The government has recently approved new laws regarding Wealth Tax in Spain. This is not surprising, as tax regulations are constantly changing in every country. The added pressures on budgets due to Covid 19 make increases inevitable. Some taxes have been increased, but there is good news too.
There are two basic mechanisms for governments to raise cash:
- borrow more
- or increase taxation.
Further borrowing is almost impossible; no government can live on the ‘never never’ indefinitely. Therefore, loading more and more debt onto future generations is unfair and unsustainable.
The UK government has borrowed an additional £400bn to pay for Covid. Many assistance programs are ending, interest on borrowings is piling up, and many sections of society will need further help. Therefore, increased taxation is the only way to repay the debts, reduce interest payments, and balance the books.
The hot topic of Wealth Tax in Spain
Some would argue that increasing Wealth Tax in Spain is the best option, as the only people capable of paying more in such extraordinary times are the rich. Others would point out that the overall tax take would rise by reducing taxation under the Laffer Curve theory. However, both are relatively blunt instruments. Moreover, increasing taxation for the wealthy could encourage a more vigorous pursuit of tax avoidance strategies which would redirect money to clever accountants rather than the public purse.
The Laffer Curve theory isn’t as simple as saying reductions in tax rates increase gross tax-take. For example, some tax advisers in Andalucia are lobbying the government to reduce or even eliminate Spanish Wealth Tax. There is a perception that Southern Spain is losing out to retirement destinations, with wealthy individuals choosing Portugal, Italy, or Cyprus over Spain. They point to Madrid, where no Wealth Tax exists, as an example of zero tax equating to a wealthier Autonomous Community.
It’s also being argued that zero Wealth Tax will help the hospitality sector as more wealthy individuals choose to live in Andalucia rather than other Autonomous Communities or countries.
As things stand, Wealth Tax is still an important part of the Andalucia and national tax code; it doesn’t look like it will be changing anytime soon.
Changes are being made to the taxation of a variety of assets and income sources. For example, the methods of calculating property values for Spanish Wealth Tax purposes have been updated as historical cadastral values are no longer representative of current values.
Changes to how Spanish Compliant Bonds are taxed
The taxation of Spanish Compliant Bonds has also changed; a couple of loopholes have been abolished. Previously, it was possible to place funds into a structure where the donor could renounce any right to redemption either for a fixed term or forever. In addition, it was also possible to use Temporary and Lifetime annuities to dramatically reduce income tax liabilities. Both loopholes have been closed. Any money placed in unredeemable structures will now be considered as the donor’s assets for Wealth Tax purposes. Consequently, only genuine annuities that give the money to an insurance company to provide an annual income with no capital value will be eligible for exclusion from Spanish Wealth Tax.
However, the good news is that all other benefits of investing in Spanish Compliant Bonds remain untouched. For example, capital gains will still roll up free of Savings Income Tax, and the favourable tax treatment of income withdrawals stays the same.
Add that to being able to invest in a wide range of multi-asset, multi-currency funds managed by the world’s most prestigious investment companies covering all global markets and sectors, and the Spanish Bond is still a vital financial planning vehicle for expats in Spain.
As ever, it is important to keep your financial planning strategy current and relevant to your particular situation. Although complying with one’s tax obligations is mandatory, no one is obliged to pay more than legally due!
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