17 May, 2020 @ 12:00
2 mins read

Chartered Financial Planner Jonathan Holdaway explains the Spanish tax compliant bond

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INHERITANCE: Mallorca residents being hit by tax on property

Article by Jonathan Holdaway

HAVING recently completed the purchase of our first home in Spain – thankfully we were able to move just before lockdown came into force too, it is quite apparent that the country’s tax authority seems to have various ways of relieving us of our money!

However, when looking to make other investments, there are legitimate ways in which excessive taxation can be avoided – as long as you have the most appropriate financial plans.

For a UK resident these sorts of plans will include ISA’s, personal or company pension schemes and in some cases trusts.

If a Spanish tax resident – like in most EU countries, these ‘tax efficient’ plans are not recognised, and tax authorities will always expect you to pay the appropriate rate of savings income tax in the country and region in which you reside.

Trusts are not recognised at all and often viewed as bordering on ‘tax evasion’.

As I said Spain is seen as a country with relatively high-tax – as such many UK expats try to keep their tax residency there, by spending less than 183 days out of the country in the tax year. The Spanish tax authorities are beginning to look closely at these people, requiring written proof of the time spent in the UK.

Opting for Spanish tax residency may be more attractive than first envisaged, as there are ways of avoiding savings income tax if using sanctioned investments, however:

  • A tax-compliant life insurance bond must hold the funds
  • It must pay out life insurance slightly in excess of the bond value on death 
  • Only EU UCITS funds are allowed
  • A fiscal representative in Spain, responsible for paying any taxes due, must be nominated by the bond company

Investments such as these are not liable for annual taxation, unless ‘withdrawals’ are taken – and even then a small part is assessed.

Therefore, if no withdrawals are taken, no tax is payable and the bond does not have to be declared.

For example, assume an investment of €150,000 was made into identical funds, in both a Spanish tax compliant and a non-compliant bond, and there is no other income from savings. 

If the growth in the first year was, say €10,000 in each case and this was all taken as ‘income’ –  the investor must declare this as savings income and pay tax on the total amount.

The taxable amount varies considerably between the two investments – the entire €10,000 for the ‘non-compliant’ bond, yet for the compliant bond this reduces to just €625.

The amount of tax therefore reduces from €1,980 to only €119 (source OMI).

Bear in mind that until withdrawals are taken, or the bond is totally surrendered, no tax is payable on the ‘growth’ in either bond’s value. 

In conclusion, not only do you need to consider the tax rules and rates of tax in your country of residence, but also the investment arrangements available to you.

In this respect you could argue that Spain is almost a ‘tax haven’ for residents who take advantage of the tax saving opportunities available to provide growth or income from their assets.

In addition, if you are currently holding money in cash – which will actually be reducing in value with inflation, now is an attractive opportunity to take advantage of buying into world stockmarkets at a considerable discount, if investing for the medium to long term.

This article should not be considered as specific investment advice as it is general in nature.

To discuss the Spanish compliant investment bond, or indeed any investment please contact me for a free initial discovery meeting on zoom – you don’t even need to leave the comfort of your own home.

Staff Reporter

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