By: RAOUL RUIZ MARTINEZ
financial@portugalresident.com
Investment Advisor
Finesco financial Services, Ltd
WITH THE increase of the Bank of England base rate to 5.75 per cent, there is now a genuine reason to review the performance of your savings. Why not move across into savings accounts that will provide you with higher rates than 5.75 per cent and, if you could save in tax, provide you with after tax returns of over six per cent?
Let’s start with UK bank interest, where the interest earned from savings is normally taxed at source. For example, savings held by a UK bank or building society account will normally withhold a standard 20 per cent tax on interest.
In other words, at an interest rate of five per cent, you will receive only four per cent net of tax. Unfortunately the residual balance of four per cent is taxed again under your country of residence, i.e. where you live.
The ideal solution would be to ask the bank or building society on their process as to how interest may be paid gross. If your bank confirms it will pay your interest gross, then you will only be taxed according to your country of residence under your annual Tax Return and avoid any complicated tax rebates.
If your bank will not agree to satisfy your request, then there are a number of UK banks and building societies that are registered in offshore locations, such as the Channel Islands, that will allow interest to be paid gross and allow you to control the tax you pay.
Offshore tax savings
There is something known as the European Savings Directive (EUSD) which is an agreement between Member States for their tax authorities to exchange information with each other on customers who earn savings income in one state but reside in another.
However some states, notably Austria, Belgium and Luxemburg, are being allowed to deduct tax known as Withholding Tax instead.
Offshore locations such as the Isle of Man and the Channel Islands have agreed to introduce the same Withholding Tax.
If you hold a bank or building society account in these locations and you are resident in an EU State such as Portugal, then it is probable that you will be affected by the Directive.
Offshore Withholding Tax
From July 1 2005 tax is being withheld as follows:
July 1 2005 to June 30 2008 – 15 per cent
July 1 2008 to June 30 2011 – 20 per cent
From July 1 2011 onwards – 35 per cent
Some locations are offering the option of exchange of information instead of Withholding Tax. If you select this option, interest on your account will continue to be paid gross and you should declare the interest received on your Tax Return. The bank or building society will send details of you and the interest earned to their Tax Authority who will forward this to the Tax authority of the country where you are resident.
The Directive applies to accounts held by individuals only. It is possible for you to hold your deposits within a tax efficient wrapper which places it outside of the scope of the Directive.
Moreover the same structure allows you access to institutional rates of return, potentially higher than is achievable by any individually held account.
In summary, you can arrange this higher interest, tax-efficient structure through a qualified financial adviser that ultimately offers a high level of security along with other key advantages:
Investment Security – You benefit from the capital security of deposits held with respected well-known financial institutions.
Gross Interest – Interest is paid gross and held within the account. It is not affected by the European Savings Directive which applies to individually held accounts only.
Tax Advantages – The account grows virtually tax-free, no Income Tax or Capital Gains Tax is payable at source.
Ease of Administration – You can hold various accounts with perhaps several different banks or building societies within a single plan. You can switch easily too. This helps to reduce paperwork and administration.
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