Viewing posts categorised under: Spain

How my Spectrum IFA Group Financial Adviser in Spain saved me 82,947euro in tax!!

By Barry Davys
This article is published on: 5th November 2014

05.11.14

Mr Blood had lived in Spain for eight years. However, as a result of a pension mis-selling review in the UK by a large UK bank he received compensation to cover a pension shortfall. The client was extremely satisfied with the amount of the compensation. Advice was requested from his Financial Adviser (IFA), Barry Davys of The Spectrum IFA Group, on how to invest this compensation to ensure that his pension fund returned to its true value.

Whilst this payment of compensation is tax free in the UK, Mr Blood is resident in Spain. In Spain these types of payment are taxable. Fortunately, the IFA knew the differences in the tax regimes. Barry had a tax lawyer calculate the amount of tax due on the compensation payment and Mr Blood was, not surprisingly, horrified to find that the tax to be paid was 82.947,91€.

Despite the client having signed a letter of acceptance with the bank and the compensation having been paid, Barry reviewed the case and found that the letter of acceptance did not sufficiently identify the issue of Spanish tax, having only emphasised the UK tax situation. Barry opened negotiations with the bank. As the regulatory requirements in the UK required the bank to put the client in a “no loss” position, the payment of tax resulted in a loss. To be fair to the UK bank they accepted this principle and agreed to pay a further compensation to cover the loss from having to pay tax.

The payment of a further 82,947€ could have seemed like a satisfactory outcome. However, any payment to cover the client’s loss as a result of the tax payment would be subject to taxation on the additional payment too. Our adviser again instructed a tax lawyer for the calculation of the gross amount required to ensure the client was put back in a no loss situation. Further negotiation by the IFA resulted in a grossed up additional payment to the client of 178,000€. This resulted in Mr Blood being recompensed in full for the loss.

Case Study Key Points

The key points in this case study show that a knowledge of UK and Spanish tax law was required to identify the problem. Secondly, knowledge of regulatory requirements helped ensure a successful negotiation between the bank and the IFA. Using specialist tax lawyers to calculate liabilities strengthened the client’s position. Finally the IFA’s knowledge of UK and Spanish pension law helped to identify what options were available for reimbursement.

On payment of the additional compensation Mr Blood commented;
“I was frankly shocked to learn that the Spanish Hacienda doesn’t recognize compensation for a loss as exactly that; a compensation. My initial dealings with the bank quickly highlighted my lack of experience with financial matters, and I was relieved that Barry agreed to negotiate on my behalf. His in-depth knowledge of the financial services industry and his negotiation style delivered for me the best possible outcome I could have wished for me and my family. I sincerely believe this outcome was only possible with his support.”

Barry Davys was also pleased. “It is extremely gratifying to be able to help someone in this way. The years of studying taxation, pensions, regulations etc. feel worthwhile in situations such as these. It is an extremely interesting time in Spain with many changes in taxation. I look forward to the challenge of continually helping international people with their financial planning to put them in the best possible position”.

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Savings solutions in Spain

By John Hayward
This article is published on: 29th October 2014

29.10.14

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.

Scottish Independence: A major faultline exposed in the UK?

By David Hattersley
This article is published on: 15th September 2014

Whatever the outcome of the referendum on September 18^th, the willingness of people to take risks to free themselves from Centralised Government (ie. in this case, Westminster) has exposed the growing dissatisfaction with large centrally controlled government. This would still apply to the UK, even without Scotland. No doubt there will be intense negotiations over the coming months in relation to the outcome of the referendum.

With the UK elections due soon, this could give rise to the same dissatisfaction in the UK, particularly if it is seen that the Scots get greater freedom. As a result, the UKIP could gain some seats based on their anti-EU stance, or there could be a change in the balance of power in key seats. The potential then arises of a coalition, but how will that be formatted? Will there then be a referendum on an exit from the EU?

So, where does this leave investors? The UK has been seen as a “safe haven“ for investors and this is bound to change, at the very least just in perception. Markets do not like uncertainty and this inevitably leads to greater volatility. Currency, bonds, gilts, property and equities will all be affected.

A globally diversified portfolio, in a wide range of asset classes, will help spread the risk compared to a UK-biased selection. This is where Independent International Financial Advice is vital! Protection of wealth can only be achieved where all asset classes are considered as part of a portfolio.

Buying Property in Spain

By Richard Rose
This article is published on: 6th August 2014

Investors are returning to the Spanish property market in increasing numbers following the bursting of the property bubble and financial crisis of 2008/2009. Property values have fallen by as much as 50 percent and beyond in some areas, creating pain for those who bought at the top of the market, but opportunity for new investors.

It’s not just individual investors who are returning to the market, but also large institutional property investment firms. They typically are purchasing tranches from the “bad bank,” set up by the Spanish government to relieve pressure from its banks, and also directly from banks and other institutions.

Like any investment, we would much rather purchase an asset at the bottom of its cycle than its peak. Easier said than done. I would challenge anyone who purports to be able to pick the top and bottom of any market; however, there are several pertinent points to consider when looking at the present value of the Spanish property market. The market has fallen considerably, Spain’s economic outlook appears to be slowly improving, tourism in many areas actually has picked up over recent years and demand from international individual and institutional investors is increasing.

Buying property in Spain, particularly around the yachting centers of Barcelona and Palma de Mallorca, has historically been popular and is becoming popular again, but the cost of purchasing property varies from region to region. In Catalonia, the transfer tax for the purchase of a secondhand dwelling has increased to 10 percent of the purchase price as regions look to increase their tax revenue. When you include notary fees, registration fees, property valuation costs, etc., the purchase costs can be estimated at 13 percent of the purchase price.

Borrowing in Spain, despite what you may hear, is still possible for yacht crew. Most banks will lend a maximum 60 percent of the property’s value to non residents, and a few will now lend up to 70 percent, dependent on the applicant’s financial circumstances.

Assuming the highest loan to value of 70 percent and purchase costs of approximately 13 percent, investors would need equity of at least 43 percent of the purchase price to complete the acquisition. For Spanish residents, the loan to value figure generally increases to 80 percent, again dependent on a person’s circumstances. If the property is subsequently rented, the income is taxed at marginal rates. Ongoing local taxes also apply, although they are relatively low in most municipalities; capital gains tax and inheritance tax may also be levied.

It’s recommended that professional advice be sought before making any property investment. A mortgage broker should be able to source the best terms and conditions for any financing that you may need.

The REAL effect of inflation

By Chris Webb
This article is published on: 23rd July 2014

23.07.14

On a day-to-day basis, inflation isn’t necessarily something you spend a lot of time thinking about. However, occasionally, you might find yourself asking – what exactly is inflation? And how does it affect me?.

Inflation is simply a sustained increase in the overall price for goods and services which is measured as an annual percentage increase.

As inflation rises, every pound or euro you own purchases a smaller percentage of these goods or services.

The real value of a pound or euro does not stay constant when there is inflation. When inflation goes up, there is a decline in the purchasing power of your money. For example, if the inflation rate is 2% annually, then theoretically a £100 item will cost £102 in a year’s time and £121.90 in 10 years time.

After inflation, your money can’t buy the same goods it could beforehand.

When inflation is at low levels it is easy to overlook the adverse effect it has on your capital and the income it produces. Regardless of how things look today, the likelihood is that the price of all the goods we buy and services we use will be higher in the future.

Inflation does not reduce the monetary value of your capital, a pound is still a pound and a euro is still a euro, but it reduces the “real” value. It erodes the spending power of your money, potentially affecting your standard of living.

The chart below details the effect of inflation over a 15 year period, 1998 to 2013. It is easy to see that leaving money exposed to inflation risk and not attempting to beat it and achieve higher growth is a no win situation.

Many clients will say that investing is a risk (see my alternative article to risk), and of course there is always an element of risk but leaving your money in a low rate bank account, open to inflation risk, is surely the riskiest option…….you can’t win !!!

If you had left your money open to the effects of inflation between 1998 and 2013 then it would have lost 35% of its purchasing power.

As statistics prove we are living longer now which means that we can look forward to a longer retirement period therefore the impact that inflation will have on your finances needs to become a prime consideration.

Risk Tolerance

By Chris Webb
This article is published on: 18th July 2014

18.07.14

Each and every one of us has our own risk tolerance which should not be ignored when considering making any type of investment. Any good financial planner knows this and they should make the effort to help you determine what your risk tolerance is.

Then, based on this information, they should help you to build a portfolio that is aligned to your level of risk.

Determining one’s risk tolerance is based on several different criteria and there are different ways to look at how you should assess the risk you need to take. Firstly, you need to know how much money you have to invest, what your investment and financial goals are and what time horizon is involved. Then you need to consider the actual risk you are prepared to take.

Due to the emotional aspect of investing, there are various ways to look at it.

Let’s say you plan to retire in ten years and you’ve not saved a single penny/cent towards it. You could view this in two ways:

You need a higher risk tolerance because you will need to do some aggressive investing in order to reach your financial goal.
You may consider that as retirement is looming, you do not want to take unnecessary risks. If the markets were to crash it would affect your situation, therefore a more balanced portfolio (lower risk tolerance) would be better suited.

On the other side of the coin, if you are in your early twenties and want to start investing for your retirement now, you could share the same views.

You should have a higher risk tolerance because you are young enough to ride out any market turmoil, maybe restructuring to a more cautious profile nearer the end goal.
You should take a lower risk level and be happy with lower gains (potentially) but the end result will achieve what you require. You can afford to watch your money grow slowly over time.

There are more factors to consider in determining your tolerance.

For instance, if you invested in the stock market and you watched the movement of that stock daily and saw that it was dropping slightly, what would you do?

Would you sell out or would you let your money ride? If you have a low tolerance for risk, you would want to sell out… if you have a high tolerance, you would let your money ride and see what happens.

This is not based on what your financial goals are. This tolerance is based on how you feel about your money!

Again, a good Financial Planner should help you determine the level of risk that you are comfortable with and help you choose your investments accordingly.

Your risk tolerance should be based on what your financial goals are and how you feel about the possibility of losing your money. It’s all tied in together, it’s emotional.

Prior to working with any clients I insist on completing a detailed risk tolerance questionnaire. This will tell me exactly what your attitude to risk is and a suitable portfolio can be devised to suit you individually.

If you are interested in investing or saving for the future then get in touch to discuss the opportunities available and, just as importantly, the risks associated.

If you already have an investment portfolio and feel that it was never rated against your own risk tolerance then let me know. I am happy to discuss further and go through the questionnaire to ensure that what you have already done is suited to your circumstances.

This article is for information only and should not be considered as advice.
This article is written by Chris Webb The Spectrum IFA Group

How are you at managing your Finances ?

By Chris Webb
This article is published on: 17th July 2014

17.07.14

As the old saying “Practice Makes Perfect” seems to suggest, we are bound to improve at everything over time. However, there is something about “money” that just appears to get the better of us. Nowadays, we only need to look at the level of debt defaults to see that this is an area where most of us just don’t seem to be making much progress or improvement.

Here are just a few reasons why people, in general, do not successfully manage their finances:

They have never been able to predict what the market will do next. However, this doesn’t deter them from trying to predict the markets!.
They’re thrilled that the credit card they’re paying 22% interest on offers 1% cash back!
They think dollar-cost averaging is boring without realizing that the purpose of investing isn’t to minimize boredom.
They try to keep up with friends and family without realizing that friends and family are actually in debt.
They think €1 million is a glamorously large amount of money when, actually, it’s what most people will need as a minimum in retirement!.
They associate all of their financial successes with skill and all of their financial failures with bad luck.
Their perception of financial history extends back about five years. This leads them to believe that bonds, for example, are safe and that the average recession is as bad as the recession of 2008.
They don’t realise that the single most important skill in Finance is control over your emotions.
They say they’ll take risks when others are fearful but then they seek the foetal position when the market falls by 2%.
They think they’re too young to start saving for retirement when realistically every day that passes makes compound interest a little less effective.
Even if their investment is over a period of 20 years, they get stressed when the market has a bad day.
They size up the potential of investments based on past returns.
They use a doctor to manage their health, an accountant to manage their taxes, a plumber to fix their plumbing. Then, with no experience in the financial market, they go about their own investments all by themselves.
They don’t realize that the financial “expert” giving advice on TV doesn’t know their personal circumstances, goals or risk tolerance.
They think the stock market is too risky because it’s volatile, without realizing that the biggest risk they face isn’t volatility. The biggest risk is not growing their assets sufficiently over the next several decades.
When planning for retirement, they don’t realize that their life expectancy might be 90 years or more.
They work so hard trying to make money that they don’t have time to think about or plan their finances, especially for those days when work will no longer take up all their time.

You may read this, identify a few points that relate to your own position and now find yourself asking “What can I do about it though?”

Without doubt the answer to that question is to seek professional advice so speak to a qualified and regulated Financial Planner. They will be able to analyse your position from both an investment and an emotional perspective, ensuring that your plan of action is tailored to you as an individual.

You should expect a detailed consultation process and only after this process has been completed can the correct advice be presented, ensuring you avoid the pitfalls detailed above.

The steps to the consultation process are as follows:

A full and thorough financial health check on your current and future situation including the completion of a Financial Review questionnaire.
Identifying areas of strengths and weaknesses in your financial planning and understanding your specific goals.
Designing a strategy to help ensure your financial aspirations are met. Also reviewing any existing portfolio’s to ensure they are working effectively and efficiently.
Once your strategy has been finalised, a full financial report based on your Financial Review will be provided to you along with a concise recommendation.
Ongoing consultations consisting of regular monitoring of your selected strategy and face to face meetings to ensure that your financial goals are achieved.

To explore all of your options and to discuss how this consultation process can benefit you please contact your local Spectrum IFA Group consultant.

An insight into the good things happening with Spanish Tax

By Barry Davys
This article is published on: 16th July 2014

16.07.14

We are pleased to report that there are a number of proposed schemes to reduce the amount of tax paid in Spain. The proposed reductions in tax apply to personal income, corporation and savings (capital gains) taxes. This will reduce the burden of taxes and some schemes, such as the “Beckham” scheme for retired people, if it passes from a proposal into law, will be particularly beneficial.

Yet it is curious that these proposed changes are getting so much press. In some cases, the proposal is simply to reduce tax back to where it was before the crisis. In addition, there are already other schemes which have already passed into law which are very useful for people living in Spain. For example, if you live in Spain but work outside Spain there is an exemption from income tax for the income from that work. The maximum allowance is 60,100€ per annum. Mark Twain’s famous quote “reports of my death was an exaggeration” could also be applied to the “Beckham” scheme. There is still a version of this scheme which can be extremely beneficial for people who wish to sell property outside of Spain.

Then there is the taxation of pensions and investments. In the best case, and I emphasis this is the best case, the taxation on pension income and investment income can be as low as 3.25%. A recent report in the press was highlighting a proposed detrimental change in taxation to dividend income without also mentioning this other rate of investment tax.

During the next 6 months there will be up to 17 changes in tax in Spain. Most of the changes will be beneficial. We work with a number of tax lawyers and specialists and we give clients access to these experts for a reason. Spanish Tax need not be painful, but you do need someone on your side who knows their way around the system.

We recommend a strategy for making the most of the changes by taking the following action:

Have a review of your Spanish Tax situation to ensure you are compliant.
See if there are any back taxes you can claim for the last four years
Use the most appropriate of the new rules when they are passed into law (you can only do this if your affairs are in order).