Negative Interest Rates in Europe
7 Tax Changes for Expats this Spring
Negative Interest Rates in Europe’ is the first of a series of 7 articles relating to tax changes affecting Expats this Spring 2020. The world moves on, and Expats should consider the tax efficiency of their assets to protect Family, Business, Property and Pensions Living and Working Abroad.
Here in the first of the series, ProACT Sam looks at the impact of negative interest rates and charges on Expat’s savings.
Negative Interest Rates in Europe & Charges on Savings
Question: Whats the difference between tax at source, a bank charge, and a negative interest rate?
Answer: Nothing in practice.
Investors in cash savings look for their bank or financial institution to pay an income or interest in return for the use of their capital. That’s the bond. If 1% interest is paid on £100,000 invested, an income of £1,000 is earned by the saver.
Tax Free and Tax to Pay
A UK tax payer will have this £1000 interest paid tax-free. A basic rate tax charge would be 20%. In Germany, €801 euros is tax free with a basic rate starting at 14%. Portugal-based Expats could pay no tax on savings interest earned from a bank account outside Portugal.
In Cyprus, Expats could pay 0% on any interest if they have a non-dom tax exemption certificate. This covers an unlimited amount of interest earned in any year. Without the exemption certificate, Cyprus Expat tax residents pay a flat rate 17% savings interest tax - no allowances, not tax free.
Bank Charges & Risk
Expats are used to being charged for moving money around the world by old world banks hampered with large fixed-cost branch networks. We all wince at the expenses banks can charge for services, as a business or individual customer.
A new factor to consider is that banks are changing their interest rates on current accounts to offer negative interest rates. In Cyprus this means that the ‘guaranteed’ sum of €100,000 could be offered at 0% interest, but that any savings over this will be ‘charged’ at the negative interest rate.
All European Union bank deposits come with a ‘bank guarantee’ to return €100,000 per person per account in the event that the bank goes bust. So if you deposit €200,000 in a bank savings account in your sole name and that one bank goes bust, you could lose €100,000. A hefty charge!
Negative Interest Rates Charge
Now Expats with larger bank deposits must also consider these negative interest rates.
So if you hold €200,000 in a bank account in Cyprus, you could ‘earn’ 0% on the first €100,000 on deposit.
The second €100,000 would be subject to a negative interest rate of say 0.6% (typical rate for savings accounts in Cyprus).
This effectively means there is a ‘bank charge’ of €600 paid in the form of negative interest for the bank holding your cash on deposit for a year, and your bank balance would go down by €600 accordingly.
In practice, this is no different to taxing at source or bank charges.
In the UK National Savings Premium Bonds have run for 54 years paying no interest, the principle is to pay equivalent interest in the form of lottery winners. On average all holders receive an average 1.4% interest on Premium Bond ‘savings’. In practice you may not receive any interest for years, but you never pay a charge for the National Savings business holding your cash on deposit.
What action can Expats take to protect their savings from negative interest rates in Europe?
Expats in Europe should review their deposit cash savings to ensure that in an era of low interest rates, they are not losing value on: tax charges at source, bank charges and/or negative interest rates PLUS ensure their deposit cash savings are always covered by investor protection rules.
Want more help or information on how you can protect your Expat savings?
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