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.
Will Spain be moved by Brussels?
By John Hayward
This article is published on: 28th December 2013
We are at the end of 2013 and after all the festivities some people have the less than happy task of making tax and asset declarations. From the 1st January 2014 to 31st March 2014, residents of Spain will be wondering if they need to complete the Modelo 720 Overseas Assets Declaration. In 2013 there was an immense amount of uncertainty for both those having to declare and also for the accountants who had to work out how to complete the Modelo 720. It seemed that each day a new “Frequently asked question” would appear on the Agencia Tributaria website. The deadline of 30th April 2013 was also part of the revisions having initially been set at 31st March. From 2014, the deadline is 31st March, unless this is revised again.
In the background there have been pressure groups attempting to persuade the European Parliament that this law is discriminatory and that the Kingdom of Spain is acting illegally. Full details of the complaint. The problem is that, as with other complaints made to the European Parliament, Commission, or Court of Human Rights, the speed of response, if any, is pedestrian. Take the Land Grab law. Spain and Valencia have been reprimanded but it seems nothing has actually changed. In my village, a new property development law was introduced in 2004 which would see 30 or so property owners having to pay for a new infrastructure and lose part of their land as well. This is still law although it is unknown when the development will be started. Not soon is the standard guess.
The fact is, as much as some might feel aggrieved about some laws in Spain, they are unlikely to go away. Some believe that Spain might be shooting itself in the foot if it thinks that charging people more is going to encourage people to stay. For example, inheritance tax, which was of little or no significance for residents of the Valencian Community due to a 99% reduction for those who qualified, was increased on 6th August 2013. Other autonomous regions will also be taking steps to balance the books. News of bad weather in the UK, The Netherlands, or Germany may not be sufficient to hold onto foreign residents.
How can The Spectrum IFA Group help you? We do not recommend money is invested in Spanish institutions other than small amounts on deposit for regular short term expenses and needs. Why? Firstly, because we do not have enough confidence in them and, secondly, because we have a wider selection of products at our disposal, especially for Spanish tax residents. Therefore, we can deal with overseas insurance companies and investment houses without your money being in Spain. At the same time, the investments are 100% tax compliant in Spain.
The main areas we look at are UK Pensions and the suitability of transferring these funds to a QROPS (Qualifying Recognised Overseas Pension Scheme). I hold the Chartered Insurance Institute Specialist Pension G60 qualification. Every company discussing pension planning and transfers should have this or its equivalent. In addition we help people to accumulate more from their money, allowing access to income in a tax friendly manner. We use Spanish Compliant Bonds for residents of Spain.
Under the Modelo 720 Overseas Asset Declaration, neither a QROPS, which can hold a Spanish Compliant Bond, or a Spanish Compliant Bonds held outside a QROPS, is declarable. In addition, we can arrange your investments so that there is a reduced, and possibly no, inheritance tax to pay by your dependants or beneficiaries.
For more information, contact your local advisor
Diversification could pay dividends
By John Hayward
This article is published on: 14th December 2013
For most people the aim of diversifying their savings and investments is to reduce risk. This is a creditable approach but the proof of its creditability can generally be seen over the long term.
The danger of focusing on the FTSE100
“The FTSE100 has gone up 50% over the last year. Why haven´t my savings gone up by the same amount?” Focusing on the FTSE100 can be misleading as it represents a small percentage of global economic performance and, for the cautious investor, is not a realistic indicator. If the savings had increased by 50% in a year, undoubtedly they would have gone down by a similar amount in times gone by. When putting together a cautious portfolio for the retired expatriate, who tends to focus on capital protection, firing 100% of the cash at equities would seem risky if not careless.
Investment cycles
The fact is that ALL investments tend to work in cycles. With a diversified range of investments, whether this is based on asset type or geographical area, history has shown us that when one might be going down there is another going up. If everything moved by the same amount, albeit at different times, there is the risk that, over time, nothing would be accomplished as the ups would merely counter the downs.
Timing the markets
There is an expression that it is time in the markets not timing the markets. The perfect situation would be to time exactly when to get into, and then out of, investments. There are not many, if any, that get timing correct.
The benefits of dividends
In volatile equity markets, dividend paying shares and funds can create cashflow. Whilst the underlying capital might be reducing in value due to a major global catastrophe in or mismanagement of finances by those in global authority, many companies could be making significant profits and translating these into dividends. There are funds which have been pay 5% or more a year in dividends. In time, whilst the dividend flow has been merrily producing the necessary income stream, the underlying investments should rise. One thing is clear. After a perceived Armageddon there has often been an opposite and greater Valhalla.
The long term view
The problem is that, as much as people say they understand the long term nature of investments, when there is a downturn in markets there tends to be panic. They sell when markets have fallen and potentially guarantee a loss.
The need to improve on bank deposit returns
The simple truth is that interest rates are low and are likely to stay that way for some time to come. Traditional savings are not paying what they use to. Low interest rates are great for mortgage holders but not for those who rely on interest to pay their bills. Therefore there is the need to find other sources for the desired income.
With a well-diversified portfolio ranging from deposits for today´s expenses through to equities for longer term needs, reviewed on a regular basis, the chances of having an affordable retirement are greatly improved. Wrapped in a Spanish compliant life bond, you can also benefit from very low taxes in Spain.
Whether it is QROPS, financial planning, or life assurance advice in Javea, Denia, Moraira, Valencia, Madrid, Barcelona or Malaga, we can help with your financial planning needs.