much more of my time these days speaking to individuals and intermediary firms about pensions and I think there are several straightforward reasons for the increasing level of interest.
Put simply, the realisation is dawning (or perhaps it dawned some time ago) that not only is life expectancy increasing, but the population itself is ageing. What I mean of course is that the proportion of older people compared to younger generations is increasing year by year. This is due to the double effect of a reducing birth rate (although there doesn’t seem to be much evidence of this in Gibraltar!) coupled with advances in health care and a better awareness of health issues in general.
There is nothing revolutionary in any of this of course. What has changed in recent years – as always this is just my own personal opinion – is the impact of the financial crisis, which affects everyone in one way or another. Five years on and the global economy shows no sign of bouncing back. One of the consequences is that individuals have to take more responsibility for their financial arrangements to see them through later life after retirement. As we all know, more people are living well into their 80’s, 90’s and beyond, so even retiring at 65 generally means you are making financial preparations for a long time ahead. And, of course, for anyone wishing to retire earlier the situation becomes even more critical.
When considering pension arrangements, the general advice has always been that the earlier contributions are started the better the final result. But in reality do young people in their 20’s actively consider pensions these days? Please don’t write in if you are doing so, but my belief is that not enough people are being encouraged to provide for their financial future. When I was in my 20s the bank for which I then worked forced me to join their final salary scheme – more of which shortly. But these days, I can understand why “twenty somethings” feel that other things take priority. Paying off student loans, saving for deposits on first homes or even just rental contracts are just a few examples. And then life changing events such as marriage and children come along too.
I remember when I was 25 that my projected retirement age of 60 seemed a very long way away. But of course, as my fellow quinquagenarians will attest, it seems to catch up with you very quickly. So it’s rather disconcerting to read in the press of poor investment performance, less than perfect advice being given (or even worse, no advice at all) and the like. Couple these negatives with the apparent complexity of available options and one can see why the whole issue of pensions can appear to be so off-putting.
So let’s turn to a couple of terms you will see in the press and try to demystify these confusing acronyms. I begin with the most commonly seen – QROPS – which stands for Qualifying Recognised Overseas Pension Scheme. These can be used by British expatriates and others who have spent time working in the UK and have built up a pension there. QROPS enables them to transfer the value of such pensions into a non-UK scheme. But why would they do this? The reason is that leaving the pension behind in the UK means that it remains subject to UK pensions law. UK income tax may be deducted at source – regardless of where one might now be living; UK investment restrictions continue to apply; and, on death, succession issues cause real concern.
For a more in depth look at these schemes, readers may wish to look back to my article in October last year (all back issues on are online at www.thegibraltarmagazine.com). The legislation that governs QROPS was introduced in 2004 although it came into effect two years later. Eagle-eyed readers of the financial press may also have seen reference to a similar looking acronym – QNUPS. Again this refers to a pension governed by underlying UK legislation and the acronym itself stands for Qualifying Non-UK Pension Scheme.
The two types of
scheme are similar but each is used for different reasons. A key
differentiating factor is that funds that have not benefitted from UK tax
relief should be used in a QNUPS. If one has a QROPS, it is always going to be
a QNUPS. But a QNUPS is not necessarily going to be a QROPS. Are you still with
me? It’s not difficult to see why you should seek advice.
But why should
this concern us in Gibraltar? In the case of QROPS, the answer is that these
types of arrangements concern individuals with a UK pension who are living
abroad (or are able to demonstrate an intention to emigrate), so one can easily
understand why the English-speaking press in Spain is awash with pension
service providers trying to promote their pension schemes.
But the same
rules also apply to anyone who has a UK pension and who has now left the UK:
and, of course, there are many Gibraltarians in this position. My advice to
anyone who has worked in the UK at some point and therefore has a UK pension,
is to consider carefully whether or not a QROPS might be suitable. It may be
that the UK pension is relatively modest. If one worked in the UK for just a
few years this is likely to be the case. So you should check whether the QROPS’
provider you are speaking to offers a “lite” version of their scheme –
typically these are more keenly priced, although there may be restrictions on
the investments allowed within the pension and so on.
As always,
professional advice should be sought as early as possible because individual
circumstances need to be considered. What works for your friend at the golf
club may not work for you. For example, I am often asked if final salary
pensions can be switched to a QROPS. They can, but one needs to consider very
carefully whether this would be a wise move. Such pensions (if you can get them
at all these days) are unusually highly-prized because the pension you receive
is based on the final salary that you were drawing when you left the company
concerned. Index-linked schemes, where future pension payments match inflation,
are of course the best of all.
The one thing
that is clear with pension planning is that you shouldn’t wait until you retire
to start considering your options. It could be that you are living on your
pension and other investments for almost as long as you are living on a salary
or running your own business. And that goes for your dependents too. It
therefore makes sense to pay as much attention to your future needs in financial
planning as you do your current ones. So organising, or re-organising, your
pension arrangements is one New Year’s resolution that you should stick to. Now
off you go the gym!
Monday, February 4, 2013
Alan Montegriffo joins Sovereign Insurance Services
Gibraltar-based Sovereign Insurance
Services has marked the beginning of the New Year by expanding its business in
Ocean Village. The company has acquired the general insurance book of Eurolinx
Limited and as a result, well-known local insurance personality Alan
Montegriffo has joined the expanding team.
Commenting on the acquisition, Sovereign
Insurance Services Managing Director Geoff Trew said that although organic
growth was positive, the Eurolinx general insurance book would allow the
business to grow exponentially over the coming year. He added that the company
is delighted that Mr Montegriffo is joining the team. Mr Trew pointed out that
Neil Entwistle has also recently joined the company, and that he will
concentrate on working with the Sovereign Group offices world-wide to generate
international insurance business opportunities for their Gibraltar, London and
international insurance markets.
Sovereign Insurance Services is a
subsidiary of the wider Sovereign Group whose global Head Office is located in
Main Street. Now boasting a total staff complement of almost 80 locally, Sovereign
has offices in a further 23 locations worldwide.
Group Finance Director Gerry Kelly, himself
based in Gibraltar, welcomed the acquisition adding that Sovereign Group
remains interested in any further suitable opportunities, both locally and
abroad. He commented that two further deals were being considered at present.
Sovereign Insurance Services is a fully
licensed insurance broking intermediary and is based at new state of the art
premises at Ocean Village’s Promenade. They arrange all types of Insurance
cover for both personal and corporate clients worldwide where coverages include
such specialist lines as healthcare, construction, corporate liability,
contingency and kidnap & ransom. Benefitting from their location at the
Ocean Village marina, a full range of marine and aviation based insurance
services are also available.
Thursday, January 17, 2013
Making the most of a fresh start abroad
CASE STUDY
The Newly Moved Expat
Personal status:
Couple in their 30s with young children
Expat status:
just arrived Dubai on a three-year contract renewable
Financial status:
income of around £90,000 plus bonuses; spouse not working
Current investments/savings:
minimal
UK commitments:
mortgage, covered by rental income
He is working fulltime abroad so will be non-resident in the UK as long as he doesn’t return for more than 90 days a year.
Ordinarily, the day count is just one factor in determining when a UK resident has become non-resident, as some have found to their considerable cost. But in this case, the full-time employment contract means he can rely on day count to establish non-residency, so it should be relatively easy for him to ensure that he will be Dubai-resident for tax purposes throughout his stay.
If he can avoid spending more than 90 days in the UK he will pay only Dubai tax and the rate of tax in Dubai is a very lenient zero. If he can save money from his salary and bonuses he would benefit from paying those into a Qualifying Non UK Pension Scheme (QNUPS). QNUPS are particularly useful when no deduction against personal tax is required.
He will not be suffering personal income tax while in Dubai, so there would be no benefit in paying monies into a registered scheme which would generally give him a tax deduction. A QNUPS would provide greater benefit than the alternatives because the amounts built up within it escape the normal 55pc Member Payment Charge which would apply to the fund on his death. This charge is really an inheritance tax payable by funds belonging to UK domiciled persons.
The QNUPS will act as a tax-free savings vehicle for when he returns to the UK. There would be no tax payable on the capital gains and income made within the QNUPS until paid out. This means that when he returns to the UK his savings can be invested tax-free by his pension trustee. This is very advantageous. If he pays higher rate tax his returns should double, if made tax free, compared with the same returns made and taxed in the UK.
If the UK property is his main residence he would not pay capital gains tax (CGT) on resale, irrespective of his tax residency, as long as he correctly applies for principle private residence relief (PPR).
If it is an investment property, ordinarily he would pay CGT on resale but only if he was UK-resident at the time of sale. The UK is unusual in not charging CGT on a sale of UK assets if the owner is not UK-resident. If it is an investment property he would do well to sell it while in Dubai taking the gain tax free. He could reinvest into the UK property market, rebasing his acquisition cost. His CGT bill on the eventual sale if he went back to the UK would be reduced this way.
Or he could transfer investment property to his QNUPS. The transfer to the QNUPS would be tax free due to him being non-resident and any subsequent sale, irrespective of whether he was in the UK or not, would escape CGT because it would be made by his non-resident trustee.
Irrespective of his residence, the rental income generated by the property would be taxable in the UK because it is UK-source income. He would be allowed to deduct interest on loans secured on the property as long as they were taken out to purchase the property.
This is a point which many miss. If a property is remortgaged the new loan is not to purchase the property and relief from tax on the interest may be denied. He can also deduct all other costs of the maintenance of (but not improvements to) the property, including flights home to inspect or manage the property. In practice this normally means that there is little or no tax due.
Howard Bilton is chairman of The Sovereign Group and a barrister at law
The Newly Moved Expat
Personal status:
Couple in their 30s with young children
Expat status:
just arrived Dubai on a three-year contract renewable
Financial status:
income of around £90,000 plus bonuses; spouse not working
Current investments/savings:
minimal
UK commitments:
mortgage, covered by rental income
He is working fulltime abroad so will be non-resident in the UK as long as he doesn’t return for more than 90 days a year.
Ordinarily, the day count is just one factor in determining when a UK resident has become non-resident, as some have found to their considerable cost. But in this case, the full-time employment contract means he can rely on day count to establish non-residency, so it should be relatively easy for him to ensure that he will be Dubai-resident for tax purposes throughout his stay.
If he can avoid spending more than 90 days in the UK he will pay only Dubai tax and the rate of tax in Dubai is a very lenient zero. If he can save money from his salary and bonuses he would benefit from paying those into a Qualifying Non UK Pension Scheme (QNUPS). QNUPS are particularly useful when no deduction against personal tax is required.
He will not be suffering personal income tax while in Dubai, so there would be no benefit in paying monies into a registered scheme which would generally give him a tax deduction. A QNUPS would provide greater benefit than the alternatives because the amounts built up within it escape the normal 55pc Member Payment Charge which would apply to the fund on his death. This charge is really an inheritance tax payable by funds belonging to UK domiciled persons.
The QNUPS will act as a tax-free savings vehicle for when he returns to the UK. There would be no tax payable on the capital gains and income made within the QNUPS until paid out. This means that when he returns to the UK his savings can be invested tax-free by his pension trustee. This is very advantageous. If he pays higher rate tax his returns should double, if made tax free, compared with the same returns made and taxed in the UK.
If the UK property is his main residence he would not pay capital gains tax (CGT) on resale, irrespective of his tax residency, as long as he correctly applies for principle private residence relief (PPR).
If it is an investment property, ordinarily he would pay CGT on resale but only if he was UK-resident at the time of sale. The UK is unusual in not charging CGT on a sale of UK assets if the owner is not UK-resident. If it is an investment property he would do well to sell it while in Dubai taking the gain tax free. He could reinvest into the UK property market, rebasing his acquisition cost. His CGT bill on the eventual sale if he went back to the UK would be reduced this way.
Or he could transfer investment property to his QNUPS. The transfer to the QNUPS would be tax free due to him being non-resident and any subsequent sale, irrespective of whether he was in the UK or not, would escape CGT because it would be made by his non-resident trustee.
Irrespective of his residence, the rental income generated by the property would be taxable in the UK because it is UK-source income. He would be allowed to deduct interest on loans secured on the property as long as they were taken out to purchase the property.
This is a point which many miss. If a property is remortgaged the new loan is not to purchase the property and relief from tax on the interest may be denied. He can also deduct all other costs of the maintenance of (but not improvements to) the property, including flights home to inspect or manage the property. In practice this normally means that there is little or no tax due.
Howard Bilton is chairman of The Sovereign Group and a barrister at law
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