Use a beneficial savings structure
Investing money is often seen as a risky thing to do even though it is generally understood to be necessary. For example, those receiving pension income would not be in the same position if the companies paying the income had left all of the pension contributions in a current account or in a box under the bed.
Reducing Spanish tax
By John Hayward
This article is published on: 27th June 2023
Financial markets can be volatile (always, I hear you shout). We fully appreciate this. We also acknowledge that inflation has created higher interest rates. Better news if you are a saver but not so pleasant for mortgage payers, or parents having to help their children pay off increased debt.
Let us imagine that, for the foreseeable future, we have high inflation accompanied by higher interest rates. Using an amount of £500,000, I have compared depositing in a savings account with investing in a Spanish compliant investment bond and I have used an interest/growth rate of 4%. I have based my comparison on the bond paying growth to the bondholder’s bank account and using GBP as I cannot see any Euro accounts paying 4%.
– £500,000 at 4% = £20,000
– Using an exchange rate of 1.16 £/€,
– £20,000 = €23,200
The deposit account interest is taxed in full and, at current 2023 rates, is €4,752 each year. This has to be declared in the annual tax return.
The Spanish compliant bond attracts tax on the gain within the withdrawal. I have based the calculation on the same amount being withdrawn i.e., €23,200. In the first year, the taxable gain within this is only €892 and the corresponding tax is €170. The taxable amount within the bond income increases over time but, over 10 years, the tax is:
– €47,520* on the deposit account interest
– €8,381* on the bond income
This gives a tax saving of over €39,000 over 10 years by using the Spanish compliant bond.
If no money is withdrawn from the bond, no tax is payable whereas the interest on the deposit account will continue to be taxed.
If the bondholder moved back to the UK, and nothing had been withdrawn whilst living in Spain, any growth on the bond whilst resident in Spain would be ignored by the UK tax office.
As an added benefit of reducing taxable income, wealth tax can be reduced. See this Wealth Tax in Spain article.
There can also be inheritance tax benefits with the bond when compared to the deposit account.
Well managed portfolios have consistently outstripped inflation. Conversely, deposit interest rates offered to savers have consistently under-performed inflation over the years.
To find out how we can help you with your existing investments and tax planning, and provide you with ideas for the future, contact me today at john.hayward@spectrum-ifa.com or on +34 618 204 731 (WhatsApp)
* E&OE. The above is a simplified example for illustrative purposes and general guidance only.