This is something I am being asked a lot at the moment, as so many of my clients have money on deposit in UK banks.
UK term deposit rates as a resident of Spain
By Jeremy Ferguson
This article is published on: 1st November 2023
Many of them are offering healthy fixed term deposit rates at the moment to clients, but very often my experience is the bank will only allow customers who live in the UK to place cash into these term deposits. This only tends to come to light after speaking with them for ages on the phone to try and move your cash, after which they will very often ‘reject’ your request due to the fact you live here in Spain. Some banks are OK with that, but the majority are not.
There are also a few ‘downsides’ to these term deposits when you are a Spanish tax resident. To explain; if you were to invest in a 1 year term deposit offering 5%, then this will of course be taxed here in Spain at maturity. The complication comes with the fact that you have to file your tax returns in Euros. Imagine if you placed that one year deposit today, maturing in a year’s time in November 2025, and then assume a scenario where the exchange rate recovered from the 1.14 ‘ish’ we are seeing at the moment to 1.18 by the end of next year, (which is entirely feasible). You would have to declare the 5% yield in euros, which would end up at approximately 8.5% in this example. Tax will then be due on this amount, having the effect of significantly reducing your actual ‘profit’.
Of course it could go the other way but this is an issue, as each year the fluctuations can ‘disturb’ the actual amount you receive. This has only really come to light this year, as people have just not experienced yields on cash deposits for such a long time.
There is also of course the risk of placing your funds with the bank you chose, or institutional risk. The compensation scheme in the UK most people are familiar with will cover a deposit loss up to £85,000 per individual account. To utilize this as best you can it can get messy trying to hold money in many different banks. The reality for most people I deal with here is they tend to have a UK bank account from when they lived there. To try and open a new UK account when you live here is nigh on impossible, so spreading your risk by having a number of different accounts isn’t achievable.
However, a solution which deals with most of these issues is available. Without getting into too much detail, you can invest in a cash ‘fund’ run by one of the World’s biggest Investment Companies. Your money ends up being invested with nearly 200 underlying banks within the fund, so the risk of a bank failure is massively reduced.
Using the right structure to access this fund means you don’t have to pay tax on an annual basis as this will only be due when you cash in your investment, and therefore each year there is no need to consider the complications of the exchange rate issue touched upon earlier.
If rates were to rise further the fund will automatically take benefit from that, and so your ‘cash’ is being actively managed with no need for you to be doing anything.
The suitability of this solution of course depends on each person’s individual circumstances, but if you would like some more information, please do not hesitate to get in touch on the form below.