I acknowledge the feelings that come with the death of a relative, but this article is not about the grieving process.
The article describes how to deal with an inheritance and so will start from the point when you learn how much your inheritance (bequest) is going to be.
Viewing posts from: November 2000
I have received an inheritance. What now?
By Barry Davys
This article is published on: 31st July 2023
31.07.23
Oh wow, that will be helpful/very nice! I didn’t expect that much! What a lovely surprise!
These very common responses on finding you are about to benefit in a Will are shortly followed by “What should we do with it?” or “Let’s buy a holiday home/new car/go on a cruise/ give money to the kids etc.” It is unusual for me to find a reaction in between these two different approaches to receiving a bequest.
My experience of working with people who have received inheritances gives me insight into what things are important to consider. Some of these people have worked with me on inheritance tax planning before the death of the relative. This does not mean planning immediately before the death but sometimes years in advance. This type of planning is the subject of another article.
Typically though, as recipients we focus on the amount that we are getting in isolation and make our decisions based simply upon the amount we receive.
This approach often leads to buyers’ regret, defined in the dictionary as:
‘A sense of regret or uneasiness often after having purchased a house, car, or other major item, especially when the acquisition involves an ongoing financial burden.’
A new car comes with ongoing expenses: insurance premiums for a newer or bigger car can be higher, maintenance costs greater. Similar issues occur for a holiday home. Here is an analysis of the true cost of buying a house
Here are some very important steps to ensure you avoid the buyers’ regret syndrome and form a process on how to make the best of your good fortune.
Check your answers to these questions:
- Am I thinking “What would Dad/Mum have wanted me to do with the money, what can I spend it on?” Or am I thinking “What would be the best use of the money for my family”?
- The money is now mine. Have I accepted yet that I am now responsible for looking after it?
- Can I write a list of how to improve my family situation with my money?
- What type of an investor am I?
- If I want to be cautious, what does that really mean in practical terms? How would I choose savings that are “safe”?
- Will I be glad when it is all over, put away somewhere safe and I don’t have to worry about it anymore?
- Will I be able to leave an inheritance to my family?
These questions help us take the focus away from how much you have received to how it will benefit your family and improve your quality of life. Why is this important? Unlike an annual bonus or a job with a higher salary, receiving an inheritance from the deceased relative will happen just once from that relative. Often the relative, when deciding to leave you something, will have been thinking “I hope this will benefit the family and make their life a little easier”.
How to deal with an inheritance – a step by step process
How you approach the issue of what to do with an inheritance should depend on your financial position before the inheritance.
How can you fit the inheritance into your finances so it gives ongoing benefit?
The process:
- List your debts
Whether you should you pay off your debts depends on the interest rate of each debt. One certainty is that if you have a Spanish mortgage with a fixed rate of interest at 1% for 10, 20 or 30 years you should not pay off this debt. Please contact me for an explanation of the returns on your savings and how this mortgage fights against inflation to your benefit, along with a full description of how this works. - List your future expenditure e.g. school or university fees
If you have a use for the money at a set date, savings should be designed to meet that need. Bitcoin etc is not going to give you the certainty that the money is there when you need it. - How much emergency fund do you already have in the bank?
An emergency fund should typically be enough for six months of expenditure. Top up your emergency fund if necessary. - Do I need the money to grow or do I need it to provide an income?
If you wish to bolster your pension when you get to retirement, it may need to grow now and provide an income at retirement. If you wish to leave money to your family, you may wish take the income or profit from your savings and to leave the capital ready to pass on. - Where are my existing savings and investments?
Often I see people doubling up on a particular investment, often by accident. One fund may, for example, hold lots of Tesla shares already. If so, you might not want to buy lots of Tesla shares with your inheritance. Why not? By concentrating your investments like this you increase your exposure to risk. - Look to pay for gifts or toys such as new golf clubs from the income not the capital
I have helped many clients over the years preserve their inheritance with this approach. In addition to the toys, I have structured donations to charity too. - Analyse your options
What type of savings match my risk profile and how do I make them tax efficient? - Then do what you have decided to do
It is surprisingly common for people to still have an inheritance some years after they have received it. Not being an expert or experienced in savings and investments and tax they end up doing nothing out of fear of doing something wrong. Whilst this is understandable, the real value of the inheritance is eaten away by inflation with a “do nothing” approach.
Thoughtful, considered planning is how I approach a request to help with an inheritance. A step by step approach is best using the process above. By using cashflow modelling software I can show you what your financial future looks like now you have the new money. The software also allows you to explore different options and compare the possible outcomes. This “what if“ analysis is one of the most useful parts of the planning process. Assessing the best planning for Spanish and/or UK tax is a speciality of my advice.
Special Spanish tax items
There are specific reporting requirements about your inheritance in Spain, even if you have paid inheritance tax in the UK or Ireland.
This report must be made within six months from the date of death.
If you receive an inheritance in your name and then decide to do something with the money in joint names, there is gift tax to pay in Spain. A typical trap is buying a property in joint names with the inheritance only to find out there is gift tax on half the value of the house.
What next and how to make the best of having received the money?
You can book a call with Barry Davys of The Spectrum IFA Group who specialises in advising on how to manage the inheritance. Please choose a time that is convenient for you on his online system
He has dealt with many such situations in both the UK and in Spain. He brings understanding of the circumstances and respect of your wishes inside a framework of professional advice.
He often acts with lawyers who are settling an estate. The lawyer works on the process of settling the estate whilst Barry is forward looking and works on the planning for the future.
Barry will personally get in touch with you within the next five days. Any call or communication will be in confidence.
Use your inheritance you have received for your future
By Barry Davys
This article is published on: 30th July 2023
30.07.23
Travel broadens the mind, and the investment portfolio
Have you ever been to India for work or to travel?
I haven’t but my partner went for work and my daughter for travel. Some seven other friends have also travelled and all have reported the same way. It is a great place, still lots of improvements to be made, but the people work hard and are generally friendly.
With a current population estimated at 1.46 billion (now larger than China’s), India accounts for around 18% of the world’s total population.
If you were running a business with:
- 18% of the world’s population in your home market
- English being spoken well by a good proportion of the population and with English language ability providing valuable access to international markets
- skilled and hard working employees
Would you be mildly optimistic about your outlook? Of course, you would have to deal with the day to day issues of logistics, marketing, financing etc but even so, you might still be mildly optimistic.
The story is only just beginning. Yours and my parts of this story come at the end of this article. Read on.
The IMF, World Bank and Goldman Sachs are all optimistic about the country’s outlook. India is currently the fifth largest country by size of economy. However, by 2050 Goldman estimates it will be the third largest in the world. Sounds good but when you examine the numbers it really is impressive.
In 2022 the Indian economy was valued at $3.385 trillion. Goldman expects the economy to be $22.2 trillion by 2050. By 2075 it is anticipated it will be $52.5 trillion, making it the second largest economy in the World.
To give some context, the economic output (GDP) of some other countries in 2075 are estimated to be:
- USA $51.5 trillion
- Japan $7.5 trillion
- UK $7.6 trillion
- Germany $8.1 trillion
Your involvement in the story
Sounds good but what has this got to do with me?
If you are about to receive or have received an inheritance at, as an example, age 50, it is likely that you will live around 40 years. This change in India to 2050 will take place in your lifetime.
If you have children, and especially with grandchildren, this change in India to 2075 will take place in their lifetimes.
I am not an investment manager but am able to arrange for discretionary fund managers (DFMs) to run investment portfolios on behalf of my clients. I direct the DFM to invest in a manner that fits both with your attitude to risk and your longer-term planning objectives. This includes your requirements for income and inheritance tax planning for your family.
I am forward looking. This story of India is not a recommendation to invest in India. It does illustrate however that if this economic expansion is expected to develop over your lifetime, we could ask the DFM to consider including at least some Indian exposure in your portfolio.
If you wish to look to the future, book an appointment for an initial call with Barry Davys at a time that is convenient for you, using his online system at Receiving an Inheritance – What Now
Should I buy a property with the Inheritance I have just received?
By Barry Davys
This article is published on: 29th July 2023
29.07.23
The true story may surprise you?
There are some spectacular homes in Catalonia and there are many properties which are bought for rental as an investment.
If you are coming from a home owning country such as the UK (63% homeowners in 2020)¹ or Romania (a remarkable 92.9% homeowners in 2021)², it is only natural to think of property as a good idea. We may have experienced significant gains on a property and we probably know others who have done so. Most of these cases will be people who have bought their property as a home. We may have also seen the headlines about the “Buy to Let” boom in the UK. Bear in mind the boom was helped by very, very low interest rates which are most unlikely to be repeated.
Now we are seeing headlines such as ‘Lots of us are very anxious’: why Britain’s buy-to-let landlords are selling³. A reminder that like most investment markets the value of your investment can go down as well as up.
Investing in property can be effective. It should be considered like any other investment and not with the bias in our decision making that can come with having been brought up in a home owning country.
Here we help you to view an investment in property in Catalonia with data.
The first item to understand is that there is a property purchase tax of 10% of the purchase price. Other costs, such as lawyers and notary fees, are typically total 2% of the purchase price. This is an assessment of the impact of costs and taxes and what it can do to your investment return.
¹www.gov.uk – Home ownership
²European Union (Euro Stat) Home or Flat – Owning or renting
³Guardian newspaper 24/02/2023
| The true cost of a house for renting in Spain | Return on investment | ||||
|---|---|---|---|---|---|
| % | % | % | |||
| Purchase tax | 10.00 | Annual yield Barcelona | 5.7 | ||
| Lawyers, notary etc | 2.00 | Less | |||
| Property registration fee | 1.5 | Tax at say 33.8% of 5.7% | 1.93 | ||
| IBI (council tax) | 0.6 | ||||
| Landlord insurance | 0.5 | ||||
| Total cost of buying | 13.50 | Community charge | 0.3 | ||
| Furnishings and white goods | 0.75 | Total ongoing costs | 3.33 | ||
| Total Costs | 14.25 | Annual Net Return | 2.37 | ||
| Number of years to recover cost of purchase | Total Costs ➗ Annual Net Return | = | 6.01 |
In summary, total acquisition costs are typically 14.25% of the purchase price. The buyer has to have this amount of cash in addition to any deposit as the mortgage is based on the value of the property.
The rental property rate of return (yield) is shown for Barcelona. Anywhere outside of Barcelona will likely give you a lower rate of return.
Annual net returns after ongoing taxation of property tax (IBI) and income tax (rental income is added to employment income). The example uses a tax rate of 33.8% income tax on your rental but the top rate of income tax in Catalonia has recently risen to 50%.
This means it will take you just over 6 years to cover your costs from rental income.
Of course, with a bit of luck, the property will increase in value. There is an oft repeated mantra that “Oh but the property will increase in value”. It may well do, especially if you keep the property for many years. However, here are some other points to be aware of before buying a rental property for profit.
- You benefit from the increase in value when you sell the property
- Yet the true benefit is only the increase in value above inflation; not the difference in buying price and selling price but only the bit of profit above the revised value caused by inflation
- Capital gains tax is payable on the increase in buy to let property value, even if you are over 65. Inflation is not taken into account by the tax man so you pay tax on the full difference between buying and selling
- Capital gains tax in Catalonia is between 19% and 26%
- Estate agent fees in Catalonia are typically 5% of the sale price
- A further tax is called Plus Valor. Raised by the local council the tax is based on the increase of the value of the land that the property is built on. This applies to freehold properties too
- The property is part of the assessment for Inheritance Tax in Catalonia even if you return to the UK or your home country
Property investment works best when expectations and reality are matched. Knowing realistic figures, based on data, is very important. We hope that this article provides some insight and helps you with your assessment of whether it is right for you.
Are there alternatives? There are and one or two that are very tax efficient. In some cases a combination of property and other investments can work well.
For more information on these elements of investing in property in Catalonia you can book a call with the author Barry Davys. Please use his online system so you can choose a time that is convenient for you for the call. The call can be a video call or a telephone call.
0% tax when selling your UK business
By Barry Davys
This article is published on: 20th July 2023
20.07.23
How you structure the sale of a business is always important. And never more so when you make an opportunity to move to Spain and then sell your business. Spain has a scheme to attract foreign workers, professionals and entrepreneurs with tax incentives.
This scheme can lead to 0% tax on the sale.
So unsurprisingly, moving to Spain is becoming an increasingly popular option.
Before inviting you to discuss the scheme, it is important to show how I help business people in this situation with their wealth planning. In addition to the 0% tax scheme there is greater depth to the planning. Will you live happily ever after? Well let’s see.
Selling a business is often a life changer. You have more time. You are not with the same people that you have been with for, in some cases, years. You suddenly have a large bank balance. And you spend time wondering what comes next in life?
I cannot help with the “what comes next?” question but I do help people get their affairs in good order so they can move forward.
My experience of working with people who have sold a business gives me insight into what things are important financially after a sale. Having sold a business myself I also have an understanding of the feelings that appear after the sale about the new found wealth.
The bank balance
The warm feeling that comes with looking at a new, very much bigger than normal, bank balance is great. It is a sense of achievement and reward for all the work you put into building your business and sacrifices you made along the way.
This feeling makes us focus on the figure on the bank statement. However, if we have sold at 55, with average life expectancy, we could live for another 30 years; longer if you are a woman. Life expectancy, as a result of medical advances, means we might well live even longer.
The secret to dealing with this bank balance focus is to check your answers to these questions:
- Have I just lost my salary?
- Have I just lost my dividends?
- Do I want to work anymore?
- How much do I need to live on if I don’t work?
- Will I run out of money?
These questions help us take the focus away from the big, juicy bank balance to the reality of providing an income for the next 30 years.
Question five may seem a strange question having just received a payment for the sale. It is actually an important one. The large bank balance typically tends to lead to big purchases; a car for husband and wife, a new house, helping or buying a house for children, a boat, gifts to other members of the family etc.
All these purchases and gifts have one thing in common. Not one of them produces an income!
Another common action is to invest in another business. I have seen time and time again, and I have been guilty of this myself, of investing in a company in a completely different sector, or perhaps B2C when your business was B2B. It can be a very expensive mistake to think “I know about business/marketing/retailing/manufacturing” etc and then investing in a different type of business.
What made our business successful was our ingrained experience of our sector and market, our knowledge of our suppliers and competitors and our customer needs. Moving to a different type of business for investment can render all that experience irrelevant. The assessment of the investment opportunity can be skewed by thinking we can rely on our experience.
So what should we do?
Post sale action
Secure your income first and then buy the toys, make further investments and make the gifts. But how do you do that when the future is unknown? By using some of the very best cash flow modelling software it is possible to show you. With inputs that are specific to you. With real data on portfolio performance including what happened during the financial crisis and the pandemic. Graphical output shows in real terms how to generate your income and what you could spend on other things.
For more information on how the modelling can work for you, book a call, in confidence, with the author Barry Davys, The Spectrum IFA Group, at a time that is convenient for you on his online system.
The earn out
I often hear people who are selling say “and I am due a further sum of X in Y years”. It is considered as the ‘cherry on the top’ part of the deal even when it is contingent on hitting a future target. We can’t help but include it in our “How much am I worth?” calculations in our head, even though it is contingent on a target that we have no control over (loss of control is a function of selling the business).
The modelling helps with this issue too. A model with zero return from an earn out period in a contract allows you to plan with the resources you have available now. A second model is provided showing receipt of the further payment when it becomes clear the payment will be made. This second model can account for any and all of the following:
- Earn out period
- Retained shareholdings
- Loan notes
- Tax rebates
Your pension
As we have been building the business we may have thought of pension contributions as a way of managing corporation tax, personal income tax or both. The pension pot itself is generally viewed as ensuring you have a comfortable retirement.
Now you have (or will have) a larger amount of wealth outside your pension it can be very beneficial to use this non pension wealth to provide your income in retirement. Firstly, it is possible in Spain to provide you with an income with a lower tax rate than applies to a pension. This gives you income that lasts longer into your retirement, allows you to have a better standard of living, or both!
Your pension pot then becomes one of the most effective IHT planning tools at your disposal and it is already under your control.
Inheritance tax in Spain
Inheritance tax in Spain is less about where you are living and more about your connection to the UK and also where your children live. Connection to the UK because even if we leave the UK a long time before death, we are generally considered to be “Domiciled” in the UK. Domiciled has a specific definition in the UK allowing HMRC to claim inheritance tax from an estate no matter where you die
Where you children live is important because they are the taxable entity, not your estate, for inheritance tax in Spain.
The importance of inheritance tax planning increases significantly after the sale of a business. It may be that you have previously qualified for family business exemptions on inheritance tax in both Spain and the UK. This was granted based on your shareholding in the company. Now the business has been sold, the exemption disappears.
Relatively simple planning can give outstanding results in reducing the amount of inheritance tax due in Spain.
Don’t forget the basics
Our feeling of abundance pushes the basics from our mind. However, there are a few basics that we should attend to post sale and which we will then not have to worry about again. This attention often means tax savings and reduction in expenditure.
Life Assurance
Have you had life assurance provided by your business? Has that now disappeared? Do you still need life assurance if you now have a large capital sum? Do you have life cover taken out in your personal name?
When advising people on the post sale process these are the sorts of questions we address. In one recent post sale example my advice saved a husband and wife £400,000 EACH in potential inheritance tax.
Private medical insurance and income protection insurance
Were either of these insurances paid for by your company? Do you need to replace or update an existing policy and especially so when you move to Spain?
Income protection insurance will pay you an income if you cannot work. However, with the loss of earnings as a result of the sale these types of policies become void. The good news is that by addressing the income issue first in your planning, you are already meeting the need for income. The policy is no longer needed and so there is a cost saving from not having to pay the insurance company a premium.
Where next?
It is especially important that planning post a sale is broad enough to look at your overall situation and not be focussed just on the 0% tax or how to invest the sale proceeds. People have also found that continuing advice brings better outcomes for the family and ongoing piece of mind.
Of course, the 0% tax is very important and so I discuss this as part of the planning of the sale of your UK business in detail. To arrange a meeting or call please use this link to choose a time that is convenient for you to find out more about the 0% tax scheme and wealth management for you and your family.
However, perhaps you’re not interested in a holistic financial approach. If you believe investing is just about picking the right stocks or funds and have no interest in considering your complete financial picture – including tax strategies, estate planning, retirement goals, and risk management – I must admit, my comprehensive approach won’t be your cup of tea.”
Barry Davys MBA Dip PFS
Partner, Spectrum IFA Group
Building your portfolio after selling a business
By Barry Davys
This article is published on: 19th July 2023
19.07.23
Travel broadens the mind, and the investment portfolio
Have you ever been to India for work or to travel?
I haven’t but my partner went for work and my daughter for travel. Some seven other friends have also travelled and all have reported the same way. It is a great place, still lots of improvements to be made, but the people work hard and are generally friendly.
With a current population estimated at 1.46 billion (now larger than China’s), India accounts for around 18% of the world’s total population.
If you were running a business with:
- 18% of the world’s population in your home market
- English being spoken well by a good proportion of the population and with English language ability providing valuable access to international markets
- skilled and hard working employees
Would you be mildly optimistic about your outlook? Of course, you would have to deal with the day to day issues of logistics, marketing, financing etc but even so, you might still be mildly optimistic.
The story is only just beginning. Yours and my parts of this story come at the end of this article. Read on.
The IMF, World Bank and Goldman Sachs are all optimistic about the country’s outlook. India is currently the fifth largest country by size of economy. However, by 2050 Goldman estimates it will be the third largest in the world. Sounds good but when you examine the numbers it really is impressive.
In 2022 the Indian economy was valued at $3.385 trillion. Goldman expects the economy to be $22.2 trillion by 2050. By 2075 it is anticipated it will be $52.5 trillion, making it the second largest economy in the World.
To give some context, the economic output (GDP) of some other countries in 2075 are estimated to be:
- USA $51.5 trillion
- Japan $7.5 trillion
- UK $7.6 trillion
- Germany $8.1 trillion
Your involvement in the story
Sounds good but what has this got to do with me?
If you are selling or have sold your business at, as an example, age 60, it is likely that you will live around 30 years. This change in India to 2050 will take place in your lifetime.
If you have children, and especially with grandchildren, this change in India to 2075 will take place in their lifetimes.
I am not an investment manager but am able to arrange for discretionary fund managers (DFMs) to run investment portfolios on behalf of my clients. I direct the DFM to invest in a manner that fits both with your attitude to risk and your longer-term planning objectives. This includes requirements for income and inheritance tax planning for your family.
I am forward looking. This story of India is not a recommendation to invest in India. It does illustrate however that if this economic expansion is expected to develop over your lifetime, we could ask the DFM to consider including at least some Indian exposure in your portfolio.
If you wish to look to the future, book an appointment for an initial call with Barry Davys at a time that is convenient for you, using his online system at Selling your Business
Sensible Inheritance Tax Planning
By Barry Davys
This article is published on: 17th July 2023
17.07.23
One of the principals of financial planning is to keep things as simple as possible. Often that is easier said than done. Often, trying to plan in the context of unknowns means we have to try to cover a number of options. Examples include what will future investment performance be, which country will you live in in the future, how many children and grandchildren will you have and indeed, how long will you live?
One piece of planning that is quite straightforward is a piece of planning for passing wealth onto your children when one lives in the UK and the other in Spain. As an example let’s use the family called the “Sensibles”:
- Mr & Mrs Sensible live in the UK
- Child Sam Sensible lives in Spain
- Child Una Sensible lives in the UK
- In Spain there is gift tax if money is given to Sam during Mr & Mrs Sensible’s lifetime
- In the UK, there is no gift tax
- In Spain, the recipient of money from a Will has to pay Inheritance Tax (IHT)
- In the UK, it is the estate of the person who has died that pays the IHT
- Mr & Mrs Sensible wish to do some UK IHT planning and give money to their children now
The problem for Mr & Mrs Sensible is that if they give money to their children now, this will lead to Sam in Spain having to pay Gift Tax now. If they leave their money to Sam in their Will there are allowances and discounts available which means that he will pay less tax than in the event of receiving a gift.
The Solution
The solution is quite straightforward. Mr & Mrs Sensible should give the total amount of money they wish to give to Una in the UK now. This will reduce their future liability to UK IHT. To make sure Sam and Una are treated the same they should then deduct the amount given to Una from her half in their Will.
- Sam pays no gift tax and Una pays no gift tax
- Sam pays less tax on the death of his parents because of the discounts available on IHT for bequests from parents to children
- Mr and Mrs Sensible have reduced their UK IHT bill
What a sensible thing to do.
Tax tips for living in Spain 2023
By Barry Davys
This article is published on: 3rd April 2023
03.04.23
Whether you are thinking of moving to Spain or already living here, tax is a major part of your financial life that needs to be considered and planned for carefully.
1. In the UK, probably the best savings vehicle is an Individual Savings Account (ISA). This is because the income and capital growth is free of income tax and capital gains tax. It is, however, a UK tax scheme and is not recognised in Spain. Selling your ISA whilst you are still a UK tax resident can save you paying tax in Spain both on an ongoing basis and when you sell. There are also options where you can replace the ISA investments with very similar ones in Spain in a tax efficient manner once you have sold your ISA.
2. If you can, take your 25% tax free lump sum from your pension before you come to Spain. Again this is a UK based tax rule and it does not exist in Spain. You may be able to take part of a pension without tax in Spain, but there are rules and conditions. In the UK it is a clear rule and we recommend taking advantage of it. Like the ISA it is possible to reinvest the money with similar investments as you had in your pension on arrival in Spain.
3. You can pay into a UK private pension for up to five years on leaving the UK and continue to receive tax relief on the contributions. You will need to start the pension before you leave the UK. The limit is a maximum of £3,600 per annum but you only pay £2,880. The government will pay your pension company the difference to make it up to £3,600. A husband and wife paying into a pension for five years would qualify for a UK Government “top up” of £7,200. At the end of five years they would have a pension pot of £36,000 which will remain free of income tax and capital gains tax in Spain, until you start taking money from the pot.
4. Do you need to top up your National Insurance Contributions to improve your UK state pension? It is easier to do this before you leave the UK.
5. The sale of a main residence in the UK is free of capital gains tax. In Spain, the rules are different and you may have to pay capital gains tax on the change in value between the purchase price and the selling price of your home. As an example, a £200,000 gain (not at all uncommon if you have had your house for 10 years) could mean a tax bill of £44,800.
6. If you and your family are considering inheritance tax planning, consider making or receiving gifts before you leave the UK. These gifts can be potentially exempt from UK inheritance tax. In Spain, they would be subject to gift tax.
Once you are living in Spain
7. Are you eligible for the “Beckham Law”? This is a law that was introduced to encourage skilled workers to Spain. The tax rate is set at just 24% for your employment income for a period of five complete Spanish tax years. This is the part of the scheme that you will see most heavily promoted.
However, the scheme also allows you to receive capital gains and investment income from outside of Spain without paying Spanish tax. Careful structuring of your affairs can lead to a plethora of planning opportunities. Perhaps the biggest opportunity is selling your UK business and paying 0% tax on the sale. For further information please email barry.davys@spectrum-ifa.com
8. If you are approaching retirement or retiring to Spain, it is possible to save tax on the income you receive by planning the source of your income. As a brief example, pension income is generally taxed as employment income and taxed at your highest rate. Drawing funds from an investment can result in tax as little as 2%. From another source there can be 0% tax. To benefit from this planning it is important to have an adviser who understands your situation and requirements at the same time as having a clear understanding of how investments are taxed in Spain.
9. Different investments attract different tax treatments in Spain in the same way as they do in other countries. There are investments in Spain that are taxed more than others. Try to use the lower tax ones where the investment matches your requirements. You can benefit from many years without paying income tax and capital gains tax.
10. In Spain, inheritance tax is based on taxing the person receiving the inheritance rather than taxing the estate of the person who has died. If inheritance tax is a concern, with the right advice you can build a plan which manages the amount of tax due. The bedrock of the plan should be that you are not left short of money in later life. Your plan should then match your personal requirements. Some planning is simple and straightforward, so it is worthwhile looking at inheritance planning before events overtake you.
11. Are you considering returning to the UK? It is also worthwhile thinking about the possibility of an unplanned return to the UK if one partner were to die, for ill health or ill health of a family member in the UK such as a parent. If a return to the UK is a possibility, make sure you have the type of investment which will not tax you in the UK for the time you have spent in Spain.
Am I tax resident in Spain?
By Barry Davys
This article is published on: 24th January 2023
24.01.23
Case Study Spanish Tax Resident Couple
Husband 60, wife 60, married, with 2 children who are financially independent and living in the UK
👉 Pensions: £930k
👉 Investments £60k
👉 Cash Spain €60k
👉 House €1.25 M
👉 Wills – UK & Spain
👉 Cash UK £184k
Challenges
Build Understanding of Pension Situation
- Pensions will break UK Lifetime Allowance Rule even as Spanish Resident
- Difficulty estimating pension as coming from four different pension schemes
- When can I retire
- No overall investment strategy for pensions
- How to minimize tax on pensions
Better returns on Non Pension monies
- Bank accounts earning only 0.15%
Forward Planning including Inheritance tax
- Would Mrs X have enough to maintain property if current pensions provided only 50% pension on husband’s death?
- What would be the Spanish Inheritance tax if one partner died?
- How would this Inheritance tax be paid?
- How is inheritance tax applied in Spain and UK?
- How can the UK and Spanish inheritance tax liability be managed?
What we did
- Completed a full financial review of present financial standing
- Undertook a cash flow forecast to establish if widow’s pension was sufficient, how to pay inheritance tax on first death and how long their money will last
- Provided a Transfer Value Analysis report by our qualified pension expert – a Fellow of the Chartered Insurance Institute
- As a pension was a defined benefit pension, a secondary full report provided by a FCA regulated adviser with full UK pensions permissions in line with UK, FCA rules
- Consolidated pensions to improve tax efficiency, improve widow’s pension and manage in line with their other assets
- Built investment strategy to improve return on their investments and cash
- Clarified how inheritance tax works in Spain and UK and gave an estimate of tax due
- Built an inheritance tax strategy, including sufficient money available to pay tax in Spain on first death
- Minimised Spanish Tax paperwork and liaised with Spanish Tax adviser
- Produced Family inheritance tax strategy document so whole family knew the strategy without disclosing amounts held by the parents
- Wrote to UK HMRC for confirmation that the family home in Spain will qualify for the Main Residence Nil Rate Band
- Identified a UK inheritance Tax saving on a UK life assurance policy
- Carried out regular reviews over 6 years (so far) to update investment and inheritance tax strategies and to adapt to changes to the law
The RESULTS
✅ Clarity for clients and children on Inheritance Tax
✅ Improved return on bank accounts to 3.5% pa giving an improvement of 4,200 pa
✅ Removed pensions from UK Lifetime Allowance rules
✅ By providing documentary evidence from UK HMRC for Main Residence Nil Rate Band confirmed an inheritance tax saving of up to £140,000
✅ Improved widows pension by £7,000 pa
✅ Kept clients compliant with changing tax rules
✅ Answered the financial question “Am I going to be OK?” with a “Yes”
If you are a resident in Spain, or are planning to become a resident and would like any information on tax, pension transfers, investment planning or general financial planning you can contact me on:
barry.davys@spectrum-ifa.com or direct on 0034 645 257 525
Guide to Inheritance Tax in Catalonia
By Barry Davys
This article is published on: 16th December 2022
16.12.22
So, we have now managed to control the amount of wealth tax due (Wealth Tax in Catalunya). However, when we receive an inheritance or leave something to our family, we are taxed again. Inheritance tax or ‘impuestos de successiones’ feels even worse than Wealth Tax. At this point we have now paid savings tax, income tax AND wealth tax. Now there is IHT on top! Like Wealth Tax, though, it is possible to manage your liability.
Inheritance Tax in Catalunya – How it works
Perhaps the most important aspect is that tax is charged to the recipient of a bequest or property physically located in Spain. For UK nationals living in Catalunya, this is a surprise, as in the UK it is on the estate of the person who has passed away.
Tax is due on the value of the bequest but the rate of tax is dependent on your relationship with the person who has passed away. A spouse, child, sister, uncle or non-related all have different methods of calculating the tax due. Once the tax has been calculated, there may be discounts to be applied to reduce the amount. Indeed, it takes at least four different steps when working out the tax due to end up with the final figure. Fortunately, help is at hand in calculating the amount.
It is also very important to understand that the tax return has to be submitted within 6 months of the death and the tax has to be paid by the same day. A common situation we see is where a person is due to inherit a share of a property but the property has not been sold within 6 months. The forms still have to be submitted to the Hacienda and tax paid based on an estimated value. Failure to do so results in a fine and interest.
How to Manage Your IHT
There are numerous strategies, but for British people, careful planning is required. In the UK it is the estate of the person who has passed away that is taxed, but in Catalunya it is the recipient; so we have two different systems with two sets of rules. Care is needed to ensure that planning in one system does not increase the liability in the other. Fortunately our qualifications and experience in the UK and in Catalunya mean we understand this issue.
Another issue specific to British people living in Catalunya is that they do not plan for RECEIVING a bequest. When asked to assist with planning for inheritance tax it is nearly always from a view of “what can I leave to my children?”. Yet before then people often receive bequests from their parents and family which triggers a tax charge. Planning for receiving a bequest can be as important as planning for leaving a bequest.
Certain assets are exempt from Inheritance Tax. Careful choice of where investments are kept can also help. Finally, dovetailing UK and Catalan Inheritance planning can also make a difference.
If you would like to discuss how to manage your Wealth Tax liability, please email me at barry.davys@spectrum-ifa.com, call me on 00 34 645 257 525, or use the contact form below.
How to build income from your investments
By Barry Davys
This article is published on: 5th October 2022
05.10.22
How do you pay for your Mistress?
An old Chinese proverb advises “Only pay for your mistress from your income, never from your capital” It is not known if it was a wise woman or a wise man who came up with the proverb but it was a person who certainly knew about money.
I admit as a young man, before I heard of the proverb, I got this wrong. I bought a second hand Porsche 911 SC. It was fun, fast and purred fantastically. I had the money to buy the car, especially with the part exchange of my old car.
As a young RAF officer what I did not have was the income to service it. Simple repairs such as when the indicator glass broke stretched my income and I really struggled with the cost of the insurance.
The indicator glass, for example, went in a semi circle around the wing. It cost me £68 for a new glass because of that bend in the glass. I still remember the price some 41 years later as back then £68 was much more significant than it is today.
For those of us living here in Catalonia our mistress tends to come in the form of, for example,
- A boat with mooring costs, winter storage etc
- A car for touring on the continent. Often falls into the category of a big name brand of car or a vintage car with associated costs
- The temptation to eat and drink out every night, every other other night etc
- Swimming pool with maintenance
- A bigger house with associated costs including security systems, insurance, watering of the garden etc
In nearly all cases when you hear couples talking about the purchase, you will hear the question “Can we afford it?”. The thought process to answer that question is do we have enough money in the bank to buy it. If the answer is yes, the item is bought. It is much less usual to hear “can we meet the ongoing costs?”.
Interestingly, even when we have accumulated significant wealth this proverb still stays true. With more capital we buy bigger things; house, super yacht, more expensive cars etc. and end up with bigger expenses.
We need to ensure that we have sufficient net income to meet the running costs of the purchase. If we do we can
- Enjoy our purchase without worry
- Not damage our financial position by having to spend capital to pay for running costs
- Still have capital left for our surviving spouse and/or our family
- Not suffer from buyer’s regret
How do we get sufficient income to pay for our mistress? We use our existing wealth to build up an income that pays out regularly. Preferably in a tax efficient manner where possible.
Nowadays investing in the latest tech company or perhaps even a crypto currency is deemed to be the way to make money by some people. It may build your capital. However, neither generates much income and in some cases, no income.
If you would like to discuss how to build income from your investments so you can enjoy your purchases without worrying about the ongoing costs please feel welcome to get in touch, in the first instance, by email at barry.davys@spectrum-ifa.com
I cannot guarantee to help you meet all your running costs but as I am passionate about financial planning I anticipate I can improve your situation.