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.
ARE YOU PAYING TOO MUCH TAX ON YOUR SAVINGS?
By John Hayward
This article is published on: 12th October 2013
Offshore Spanish-tax-compliant investments
All financial planning advice provided by us is done so using and within insurance contracts that are highly tax efficient in Spain.
For residents of Spain, there is an opportunity to save thousands in tax by structuring investments in the right way. These investments need not, and through us will not, be based in Spain. However, they are recognised by the Spanish as being legitimate for Spanish tax purposes.
Under normal circumstances, if you have a bank deposit, tax will be deducted at source. This is irrespective of whether it is an onshore account, where the local savings tax will be applied, or if it is offshore, and undeclared, where the EU Savings Directive tax kicks in. However, whereas you might be paying 20% tax on the onshore account, you could be having 35% tax deducted from an undeclared offshore account.
Within a Spanish tax compliant investment, you only get taxed when you make a withdrawal. This means that you can defer paying tax for as long as you live. In addition, the rate of tax applied is capital gains tax, currently at a base of 21%.
Also, the amount of the withdrawal which is taxable is very small, especially in the early years, as it is deemed that the majority of the money you are withdrawing is your original capital.
Unlike capital gains tax in the UK, no further tax will be payable if you are a higher rate tax payer. The tax payable is based on the gain, not on your overall income.
These calculations are based on our understanding of Spanish tax law which is subject to alteration.
For more information contact your local adviser or use the contact form below.
Spanish Inheritance Tax and Habitual Residence
By John Hayward
This article is published on: 3rd October 2013
The Valencian Community, amongst other autonomous regions in Spain, allows huge reductions on inheritance tax. Conversely, Spanish Inheritance Tax (aka Succession Tax – ISD) can be a nightmare if you don´t qualify for these reductions. To qualify, the deceased AND the beneficiary need to be habitually resident in the Valencian Community. Habitually resident is defined as spending the majority of the 5 years prior to death in the Valencian Community.
In the UK, inheritance tax is chargeable on the deceased’s estate when it is worth more than £325,000 (£650,000 if unused allowances are included). In Spain, it is the beneficiary who is taxed. The rate of tax will be determined by the relationship, where the parties are resident, and what existing wealth the beneficiary has.
The ISD is a little more complicated. Up until 7th August 2013, residents of the Valencian Community benefited from a 99% reduction on the tax bill. Therefore, very little was due. Now spouses, descendants and ascendants will have their personal allowances, on receipt of benefits, increased from €40,000 to €100,000. However, the reduction is being lowered to 75%.
Example. Property owned in joint names and deemed to be owned 50/50. Spouse dies leaving their 50% to the surviving spouse. There is no inter-spouse exemption in Spain. Property valued at €400,000. €200,000 (50%) inherited. Under the old system, the tax bill would have been based on €200,000 less €40,000 allowance. This would result in a tax bill of €23,141 which would then be reduced by 99%, leaving a tax bill of €231. Now you need to deduct the allowance of €100,000 which leaves a tax bill of €12,415. Reduce this by 75% and the debt will be €3,103. Under ISD rules, this needs to be paid within 6 months of the death.
As mentioned, these allowances and reductions are only applicable to habitual tax residents and those who are in Group 1 or 2. Those who do not qualify, such as some unmarried couples, or those who are non-resident, would expect an allowance of around €16,000 (€15,956.87 to be precise) with no further reductions. There are a number of other factors but these are the basics.
Tax is payable on gifts as well as inheritances and the rules are very similar to inheritance tax albeit with some restrictions on how much can be gifted to benefit from the reductions.
To see how much tax you could potentially pay, or leave for someone, please go to the Spanish Inheritance Tax Rates.
If you would like to see the Valencia Government’s publication on this, please visit their website.
Property and inheritance tax increases in the Valencian Community
By John Hayward
This article is published on: 11th August 2013
As of 7th August 2013, the Valencian government has increased Stamp Duty (ITP – Impuesto de transmisiones patrimoniales) and Inheritance Tax (ISD – Impuesto sobre sucesiones y donaciones). The ITP is more obvious an increase as it will increase from 8% to 10%.
The ISD is a little more complicated. Up until this point, residents of the Valencian Community benefited from a 99% reduction on whatever the tax bill was. Therefore, very little was due. Now spouses, descendants and ascendants will have their personal allowances on receipt of benefits increased from €40,000 to €100,000. However, the reduction is being lowered to 75%.
Example. Property owned in joint names and deemed to be owned 50/50. Spouse dies leaving 50% to the surviving spouse. There is no inter-spouse exemption in Spain. Property valued at €400,000. €200,000 (50%) inherited. Deduct allowance of €100,000 which, based on current rates, leaves a tax bill of €12,415. Reduce this by 75% and the tax due will be €3,103*. This needs to be paid within 6 months of the death. Under the old system, the tax bill would have been based on €200,000 less €40,000 allowance. This would result in a tax bill of €23,141 which, although higher than the figure above, would then be reduced by 99%, leaving a tax bill of €231*. (* Subject to personal circumstances and specific assets)
As one can see, many tax residents on the Costa Blanca can look forward to sizeable tax increases. A concern is that bank accounts can be frozen on death which could mean the money to pay this tax might not be available within the 6 months stipulated. Simply becoming non-resident, which has been seen as a solution to the recent asset declaration ‘problem’, wouldn’t work here as the inheritance tax due for non-residents is even worse.
A solution could be to have money in a low risk insurance bond, recognised by Spain for tax purposes but not based in Spain and, importantly, not frozen on the death of a policyholder. Apart from being far more tax efficient than a bank account, it could provide the money at a time when there is plenty of other expense, as well as at a time when there is the human aspect of grief.
(Detailed Valencian and Castilian versions of the law can be found on the Valencian government’s website. Click here to view them.)