The Tax World Cup

KEY POINTS

• Setting the scene with our taxpaying couple and their income, etc.
• Comparative tax liabilities and explanations.
• Tax liability is not the only consideration when considering emigration.
• Confusion when dealing with EU tax rules for trust income.
• Tax exemption for only or main residence may not apply abroad.

As much of the sporting world’s attention has been focused on the World Cup in South Africa (distracted only by the ear-splitting drone of the vuvuzela), we thought it might be interesting to use this as a (rather flimsy) excuse to see what would happen if some of the European countries competing in South Africa went head-to-head on personal tax rates.

The premise for our mini World Cup tax kickabout is to look at the personal tax implications for a UK married couple who have retired and are considering whether to take up full-time residence in another European country or to remain in the UK.

The ‘teams’ under the pundit’s scrutiny are Portugal, Spain, France and Italy. In an attempt to compare like with like, we have drawn up a list of the husband and wife’s income, together with some proposed capital gains, as follows.

Husband’s income:

• UK state pension €5,000.
• UK occupational pension €80,000.
• Net UK rental income (€30,000 joint with wife) €15,000.
• Global dividends (€150,000 joint with wife) €75,000.
• UK bank interest (€20,000 joint with wife) €10,000.

Wife’s income:

• Net UK rental income (€30,000 joint with husband) €15,000.
• Global dividends (€150,000 joint with husband) €75,000.
• UK bank interest (€20,000 joint with husband) €10,000.
• Trust income (grandfather’s UK trust) €25,000 (from which UK tax will be withheld of €12,500).

In addition, some capital gains are anticipated on the sale of assets as follows.

• Their UK home (not the rental property) which they have owned (jointly) and lived in for ten years, that they purchased for €1,000,000 in 2000, and which they hope to sell for €2,000,000.
• Various quoted investments (held jointly) resulting in proceeds of €1,000,000 and gains of €500,000.

We have collated the tax liabilities resulting from the above scenario for Portugal, Spain, France and Italy based, as far as possible, on 2010 tax rates.

For the UK comparison we have carried out similar calculations using 2010/11 tax rates (including the increased rate of capital gains tax, announced in last month’s Budget).

As we expected, it was necessary to work with the different jurisdictions involved to interpret the scenario details.

We deliberately included some trust income in the figures as we are all well aware of the difficulties this causes for taxation purposes in civil law jurisdictions and we were keen to see the latest treatments.

Interestingly, there were one or two additional nuances produced by our scenario that we had not anticipated, such as the fact that Italy does not have ‘occupational pensions’ as such.

Perhaps we should also say at this point that the comments contained in this article should be regarded as only a very general guide to the potential tax exposure for individuals in the various jurisdictions mentioned and should not be construed as advice on the tax rules or liabilities for individuals relocating to those jurisdictions.

Of course, we would urge anyone considering such a move to obtain detailed tax and other related advice, specific to their particular circumstances, before proceeding.

The tax figures

Naturally, when attempting to produce some comparable figures across a number of different jurisdictions, there are always some ‘ifs and buts’ and for the purposes of this article, we have just focussed on income tax and capital gains tax and deliberately ignored wider issues such as gift and estate taxes, etc (and the latest UK tribunal cases on residence).

Furthermore, while some jurisdictions (such as the UK) only have the concept of separate taxation of husbands and wives, others have the option to tax a married couple as a single unit (team?).

Where this is available, the most tax-efficient option has been taken.

We have tried to keep it simple and give a flavour of how the tax burden in different jurisdictions compares. The headline results of our ‘survey’ produce an interesting Tax league table.

A few explanatory comments are required in relation to the figures in our Tax league table.

• First, no account has been taken of UK taxes in connection with the above tax figures. For all four foreign jurisdictions, any UK tax suffered can normally be offset against the corresponding non-UK tax due.
• In addition to ‘normal’ income tax and capital gains tax, the French revenue authorities would also seek to charge our couple French wealth tax. This is taxed at progressive rates from 0.55% to 1.8% on personal worldwide assets with a fair market value totalling more than €790,000. In the case of our couple, their wealth tax exposure would be limited to their assets located in France for the first five years of French residence. Therefore, if the value of our couple’s French assets totalled, say, €3,000,000, their annual wealth tax bill would be €16,750 (in addition to the income and capital gains tax shown above).
• As noted above, where available we have used the tax rates in force for 2010 (2010/11 for UK tax purposes). However, in the case of Spain, we have had to use some 2009 figures as not all of the 2010 figures have been agreed.
• In recognition of the global (or at least European) nature of our analysis, the results have been expressed in euros (although the present Coalition Government has no plans to join the euro anytime soon!). The exchange rate used for UK purposes is £1 = €1.20.

So, let’s analyse how our ‘teams’ performed and their ‘results’ in a little more detail.

Non-tax considerations

No one would deny the attractions of retiring to the sun and the choice between Portugal, Spain, France and Italy would come down to personal preference rather than any more objective tests.

In terms of the sun and la dolce vita, while it may be a score draw between Portugal, Spain, France and Italy, the UK is probably lacking a bit of flair in front of goal in this department.

The right of EU citizens to live and own property in EU countries is not really an issue; but the process of acquiring property can be equally tortuous in any of these countries if ‘real-life’ TV shows are to be believed.

UK

Ignoring the weather, etc, the UK features well ‘up front’ in terms of income tax, with separate taxation of spouses allowing for two sets of tax rate bands, and with the husband only just nudging in to the new 50% tax bracket.

The UK ‘team’ also does reasonably well ‘at the back’ in terms of capital gains tax, helped in no small part by the availability of the only or main private residence exemption on the sale of the UK home.

However, the back line is less attractive than it has been recently, thanks to the rise in capital gains tax rates from 18% to 28% on the share gains, with effect from 23 June 2010. Overall, a solid, if not particularly exciting performance.

Portugal

The up-front income tax rates are not as competitive as others, but not too lacklustre either and feature dividends and bank interest taxed at a flat rate of just 20%, compared to ‘normal’ income tax rates of up to 42%.

For the back-line capital gains tax, gains on the share sales perform particularly well with attractive rates of just 10% on shares held for less than 12 months and 0% on shares held for more than 12 months (for the purposes of the computations, we have assumed a 50/50 split on the shares being held for more or less than 12 months).

However, there are serious problems in relation to the gain on the house sale, this being taxed at full income tax rates and consequently letting the side down badly.

Spain

Spain scores reasonably well in terms of income tax charges, with attractive rates of 19% and 21% ‘out wide’ on dividends and bank interest.

However, like other civil law countries, Spain has yet to formulate a statutory approach as to how it taxes trust income, leading to a degree of unpredictability in the middle.

In this case, we have regarded the distribution as a ‘donation’ (a gift for estate tax purposes) and charged it to Spanish tax at 17.14% (although this varies according to the municipality of residence – for those interested in such things, this reflects the rate for Catalonia).

This treatment is not certain though, and capital gains tax (18%) might be applicable. In either case, the UK tax withheld on the trust income would not be available as a credit against the corresponding Spanish tax.

Spain then scores a significant ‘own goal’ (or two) in terms of capital gains, with rates of 19% and 21% in relation to both the property sale and the share sales.

France

At first glance, France does well in terms of both front-line income tax charges (€50,366) and capital gains tax charges (€90,000).

However, there is more to it than that and a closer examination reveals underlying issues for the tax team. This ‘unrest’ is in the form of flat-rate social security charges of 12.10% on dividend, interest and trust income, as well as on the share gains.

This additional social security charge, coupled with the added headache of wealth tax (although not particularly significant in overall terms in this case) leaves France, as in the real 2010 football tournament, hammered by most of the opposition.

Italy

Italy does well with its up front income tax rates, thanks to an attractive individual dividend rate of just 12.50% and a reasonably solid 27% on bank interest.

The support at the back from capital gains is equally good, with an exemption for the UK property gain (as the property has been held for a minimum of five years) and a flat rate of 12.50% on the share gains. All in all, a very good all-round performance from the Italians.

The final score

‘At the end of the day’, as they say in footballing circles, looking at the total tax figures, you would have to say that Portugal and Spain would be filling the bottom two slots in our group table.

The next two places would be a straight fight between the UK and France. This would probably go to penalties with the UK prevailing (for once) in view of France’s social security taxes and the annual wealth tax.

However, heading up the table at the group stage would be Italy. This would leave England and Italy going through to the knock-out phase (cue the vuvuzelas!).

Looking at a head-to-head match-up between Italy and the UK, the Italians certainly have the edge in overall tax terms, and, depending on your point of view, probably in lifestyle terms too, given the weather, wine and food, etc. (think Tuscany v Tyneside, Milan v Milton Keynes, Rome v Runcorn, etc. You get the picture).

So, the clear overall winner must be Italy, even without the decider going to extra time or penalties. Congratulations to the ‘Azzuri’, and hard luck to the plucky UK.

Now, where have we heard that before?

Mike Beattie and David Adams are international tax specialists at Nexia International member firm Saffery Champness. The authors wish to thank their Nexia International colleagues, who assisted in the preparation of this article: Salvatore Tarsia (TCFCT – Studio Associato, Milan); Andre Mendonca (Santos Carvalho & Associados, Porto); Yves Sevestre (Cabinet Sevestre, Paris); and Xavier Echeverria (Laudis Consultor, Barcelona).

Issue: 4262 / Categories: Comment & Analysis , Capital Gains , Income Tax