Thank goodness for the Spanish compliant investment bond! Each country’s tax code seems to have various ways of relieving us of our money. On the other hand, they also offer ways in which we can legitimately avoid taxation, as long as we purchase the correct financial products.
In the UK most people are well aware of the tax saving nature of pension plans, ISA’s and (to a lesser extent) trusts. Outside of the UK, trusts are often not recognised; tax authorities tend to look through them and assume direct ownership of the funds in question. Most EU countries operate along these lines, as using a trust to avoid personal taxation is not common and can be seen as verging on tax evasion.
The one exception to this are pension plans which happen to be held in a trust, but whose legal structure is still a bona fide pension plan. The flip-side of this is the investment plan within a pension, such as a (Q)ROPS. Tax on benefits taken, as either lump sums or income, is paid according to pension rules.
Taxation in Spain
Spain is seen as a relatively high-tax country. Indeed, a lot of UK expats manage their affairs in such a way as to ensure continuation of UK tax residence. As long as individuals spend less than 183 days in Spain in any given tax year, they can claim to be UK tax resident. For those that find themselves spending more and more time in Spain, this rule is becoming somewhat challenging. The Spanish tax authorities are beginning to tune into this situation, requiring individuals to show concrete proof of time spent outside the country. Brexit may compound the issue further for many; we suggest that those finding themselves in an ambiguous position take tax advice to confirm their status.
The Spanish compliant investment bond – Tax planning opportunities
Becoming Spanish tax resident may actually turn out to be less tax negative than first thought. There are legal ways of avoiding savings income tax for those who use approved investment structures. The rules are very specific and can be summarised as follows:
- Funds must be invested in a tax compliant life insurance bond
- The bond must contain an element of ‘risk’; it must pay out life insurance over and above the value of the plan on the death of the policyholder. This can be as little as +1%
- Investment funds available for selection have to be EU UCITS (Undertakings for Collective Investments in Transferable Securities) funds
- The insurance bond issuer must have a fiscal representative in Spain responsible for collection and payment of any taxes due
It therefore goes without saying that any investment which does not fit the criteria above will attract savings income tax in Spain and must be declared on an individual’s ‘modelo 720’ each year. The rate of tax ranges from 19-23% depending on which region the individual lives. Importantly, investments in compliant bonds do not attract annual taxation and therefore don’t have to be declared on ‘modelo 720’ unless withdrawals are made. As such, if no withdrawals are taken, no tax is due to be paid and the plan does not therefore have to be declared.
If, for example, a Spanish tax resident holds UK investments such as property, ISAs, shares or other investments such as foreign non-compliant insurance bonds, tax will have to be paid every year. Spain taxes people on a worldwide basis; it makes no difference where the assets are held.
Investments in compliant bonds are taxed rather more generously. Tax is only payable if a withdrawal is made, and then only on a small portion of that withdrawal. The table below shows the significant differences between the taxation of compliant and non-compliant foreign investment bonds.
The foreign non-compliant policy
€150,000 was invested into a non-compliant policy; the investor has no other savings income. The policyholder must declare the growth each year as savings income and pay tax on the total amount as follows:
The Spanish compliant investment bond
€150,000 was invested into a Spanish compliant investment bond. Until such time as withdrawals are taken or the policy is surrendered, no tax is payable on the growth in the policy. However, if the policyholder was to withdraw the growth each year the tax payable would be as follows:
In conclusion, the level of tax in a country should be considered in conjunction with the structures under which investments are held along with the opportunities for an individual to take advantage of them. Indeed, it could be argued that Spain is almost a ‘tax haven’ for retirees who use, or intend to use personal investments in order to provide income.