Protecting against political risk to retirement income

[Lootman]

Only IHT is a true wealth tax, as I'd argue that stamp and excise duty and VAT are transaction taxes, again on new activity.

I agree, although those who support IHT say it is really a tax on the transfer of that wealth, and not the wealth itself. Either way, at a 40% marginal rate, it is confiscatory.

The good news is that some of the strategies we are discussing for mitigating political risk are also effective in mitigating IHT.

[Mark]

I have been worried about the issues raised in this thread for some time and have been doing some reading around the subject to understand ways of sheltering wealth.

I don't think I am yet allowed to post links, but there are numerous articles on the Web about Family Investment Companies which are an increasingly popular approach. One can loan the company funds which can be invested, dividends earned on equities within the company roll up free of tax, and unless the '"corporate veil is pierced', taxation could be avoided.

Obviously this could be legislated against, but not without difficulty. And there are costs associated with filing returns, making this approach only suitable for larger pots, but in the event of a wealth tax this may become more attractive.

Interested to hear thoughts.


Mark

[langley59]

Regarding inheritance tax I was astounded to discover recently whilst researching potential retirement destinations that many countries have no inheritance tax whatsoever, including a number of European and Commonwealth countries.

[Alaric]

I don't think I am yet allowed to post links, but there are numerous articles on the Web about Family Investment Companies which are an increasingly popular approach. One can loan the company funds which can be invested, dividends earned on equities within the company roll up free of tax, and unless the '"corporate veil is pierced', taxation could be avoided.

Here's one of the links that comes up on a Google search.

https://www.accountingweb.co.uk/communi ... -they-work

It's similar in some ways to a personal service company.

[DiamondEcho]

Regarding inheritance tax I was astounded to discover recently whilst researching potential retirement destinations that many countries have no inheritance tax whatsoever, including a number of European and Commonwealth countries.

One reason Germany sought to shut down 'Swiss style banking' in Belgium, Luxembourg and so on. Anti-competitive they said. In fact Germans were amongst those most prominent for availing themselves of such offshore services. QED.
But yes, many countries don't have inheritance tax. This is one reasons studying jurisdiction-shopping can be useful, you see the varying approaches. Various countries have different approaches, after a bit of study it might confirm how toxic one's own one is lol.

[Lootman]

Regarding inheritance tax I was astounded to discover recently whilst researching potential retirement destinations that many countries have no inheritance tax whatsoever, including a number of European and Commonwealth countries.

But yes, many countries don't have inheritance tax. This is one reasons studying jurisdiction-shopping can be useful, you see the varying approaches. Various countries have different approaches, after a bit of study it might confirm how toxic one's own one is lol.

Not only it is a significant list of countries that do not have an inheritance or estate tax, but they include several countries that we typically regard as high-tax nations, such as Austria, Norway and Sweden. Other prominent nations which do not tax dying are Australia, Canada, New Zealand, Hong Kong, Singapore and Portugal. Whilst the US exempts estates under $5 million.

https://taxfoundation.org/estate-and-in ... und-world/

[SalvorHardin]

One way to reduce the UK political risk to investment income is to invest more overseas, focusing on dividend payers, and/or to invest in UK-based multinationals with huge overseas interests (e.g. Unilever). This is what I do; I'm retired and all of my income comes from dividends. My reasoning is as follows:

If a new government is as bad as feared it will be bad for British companies' profits, there may be some form of dividend controls and the pound will fall sharply. But overseas investments won't be damaged (much) by whatever happens to British companies (their British interests might), they won't be affected by dividend controls and their value in sterling will rise due to the fall in the pound.

This doesn't mean that you have to rush out and buy shares in companies like Microsoft. Lots of UK investment trusts are mostly invested overseas and as mentioned earlier there's always companies like Unilever (Unilever investors saw a big jump in their sterling dividend last year due too the post-Brexit vote fall of the pound against the Euro).

As others have said earlier, moving money around the family may let you use more personal allowances and get around inheritance tax (IHT).

A more severe option, one that's on my list, is to emigrate. Many countries will accept Brits who have skills which they need and/or if they are wealthy. The Canadian province of Quebec effectively sells citizenship to a sterling millionaire who is prepared to invest CAD$800,000 in Quebec (i.e. about £480,000). I'm sure that there are other countries which do similar.

As to a future government implementing a wealth tax, countries which do have such a tax find it difficult to operate. There will be major legal loopholes to exploit, such as a subjective downwards valuation similar to how probate valuations tend to be much lower than valuations for insurance.

[Lootman]

One way to reduce the UK political risk to investment income is to invest more overseas, focusing on dividend payers, and/or to invest in UK-based multinationals with huge overseas interests (e.g. Unilever). This is what I do; I'm retired and all of my income comes from dividends.

Geographical diversification is important in any situation, to address single-country market risks. But I am less confident that it solves the problem of single-country political risk, for two reasons:

1) A falling pound may well make the foreign earnings of UK companies more valuable, leading to higher dividends and share valuations in sterling terms. But that same government may punish UK businesses in other ways, such as raising corporation tax, increasing regulations, placing limits on their activities, giving unions more power and even nationalising them at less than fair value.

Regarding the latter John McDonnell said just yesterday at the Labour conference that nationalisations would happen at a price set by parliament, and not at the market value. His first targets would be railways, utilities and the royal mail.

2) If UK-based investors are seen to be making windfall gains because of, say, a run on the pound when a new Labour government forms (a possibility that McDonnell agreed could happen the other day) then a "windfall tax" on gains or dividends could be introduced. Moreover a sterling crisis typically involves exchange controls, which could happen on day one of a Corbyn government if the markets and sterling fall out of bed.

For both reasons I would not rely only upon being globally diversified to escape political risk. As long as you and your assets are within UK jurisdiction, you are exposed. And if action is not taken before a Corbyn government, then you may not be able to do too much afterwards. The risk is that 40 years of economic progress gets rolled back in days.

Nor do I think these risks are limited to only Corbyn being PM. I think May is not a good PM but she serves one important function - as a door stop against the socialist crazies. If she achieves nothing but keep them out until 2022, she gives all of us a period of time to prepare.

[DiamondEcho]

... As long as you and your assets are within UK jurisdiction, you are exposed. And if action is not taken before a Corbyn government, then you may not be able to do too much afterwards. The risk is that 40 years of economic progress gets rolled back in days.

This is what I was referring to, rather than just currency risk; jurisdictional risk of where your account is held. The currency matters less if the 'whole income' gets slammed.

[langley59]

Given the title to this topic of 'protecting against political risk to retirement income' I think there is a need to draw a distinction between protection of capital / wealth and protection of retirement income. I think the former may be a lot easier than the latter.

Take a hypothetical scenario where someone has a portfolio of £1m invested in a range of equities, investment trusts, ETFs and corporate bonds held within ISA and SIPP wrappers built up over many years and which pays 4% or £40k pa in a pretty tax efficient manner where the £40k is the individual's target income to fund their retirement lifestyle.

Suddenly that income and that lifestyle are threatened by prospective punitive tax changes. Maybe an annual wealth tax, maybe the removal of ISA tax breaks. This in combination with a forecast fall in the pound, gilt and equity prices. Suddenly the whole structure of your retirement fund which you have carefully built up over decades is not suitable anymore. What can you do? You might be able to protect your capital by selling up and moving overseas, or converting your cash into foreign currency, gold, bitcoin, etc. Not easy to do but feasible. But protecting your tax efficient income is a much different matter. Your tax free dividends will probably not be available overseas and most foreign currency, gold and bitcoin don't pay an income. This to me is the crux of the matter.

[scrumpyjack]

Certainly I can see a return to much much higher rates of tax on 'unearned' income (used to go to 98% under Labour in the 70s and one year went over 100% due to a retrospective surcharge!). It kicked in at £2,000 of income.

Also I would expect Corbyn to introduce a wealth tax and to tax capital gains as income.

On top of this we can expect a return to much much higher rates of inflation. No allowance will be made for this in determining capital gains so CGT will also become an additional wealth tax. Inflation will significantly reduce the value of GBP cash etc. The higher rates of interest that follow will then give higher interest income but it will be taxed as income even though it reflects the devaluation of your cash.

There will probably be a higher rate of Inheritance tax - It used to be 80% back in my youth!

There are lots of other things they might do (limit ISA's, bring pension assets back within the scope of IHT etc etc)

You could emigrate to Portugal where you now get a 10 year tax holiday on most income, though I think you do not now escape IHT until you have been out for nearly 20 years!

If you stay in this country your assets will still be in the sights of HMRC wherever they are situated.

All I can suggest, apart from handing over what you can to children/grandchildren before the red cloud descends, is putting your cash into other currencies less likely to depreciate, realise your capital gains but hang on to unrealised losses and lay in a good supply of booze to drown your sorrows.

Unfortunately it will be the 70s all over again but young people today have no experience of that. Let's hope there is a Thatcher Mk2 to save the country when people see what a mess a left wing labour government brings.

[thebarns]

Some good posts here.

It truly is a horrific possibility of what may be in store listening to these absolute financial illiterates spout out their rubbish at their conference.

Why oh why oh why can the Conservatives not find one decent MP with appropriate PR skills backed with common sense policies that would appeal to the sane financial mass of the population who would vote for them instead of the bunch of incompetents in power just now.

In my professional life I come across many charismatic highly intelligent articulate and logical individuals who could do the job and I am sure others must do as well.

It is so infuriating especially as I am about to retire after a lifetime of hard graft and now have to worry about these idiots possibly coming to power and the impact on my family's finances.

It saps the life out of my envisaged joy at early retiring !!!!

[Lootman]

... As long as you and your assets are within UK jurisdiction, you are exposed. And if action is not taken before a Corbyn government, then you may not be able to do too much afterwards. The risk is that 40 years of economic progress gets rolled back in days.

This is what I was referring to, rather than just currency risk; jurisdictional risk of where your account is held. The currency matters less if the 'whole income' gets slammed.

In your case, if I recall correctly, you and your assets are overseas but that you are thinking of returning to the UK next year?

In such a situation, and given a non-zero risk of a return to the 1970's, I might be tempted to leave those assets overseas. It won't affect the UK tax you owe either way if you are resident in the UK. But it could make a critical difference if you later decide you want to move the assets back overseas but no longer can because of political changes.

There are plenty of English-speaking financial centres that can provide a full range of financial services, with the same household high street banking names as operate here.

[dspp]

I expect he would also lift the family-business inheritance exemptions, thereby raiding all those gentleman farmers who bought estates as a IHT tax dodge. Wealth tax. Rent controls. Capital controls. The list lengthens.

In my opinion the choices for anyone who can't afford a family office are :

1. Pre-emptive emigration.
2. Hide it abroad, but legal ways of doing this basically no longer exist.
3. Hide it abroad, illegally, but reliable ways of doing this no longer exist.
4. Pre-emptive spending or gifting.
5. Brace yourself.

It has taken Cameron's foolish actions to bring Corbyn to the brink of office, caused by him pandering to his far right. The solution is obvious but I am afraid the same people are trying to finish what they started, and to hell with the consequences.

regards, dspp

[Lootman]

You could emigrate to Portugal where you now get a 10 year tax holiday on most income, though I think you do not now escape IHT until you have been out for nearly 20 years!

I believe that the "twenty year rule" applies where you emigrate but do nothing to affirmatively claim loss of UK domicile. In such a case, domicile will only be considered to cease to apply when you have spent 17 of the last 20 years overseas (in practice - I'm not sure it is documented as such anywhere).

But a loss of domicile may be claimed more quickly depending on circumstances. For instance, if you emigrate, marry a citizen of your new nation, buy a home there, work there, take up foreign citizenship, not renew your UK passport, and give up all UK assets and obligations, then it would be hard for HMRC to refuse a claim of non-domicile. And easy to ignore them if they did.

I suspect that in practice HMRC does not expect to collect a lot of IHT if you have left for good with your assets, and where your death may not be even notified to the UK authorities, nor probate conducted here.

[Itsallaguess]

It has taken Cameron's foolish actions to bring Corbyn to the brink of office, caused by him pandering to his far right.

The solution is obvious but I am afraid the same people are trying to finish what they started, and to hell with the consequences.

That's one view I suppose.

Another might be that during the last election, large parts of the country were unwilling to back the Conservative promise to action the EU referendum result, where the UK voted to leave the EU.

This not only weakened Theresa May's hand in the subsequent EU negotiations, where she didn't have the House of Commons majority she was looking for to enable her to push through the strong legislation that she wanted to enact as part of the 'Leave' process, it also weakened her position in the eyes of the EU, and we can see the consequences of that in the EU talks that have taken place since.

On top of that, the poor election vote allowed Corbyn and his party to stand on the brink of Government, along with all the fairy-tale (aka nightmare...) monetary ideas that this entails.

We've seen on these boards that there's been a very real reluctance to get behind the Conservative position of wanting to actually enact the result of the EU referendum from the best position of strength it can. Transfer that 'I don't like the referendum result, let's have another vote' mind-set across the country, and we clearly end up in the position we are today...

You seem to want to blame Cameron for that, for some reason, whilst it's clear that a better backing for the current Government's policy of enacting the EU referendum result would have helped to remove some of the EU-discussion risk and also the current Labour risk, and I really can't see beyond the fact that there's now a real risk that this country will end up with the 'Government it deserves', in the form of a Corbyn-led Labour nightmare, and I shudder at the prospect of what real plans the Momentum movement might have for that scenario....

Itsallaguess

[OZYU]

To call that party Labour does not seem appropriate any more imho, Communists Party is much nearer the mark bearing in mind the extreme left plans/policies, and with that label being firmly brought to the fore at election time, maybe the electorate will exercise some restraint next time round before serious and difficult to repair long term damage occurs to our UK.

Ozyu

[SalvorHardin]

For both reasons I would not rely only upon being globally diversified to escape political risk. As long as you and your assets are within UK jurisdiction, you are exposed. And if action is not taken before a Corbyn government, then you may not be able to do too much afterwards. The risk is that 40 years of economic progress gets rolled back in days.

Nor do I think these risks are limited to only Corbyn being PM. I think May is not a good PM but she serves one important function - as a door stop against the socialist crazies. If she achieves nothing but keep them out until 2022, she gives all of us a period of time to prepare.

The thing is that many people who would be affected cannot or will not be in a position to take the drastic action of emigrating (I'm not one of them, if Corbyn's commies get in I'm off). So the quickest way for them to get some protection is to move assets abroad. Although they will still be subject to UK taxes, at least they will have gained on the pound's inevitable collapse. And when UK inflation takes off they will continue to increase in sterling terms simply because the pound will continue to depreciate. A major reason why I've invested overseas for over thirty years is the weakness of sterling against the US Dollar and Swiss Franc.

Furthermore their overseas assets will grow outside the UK which will have become a pretty bad place for most investors. To quote Daniel Mitchell from the Foundation for Economic Education (a libertarian think tank), "When producers aren’t allowed to profit, they don’t produce."

https://fee.org/articles/dark-humor-fro ... venezuela/

[Urbandreamer]

To call that party Labour does not seem appropriate any more imho, Communists Party is much nearer the mark bearing in mind the extreme left plans/policies, and with that label being firmly brought to the fore at election time, maybe the electorate will exercise some restraint next time round before serious and difficult to repair long term damage occurs to our UK.

Ozyu

I take it that you are not old enough to remember a Chanceler of the exchequer who used phrases like squeeze the rich? Or exchange controls (restrictions on money leaving the country)?
http://www.telegraph.co.uk/news/uknews/ ... -pips.html
http://www.telegraph.co.uk/news/uknews/ ... limit.html

Labour use to be a lot more left wing than it became under Mr Blair. Mr Corbyn et-all simply want to turn the clock back to those days (old Labour).

That said, as an investor who bought some of his first shares from the government, I personally am less than impressed that the Labour party think that it would be acceptable to require me to surrender them back at a value that they, rather than I, put upon them. I fear that the word that I would use is not nationalisation, but theft.

[Lootman]

Labour use to be a lot more left wing than it became under Mr Blair. Mr Corbyn et-all simply want to turn the clock back to those days (old Labour).

Part of the problem is that it's hard to know what a Corbyn government would really be like. I see three possibilities:

1) Corbyn sticks to the very "reasonable" and moderate positions he took in the May election. Labour did well in May because it silenced the crazies (Abbott, Momentum) while Corbyn and McDonnell fell over themselves to come across as avuncular and "safe to vote for". Perhaps even Corbyn recognises that a sharp reversal to the 1970's would leave the UK as a basketcase economy, and even he isn't that suicidal.

2) Or the next Labour manifesto is more aggressive about lurching to the left, with high taxes, wholesale nationalisation and the works. If so, we will have advance warning of that, and can take steps to mitigate it. And frankly if the British people vote for that, then I should leave not because of Corbyn but because my fallow citizens are clueless and cannot be trusted.

3) Labour are elected on a more moderate platform but, even so, there is an immediate market meltdown and run on the pound because of fear, or even manipulation designed to undermine Corbyn. That's perhaps the worst of all three because he will have been elected on moderate policies, but then he will not want to waste a crisis, and will introduce "emergency, temporary measures" (like exchange controls and a tax surcharge on "unearned" income) which of course end up never quite going away (like income tax in WW1). Another tactic could be the "compulsory loan" to the government that the French pulled off a few years ago.

The optimist in me thinks that there might be a lot of money to be made if Corbyn goes rogue and the law of unintended consequences kicks in, decimating shares, gilts and sterling. But will Corbyn then just turn around and tax me at 90% on those "windfall" gains?