Location, location, location
To say that tax planning for a British expatriate in Spain is complex is a huge understatement! Encouragingly many clients I have met have tried to take the proverbial bull by the horns and are legitimate tax paying Spanish residents though there are many more that have fallen foul of the often misunderstood world of offshore investing!
Never has the phrase “location, location” been more poignant. Forget worst house best street, in fact forget about your property altogether for a minute – think “Where is my Offshore Bond located?” because if it is in the wrong location you are facing an extra tax bill! The most obvious choice of investment for an individual who requires a degree of simplicity with investment decisions being made on their behalf will opt for some type of Offshore Insurance Bond. This can significantly lower the taxes due on your savings and investments.
However there is a problem – Not all bonds are the same. When selecting any offshore investment product the location is paramount. In relation to those of us who are Spanish resident only “approved” Spanish bonds receive preferential tax treatment. To meet the criteria the bond must be issued in an EU country. Here lies the problem. Favourite Offshore havens include the Channel Islands and the Isle of Man and these are not EU Jurisdictions. Unfortunately many have invested their savings in these areas and the promises of tax free money is frankly the adviser responsible being uneconomical with the truth or more alarmingly they do not have sufficient knowledge of the market place. In fact there are so many misunderstandings about the seemingly magical world of offshore banking and investing that sometimes it is hard to know where to even start but for now I have chosen to focus on the product of choice the Bond.
Ok, we know the location is key but lets’ look at another urban myth and start to un-shroud the veil of secrecy that historically protected some investors. Offshore, unfortunately does not mean out of sight out of mind. You have a responsibility to declare any income or growth generated even if tax has been paid at source if you are a Spanish resident. This has just been highlighted again in the press with UBS under pressure to reveal 20,000 client names to the US authorities. So what should you do? Well this very much depends on your official residency. If you are a Spanish resident and hold UK onshore bonds you are being taxed at a rate of 20% before you even start as this type of bond is taxed within the fund.
A non compliant Spanish bond attracts an annual growth charge of 18% and no losses can be carried forward, this has the severe disadvantage for the investor because tax is not deferred, meaning that the policyholder has an imputed income for their tax return equal to the amount of growth which adds up to a large amount over time.
It is also noteworthy to mention that ISA’s and PEPS are treated in the same way as a non compliant bond if you are Spanish resident and are not tax free in Spain as often thought.
A Spanish compliant bond is also taxed at 18% but only on the growth when a withdrawal is made, this gives rise to the benefit of tax deferral… this can often lead to significant savings.
Let us give an example of how this works. Assume that two individuals each invested €100,000 for a 20 year period and that both bonds achieved an 8% per annum growth rate. The Spanish compliant bond allows gross rollup whilst invested whereas the non compliant bond is taxed each year at 18% meaning the actual growth rate is only 6.56% per annum. The outcomes are startling:
Compliant Bond
Maturity value would be €466,000
Tax payable is €65,880
Net maturity value is €400,120
Non Compliant Bond
Maturity Value is €356,300
Tax remaining is €0
Net maturity value is €356,300
A difference of €43,820
If the client had invested for income this is only taxed proportionally ensuring a low marginal tax rate. An example of this would be if a client invested €200,000 and achieved 8% (€16,000) and wanted to withdraw this amount for income. A compliant bond would leave the investor with a tax liability of €230.40 whereas a non compliant version would mean a tax bill of €2880. Some clients also have offshore bank accounts…here is what is happening in that sector: Interest from an offshore account attracts 15% retention currently. From 2008 this increases to 20%, and from 2011 this rises to an eye watering 35% – more than double the current rate. The clue to what you have is in the small print of where the asset is sited – the bonds we know to be compliant are from Irish Life International, Hansard, Lex Life, and Swiss Life… Anything else unfortunately doesn’t cut the mustard and costs you money in the meantime.
Information provided By Siddals Spain
Author: Rachel Oliver
email: Spain.Enquiries@siddalls.net
