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Expatriate Financial Planning

The approach to an expatriate’s financial planning will be determined by whether the individual becomes resident in Spain or can qualify as a non-resident for tax purposes.

While, as a whole, the Spanish tax regime for non-residents is less onerous than the regime for residents, with only Spanish sourced income and gains being subject to tax, an expatriate should take care over the number of days spent in Spain during any tax year, although under certain conditions some individuals can elect to be taxed as Non-Residents even if they become Resident in Spain.

If you are an expatriate currently living in Spain, you should review your finances with a suitably qualified financial adviser who is either authorised directly by the Spanish regulator or is based in another EU market and recognised by the Spanish regulator following prior notification by the adviser under the Insurance Mediation Directive. If you are planning a move to Spain, you should review your finances with a suitably qualified and experienced financial adviser and/or tax adviser who is familiar with Spanish tax matters before making the move.

Whilst the specific benefits of offshore life products will depend upon an individual’s circumstances, they do offer a number of potential benefits to expatriates in Spain.

Tax Efficient Investments

  • Investments in a tax compliant offshore life product grow virtually free of tax throughout the time the product is held, suffering only a small amount of irrecoverable withholding tax on investment funds located in certain countries.
  • Whilst the tax treatment of tax compliant offshore bonds and mutual funds is on a level footing in Spain, expatriates who become tax resident may wish to consider offshore investments to manage their tax liability and/or control when tax charges are made. For instance, benefits can potentially be deferred to a period that may be more advantageous from a taxation perspective.
  • A tax compliant offshore bond provides a particularly effective way of housing and switching multiple collective investments in a tax efficient manner without triggering annual tax liabilities.

Investment Choice

  • Offshore bonds generally feature a wide range of offshore funds specifically tailored to fit with expatriate clients’ preferences and attitude to risk. They also offer access to international and specialist fund managers which may not be available in domestic fund and insurance markets.
  • Spanish residents need to ensure that their investment choices conform to Spanish tax rules from the outset of their offshore bond to ensure its tax efficiency (summarised as: a) only internal life company funds (such as with-profits); or b) UCITS compliant funds or internal life company funds (including cash funds) which meet specific regulatory requirements, e.g. diversification and dispersion of investment rules, and which are named in the policy terms and conditions.

Non-Spanish Situs Assets

  • Expatriates who are non-resident in Spain for tax purposes may be advised to use offshore investments, including offshore life products, rather than domestic Spanish investments, to keep their assets outside of Spain to avoid creating Spanish-sourced investment income and to avoid future inheritance tax liabilities.

Estate Planning

  • With Spanish residents liable to inheritance tax on their worldwide assets, tax resident expatriates may also wish to consider estate planning options, such as an offshore bond held in an appropriate trust or foundation. Spain does not recognise trusts therefore care must be exercised over the use of trusts, although trusts may still be effective for UK domiciled individuals looking to mitigate UK inheritance tax. An alternative option which may be effective is to use nominations to non-Spanish resident beneficiaries.

Designed for Expatriates

  • Most companies offering offshore life products are subsidiaries of global financial services companies specialising in dealing with expatriates on a multi-lingual, multi-currency basis.
  • Offshore products can offer significant benefits over and above what might be available in the Spanish domestic market, particularly in relation to product features and investment choice.
  • An offshore product has the flexibility to adapt to changes in your individual circumstances, including changes in your residency status.
  • The offshore life companies comply with Spanish domestic regulations and are regulated in first class ‘home’ jurisdictions which benefit from strong regulatory controls.

Expatriates resident in Spain investing in an offshore bond will generally find it beneficial to obtain a tax compliant policy issued by an EU life insurance company with a Spanish branch or operating under EU Freedom of Services rules rather than a ‘foreign’ policy. A ‘foreign’ policy is a non-tax compliant policy issued by an EU insurer or a policy issued by a life insurance company which is located in a third country. A ‘foreign’ policy will be subject to Spanish income tax on an annual basis.

Expatriates resident in Spain taking out an offshore bond while outside Spain, for example in the UK before becoming an expatriate or on a subsequent visit to the UK), are not restricted to the bonds of EU-based life companies. Such bonds, for example from an Isle of Man or Guernsey life company, can be held while resident in Spain. However, as such bonds are regarded as ‘foreign’ policies, Spanish income tax is payable on an annual basis whilst the policyholder is Spanish tax resident.

The Spectrum IFA Group can help you ensure that you maximise the financial benefits
of your expatriate status and help you to assess if offshore life products are right for your individual circumstances.