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.)