Don´t bank on low charges
By John Hayward
This article is published on: 19th January 2016
Wouldn’t it be great if every time you were paid your pension or other income, you were paid a commission for receiving it? Then, each time you pay a bill, you receive a commission for paying it? You could make commission twice on the same money! Of course, this is not possible for us. It is for the banks though.
Let’s take an example based on real charges of a well-known Spanish bank and a couple selling a property in Spain for €300,000 and then re-purchasing a smaller property for €200,000 and investing €100,000 in an income paying bond.
On sale, their purchaser pays them €300,000 through a transfer to their bank. The bank charges 0.2% for receiving the money (€600). They then transfer the money to buy the next property and get charged 0.4% on €200,000 (€800). Finally, they transfer €100,000 to a Spanish compliant company based in another part of Europe for their investment. They are charged a further €400.
In total they will have paid €1,800 in bank charges for transactions other banks may not have charged anything for. The main aim is to choose a bank that does not charge. If high charges are the default, perhaps one should move to another bank. We can recommend a bank with no, or low, transfer charges along with no annual account fees.
One must also be aware that banks will probably earn a healthy chunk on currency exchange, selling the benefit that they do not charge a fee. With GBP falling back against the Euro, it is even more important to obtain a competitive rate. Whether it is for regular income payments, or one off lump sums, we can help you get the best deal.
How much have your savings increased in the last 12 months?
By John Hayward
This article is published on: 26th November 2015
How much have your savings increased in the last 12 months?
Which of the following reflects where your money has been?
Savings account +0.5% to 2% (before tax)*
FTSE100 -3.17% (before charges and after dividends)*
Cautious fund +4.3% to 5.5% (after charges)*
With interest rates predicted to stay low for some time to come, many in Spain are finding it difficult to grow their savings, or increase their income, without having to take risks they would not normally do, risking their capital.
So what are the options?
Deposit account
There are Spanish savings accounts offering around 2% although in reality this could be the rate for the first few months which will then reduce to a much lower rate. There are often restrictions on how much you can invest in these accounts. Inflation is running at a higher rate than most savings accounts and so, in real terms, most people are losing money in what they see as a risk free account.
Stockmarket
Over the long term, through growth and dividends, it is possible to make significant gains. However, first-hand knowledge, or a lot of luck, is required to make the most of stocks and shares. Most people tend to have neither. In addition, most people are not prepared to take the rollercoaster ride that stocks and shares tend to produce.
Structured Notes
These are, generally, complicated and inflexible products which are really only suitable for experienced investors. The gains can be based on a variety of things but often requiring 5 to 6 years before seeing any return.
Property
Over time, property has proven itself to be a winner. However, it has also proven that it can suffer massive reductions. It is also probably the most illiquid asset you can hold as well as potentially, the most costly to hold in terms of upfront costs, taxes and maintenance. There can also be emotional risk.
Under the mattress
This is often mooted as a home for money in times of uncertainty but then there is the risk that it could go up in flames or end up in a burglar’s swag bag.
The solution?
As financial planning advisers, we are in a position to offer the best of all worlds; the potential for growth in a low risk environment. By Investing in a Spanish compliant insurance bond, with a company that is one of the strongest in Europe, holding a variety of assets, including shares, bonds, cash and property (but not the mattress), one can achieve steady growth. There is also the facility to take regular income. Your money can grow tax free within the bond until money is withdrawn. Even withdrawals are taxed favourably. Two potential advantages; higher growth and lower taxes. Perfect!
* Source: Financial Express (12 months to 23/11/15)
Automatic Exchange of Information (AEI)
By John Hayward
This article is published on: 11th November 2015
Did you know that recently, approximately 100 countries have signed up to a new initiative by the OECD’s updated Common Reporting Standard (CRS) whereby a global information-sharing system is to be put in place amongst individual tax authorities. This means that information on taxpayers with offshore assets will be shared between the participating countries.
This transparency is meant to be a deterrent to taxpayers’ using offshore accounts and assets as a means of avoiding domestic tax. The participating countries are committed to applying this procedure in order to tackle tax evasion.
This “automatic exchange of financial account information” (AEI) will commence from 2017 on an annual basis between participating countries and is set to become the most comprehensive and powerful tool to date used by worldwide tax authorities.
The first AEI of 2017 will relate to all account information of 1st January 2016 and reporting will involve individuals who own or control accounts either directly or via financial institutions, be it banks, brokers, investment vehicles, insurance companies or other financial organisations.
The Automatic Exchange of Information (AEI) is facilitated by having financial institutions in each participating country reporting relevant information regarding clients, who are resident in another participating country, to their local tax authorities. Local tax authorities will then automatically exchange this information with their counterparts in other participating countries on an annual basis.
The account information generally includes account number, balance and gross earnings in respect of any payments through the account including any investment income, income earned from assets etc. The information on each person generally includes name, address, country of residence, nationality, national insurance and tax identification numbers, place and date of birth.
So if you live in Spain and have overseas assets and/or investments that you previously thought were non-declarable to the Spanish authorities, then this may be something that you need to address.
Don´t slip up with over “Greece”ing
By John Hayward
This article is published on: 15th July 2015
The original cash machine?
With events in Greece taking prime news position, certainly the east side of the Atlantic, the main question that I am being asked is, “How will the Greek debt problem and referendum affect my investments?”.
It is said that, back in the BC years, Greece invented finance and all the baggage that it carries. It had the first financial crisis, with bad debt. Debt was subsequently written off and the currency devalued. Unfortunately this has not been an option for Greece now as they are part of the Euro.
Greece has defaulted on loans many times before, yet this never brought the rest of the world crashing to the floor. The word contagion is used an awful lot as the assumption by many is that the rest of the PIIGS (Portugal. Ireland, Italy, (Greece) and Spain) will follow suit. If this was to happen and Spanish banks, in our case, had problems, then there would be major concerns for those who had money with them. Bank risk in Spain has been around for a while and keeping a whole lot of money in a Spanish bank makes little sense. Here are some reasons:-
- Little or no interest paid.
- High charges for little or no gain.
- Inheritance tax liability for Spanish residents.
- Even greater inheritance tax liability for non-Spanish residents.
For those who are brave enough, a financial crisis is a brilliant opportunity to make money. Many are not prepared to be so brave with hard earned savings and, for these people, we have a proven solution with a household name. Very few people like volatility. In reality, volatility means that your money can go down in value, sometimes sharply. With the right approach, we can do away with volatility. Take a look at this graph illustrating the difference between the truly managed approach, the average cautious fund, and the FTSE100. See how consistent the managed fund has been compared to the roller-coaster ride of the others.
Greece is the word at the moment but this shouldn’t mean that all our lives should be dependent on what happens there. Living in Spain, being part of the Euro is the one that I want.
Can You Avoid Spanish Inheritance Tax?
By John Hayward
This article is published on: 27th February 2015
Savings with UK banks and investment companies could form part of a Spanish Inheritance Tax (IHT) calculation.
If you have money in a Spanish bank, the Spanish tax authorities know about it. If you have money in a UK bank, they probably know about this too due to information passed over by the UK tax authorities. Of course, if you have over €50,000 in a UK bank account you will have reported this to Spain within your Modelo 720 form.
For a Spanish tax resident inheritor, Spanish IHT is due on worldwide assets. Therefore, a Spanish resident wife, inheriting from her husband, could pay tax based on their Spanish property and other Spanish assets PLUS tax on the overseas assets.
The English Will does NOT stop the Spanish tax authorities claiming Spanish IHT (Succession Tax) on overseas assets. The Will governs the distribution of the estate, not its taxation directly.
We can help mitigate, delay and even sometimes completely avoid Spanish IHT by placing money in a Spanish compliant insurance bond based outside Spain. Suitably arranged, the bond could save many thousands of euros in inheritance tax.
Have you or someone you know had to pay Spanish non-resident inheritance tax since 2010?
By John Hayward
This article is published on: 11th November 2014
Further to the judgment made by the European Union Court of Justice (ECJ) on 3rd September 2014, that Inheritance and Gift tax rules in Spain were discriminatory between residents and non-residents, several key firms of accountants and lawyers have implied that anyone who has been subject to the higher non-resident rates in the last 4 years could make a claim.
There has not been any formal approval by Spain but proposals are to treat those non-Spanish tax residents living in the European Union (EU) or the European Economic Area (EEA) as if they lived in one of the autonomous regions of Spain where tax rates tend to be heavily discounted. The region will be determined by where you have spent most time in the last two and a half years or by where the majority of your Spanish assets are situated if you live outside Spain.
Gifts outside the EU or EEA to a Spanish resident could be subject to the rules of the autonomous region where the recipient has his/her residency.
Although the changes have not yet been formally approved, lawyers are submitting tax returns on the basis that the qualifying non-resident will receive the tax advantages of the relevant autonomous region.
This will mean that, for example, children living outside Spain, inheriting from parents in Spain, will no longer have the much higher (generally) “National” Spanish taxes to pay. Parents will be able to gift property to their children without necessarily needing to make expensive tax avoidable arrangements.
However, not all autonomous regions are so generous with their discounts. Whereas Valencia offers very large discounts to all direct family members, Murcia, next door, only offers significant discounts to those under 21. Also, there are limits on discounts in most, if not all, regions and so they may not cover all of the assets. Therefore it is extremely important to have assets positioned in the most tax efficient manner. This needs to be legal as well.
How can we help?
1/ If you or someone you know has paid inheritance tax on money from an EU or EEA resident who has died in the last 4 years, you may be able to make a reclaim. We have lawyers who can help with this on a no win, no fee, basis. (We are not tax advisers)
2/ We are experienced in helping you arrange your finances in a Spanish tax compliant manner, helping you and your loved ones to reduce the impact of Spanish taxation.
Savings solutions in Spain
By John Hayward
This article is published on: 29th October 2014
Stockmarket falls and low interest rates
Have you seen your investments fall by over 4% in the last month? This could be the case if you have been invested in the stockmarket. Most people know that investments can go down as well as up. Over time, stocks and shares can make significant gains. However, it still hurts when one sees a loss of this amount in such a short period. Some people prefer to keep their money in cash but then we have another risk. Interest rates are low and, even with the suggested increases in 2015, they could remain low relative to inflation. What many people want, and probably need, is a steady increase in the value of their savings with as little risk as possible. So what is the solution?
The low risk solution
We at The Spectrum IFA Group have access to an insurance bond offered by arguably the largest insurance company in the UK and one of the largest in Europe. Their investment model has allowed consistent returns of over 4.5% a year (after deducting charges) whilst exposing the investor to a fraction of the risk of a stockmarket such as the FTSE100. Whilst the FTSE100 has fallen by more than 4% over the last month, this low risk approach has produced a gain of almost 1%.
Tax friendly in Spain and the UK
No tax is payable on the pure growth of the insurance bond. Even if withdrawals are made, the tax treatment is vastly more favourable when compared to bank accounts or other non-compliant arrangements (see an example of how tax is calculated here). If you are currently Spanish resident, but you subsequently move back to the UK, the bond can follow you and benefit from the advantageous tax treatment awarded to these policies in the UK.
Outside Spanish inheritance tax (IHT)
With Wills correctly drafted and you are deemed domicile the UK, this insurance bond is outside Spanish IHT because it is not based In Spain. With IHT in Spain extremely punitive for non-residents (law possibly to change in 2015), this is a huge benefit to the non-resident beneficiary. It can be written in joint names so as to avoid Spanish IHT on the resident owner.
No Modelo 720 declaration
As this bond is Spanish compliant, there is no obligation to declare it as an overseas asset on the Form 720. This is because the insurance company declares it to Spain each year.
To find out more about how we can help you arrange your savings in a more beneficial way, contact your local adviser or fill in the contact form below.
How much is Inheritance Tax in Spain?
By John Hayward
This article is published on: 23rd October 2014
There are two sets of rules that could apply; one by the autonomous region and one by the State. For these purposes I will focus on my region, the Valencian Community, which covers the provinces of Castellón, Valencia, and Alicante.
There are several factors which determine how you or your estate is treated. These include;
- Your relationship to the deceased or the beneficiaries.
- Country and/or region the different parties are resident.
- How much pre-existing wealth the beneficiary has.
Unlike the UK, where the total estate of the deceased is taxed after allowances, in Spain it is the individual inheritor who is taxed.
State rules
- Basic allowance of €15,956.87 for those who qualify.
- 95% reduction on the value of the main residence (max. €122,606.47). The property cannot be sold for 10 years from the date of death to retain this reduction. If sold within 10 years, the tax will be recalculated. This reduction only applies to married couples and close family.
Valencian Community rules
If you are resident in the Valencian community you, or your beneficiaries, can benefit from much higher allowances and less restrictions.
- 95% reduction on the value of the main residence (max. €150,000). This cannot be sold for 5 years from the date of death to retain this reduction. If sold within 5 years, the tax will be recalculated. Again, this reduction only applies to married couples and close family.
- €100,000 allowance for each qualifying individual. The allowance is more for younger children.
- 75% reduction on the final tax bill.
Example (Husband (deceased) and wife resident in Valencia)
Main residence value €350,000
Wife inherits husband´s half €175,000
less 95% reduction (up to €150,000) €142,500
Net value € 32,500
less Tax allowance €100,000
Result? NO TAX TO PAY*
If the property was sold within 5 years, or the wife did not want the restriction of having to keep hold of the property for 5 years, the tax bill would work out to about £8,500. However, this would then be reduced by 75% (as she is resident) giving a net tax bill of just over €2,000.
For a non-resident, the tax bill would be around €23,000.
This is a simplified example but it illustrates the enormous difference in tax treatment for residents and non-residents. For a resident couple, there is not likely to be a huge potential tax bill. The problem comes after this when the non-resident children and grandchildren inherit. Spain is under pressure to equalise the rates charged for residents and non-residents and there could be changes in 2015.
If you would like to know how much inheritance tax you or your loved ones could be obliged to pay, and look at ways at reducing or even negating the tax, contact your local adviser.
Please note that these rules are subject to alteration. We are not employed as tax advisers.
*There could be capital gains tax to pay.
Source: Generalitat Valenciana
Spanish Tax Reforms
By John Hayward
This article is published on: 29th September 2014
The latest news we have, is that there are likely to be significant cuts in income tax in the election year of 2015. The average reduction in Spanish income tax will be 12.5%, and 72% of those earning up to €24,000 will be as much as 23.5% better off, according to the Hacienda. In addition, the bands of tax are being reduced to 5 from 7.
Taxes on savings are also being reduced over the next 2 years, to the levels we saw in 2011. In addition, there are other tax benefits for families and small and medium-sized companies
Full details can be found by visiting this link to the Hacienda´s website http://bit.ly/1yDs915.
These are proposals at this stage and are subject to possible changes before the end of the year. However, it is clear that there will be changes.
As a guide, here are the existing rates and the proposed new rates.
In the meantime, if you would like ideas of how to reduce Spanish Income and Savings Tax, look at ways of increasing your income in a low-risk environment, or you would simply like to review your overall financial position, contact me below.
Investments can have too much structure
By John Hayward
This article is published on: 24th February 2014
What are structured products?
Structured products are usually set up as an investment of a lump sum in exchange for a return based on the performance of an underlying index such as the FTSE100. They are arranged as fixed term contracts of, normally, 5 to 6 years although some can pay out earlier under certain circumstances. They can be bought from a variety of sources and are particularly popular with banks.
Structured products could be suitable for someone who is willing to buy and hold, understanding that if markets fall sufficiently, then the return could be less than what was paid in. Some structured products offer capital guarantees. This ´promise´ of the return of your initial investment can be somewhat veiled in that the guarantee could be based on the particular underlying index not falling below, say, 50% of its starting level. For example, the initial investment is made and the FTSE100 and that point stands at 6000. 5 years later, the end of the contract, the FTSE100 is at 5700. In this case, the client would receive the full initial investment even though the index level has fallen. Some suggest that the FTSE100 falling by 50% is not likely thus selling the product as risk free. The FTSE100 certainly has fallen by more than 50% in the past (eg. 1999 to 2003).
The people offering any guarantee could be a third party. This is where we have another level of risk, known as counter-party risk. If the third party fails then the guarantee could be worthless.
Another risk is people wanting to access their money before the fixed term is up. The problem is that these products often have no secondary market which could mean you may not be able sell it without suffering a significant loss.
As with all types of investments, there are varieties on a theme, some suitable, some not, depending on one´s risk profile. Complete understanding is essential from the outset.
For more information on how we can protect your savings whilst offering low risk, liquid investments, contact one of our advisers.