Property Guides and Information for the Costa del Sol, Spain

A Double Tax Saving Opportunity

Blevins Franks
Ever since taxes were first imposed, people have been finding ways of avoiding them. In today’s world, though, tax planning has become highly complex, with the Spanish and international tax agencies declaring war on tax evasion and teaming up to track down evaders. In July 2005 we also entered into a new era in how expatriates structure their financial affairs with the start of the EU wide Savings Tax Directive.

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One of the first things many Britons do on moving overseas is to open an offshore bank account. These accounts have many practical uses, particularly if you will be spending time in more than one country, and banks in the Isle of Man and the Channel Islands offer services specifically geared to expatriates.

Another reason many people choose to deposit their capital offshore is because they believe it’s an effective means of tax avoidance. However, according to the law in both Spain and the UK you must declare your worldwide income, so you are as obliged to declare your offshore interest earnings as those from onshore banks. Failure to do so is tax evasion - a crime under money laundering laws.

The EU savings Tax Directive, which started on 1 July 2005, ensures that these offshore savings will be taxed regardless of whether they are declared or not, and will help the tax authorities find out who has been illegally under declaring their income.

The key points of the Directive are:

1. Most EU States automatically exchange information on your personal tax situation, including identity, residence and interest earnings. Your tax authority will compare this information with your tax return. If the figures do not match up, they are likely to investigate. 2. Some jurisdictions, including Jersey, Guernsey, Isle of Man, Switzerlandand, Luxembourg are, instead of automatic information exchange, applying a withholding tax, starting at 15% and rising to 35% in 2011. 3. The definition of “savings income” is broad and includes interest earnings from bank accounts and some income producing investment funds. 4. UK investments like PEPs, ISAs and premium bonds are not tax free in Spain, and fall under the scope of the Directive. 5. Some income payments are excluded from the Directive. These include pensions, dividends from shares, income withdrawals from life assurance policies and payments to companies or trusts.

The fact that assurance policies are not subject to the Directive is particularly good news, especially as they benefit from very advantageous tax treatment in Spain.

Insurance bonds therefore provide a possible solution to a wide range of tax planning concerns. They have a variety of names, including a Personal Portfolio Bonds (PPB), Offshore Bonds, and they are also sometimes referred to as tax “wrappers”. It is basically a specialised form of life assurance arrangement, specifically designed to enable investors to hold their own choice of assets.

The PPB offers many unique tax benefits, but when held within a suitable Trust the advantages are exceptional.

In summary, the benefits of a PPB in Spain are:

Income and capital gains: These are not taxed when retained with the Bond. If you do not need to take withdrawals you do not pay tax, allowing the gain to accumulate entirely tax free within the Bond. Withdrawals: In the event of a withdrawal, only the gain element is taxed and not the whole value of the withdrawal. For example, if your bond has increased by 10% and you withdraw €10,000, only €1,000 is liable to tax and €9,000 is tax-free. Of the amount taxable, there is a further reduction depending on the length of time you own the Bond. It is reduced by 40% if held between two and five years and by 75% if over five years. (Only one withdrawal per year qualifies for this remarkable tax benefit) Wealth tax: Holding your assets inside a Bond usually leads to a significant reduction in wealth tax too. This helps high net worth individuals lower their tax bills considerably. It is also possible to set up your Bond so that is has no value at all for wealth tax purposes and will therefore be excluded from your wealth tax return. Succession tax: On death, if the contract is not a Spanish one and it is left to an individual who is not resident in Spain (or is held in trust for such beneficiaries), succession tax is not payable either.

Assigning your Bond to a Trust arrangement can create some very unique tax and other advantages. However this is a very specialised field and it is therefore essential that you seek professional guidance over what is appropriate to your personal circumstances.

Some of the advantages of a Trust include:

Succession tax: The assets in the Trust are not liable to succession tax in Spain Inheritance tax: If the settlor dies in Spainas a non-UK domicile there is no liability to UK inheritance tax. Probate: No probate is required and your heirs can obtain benefit from the Trust quickly and easily. Family situations: With a Trust the Trustees act to look after your beneficiaries without the assets being dissipated. For example, the Trustees can ensure that your children do not lose any of the Trust assets if they get divorced. The Trustees will look after the money if they think any of your dependants could be a spendthrift or simply incapable of managing the money, for whatever reason. The Trustees will be guided by you Asset protection: Assets in Trust are normally protected from personal creditors.

If you are looking for a “home” for your investments which is both tax efficient and capable of producing above average returns, a Personal Portfolio Bond, with your choice of underlying investments and which is held in Trust, is highly likely to be a possible solution to both your tax and investment requirements.

When it comes to tax planning, the earlier you start thinking about it the better. You can evaluate your options, quantify your tax liabilities, plan your investment strategy, decide on ownership structures and take steps to avoid tax on leaving the UK (if you have not already done so) at the same time as minimising them in Spain.

Expert professional advice is essential and you should take advice from an independent financial adviser or tax expert who is knowledgeable of both the UK and Spanish tax rules. The PPB can be a beneficial structure for both Spanish and UKresidents, as long as you set up your financial affairs correctly and, ideally, from the outset.

The above are summaries of complex issues and usually specific advice should be sought.

Blevins Franks is one of the largest firms of wealth management specialists in Europe and have been advising expatriates on all aspects of successful financial planning – including wealth management, tax planning, estate planning, European mortgages and pensions analysis - for over 30 years. Our 11 Spanish offices, located in the main expatriate areas, are backed up by Blevins Frank's unique UK based Tax Advisory Service, ensuring continuity of advice both before and after your move.

February 23, 2006 | Permalink

Retiring to Spain? Get your Financial Planning Right

Blevins Franks
Are you planning to buy a house in Spain or have recently retired here, you’ll be looking forward to starting your new life and to putting those savings you’ve worked so hard for to good use.

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Without a crystal ball we cannot know exactly how many years we’ll have to enjoy our retirement, but if you retire at the normal age statistics show that people can expect to live 20 years in retirement. In order to enjoy every single one of these years, you’ll need a plan to ensure you don’t outlive your accumulated income. Without a salary coming in, your pension and savings will need to enable you to live comfortably for the rest of your life.

Most people still need an estimated financial budget during retirement. Estimate your monthly expenses based on the lifestyle you plan to live. The rule of thumb for people wishing to continue living their pre-retirement lifestyle is to estimate at 80% of their current expenses. This is based on the fact that you’ll no longer have work related expenses such as commuting, lunches, dry cleaning, work clothes etc.

However, many people actually spend more money in retirement than they do whilst working, for example, if they travel, play golf etc. Moving to Spain also means different expenses, so it is necessary to study Spanish cost of living and work out a new budget. Allow for extra “hidden costs” associated with settling in and don’t forget to include medical insurance and a reserve for emergencies. Also, although on average a 65-year old retiree will live another 20 years, others live 30 years longer so take this possibility into account as well.

If you calculate that your money may not support the lifestyle you have chosen, you will need to make adjustments.

Whilst planning for retirement your strategy is likely to have been focused on long-term wealth accumulation. Once you retire some goals will change. You’ll be withdrawing money from your retirement account, rather than just accumulating, so you may need to move some of your wealth into investments designed for short-term needs.

Having said this, many retirees make the mistake of abandoning their long-term strategy completely. Bearing in mind that you need to plan for 20+ years ahead, a long-term approach is still very relevant. To get the balance right, ask your financial adviser to examine your needs and current investment strategy and determine the best way forward for you.

Ask yourself the question “If I could have all the money I have previously invested and now hold in a variety of arrangements… would I still invest in the same things?” If the answer is “no”, and it’s likely to be, seek advice on making the necessary changes to your new investment, pension and tax environment.

Savings & Investments

Retires often become risk averse. Without a steady employment income they worry that their nest egg could diminish unexpectedly. As a result they only seek very low risk investments, such as leaving it as cash in a savings deposit account. Although this attitude is understandable, it’s not always wise. Your goal during your retirement is to maintain your financial independence for your entire life time. This means inflation is your enemy and your investment strategy should be designed to at least outpace inflation, if not continue to build your nest egg. Inflation can easily erode the spending power of your capital, even if you are earning interest. Another issue for expatriates to consider is the rate of exchange.

If you keep your savings in a Sterling account and convert to Euros when you need them, the value of your capital will be affected by exchange rate movements. This could work in your favour, but it’s also likely to work against you and you won’t want to rely on luck. Finally, interest and tax rates can change. Interest rates can fall dramatically so you should not rely on receiving a certain interest rate to earn enough money for retirement. Likewise, the tax rate you pay on the interest you earn could also increase, eroding your income. We recommend holding a variety of investments in your portfolio.

You should always keep a certain amount of cash, but you could also hold a well-diversified equity portfolio and/or a bond fund. Bond funds also provide a regular income, which many retirees find useful. Another investment possibility is a guaranteed bond. As long as it has a 100% capital guarantee you won’t lose any of your money and stand to earn more than you would on deposit. However you would need to tie your money up for 5 years.

Everyone has different needs and circumstances, so ask your financial adviser for advice on the right investment mix for you. Pensions Nowadays there are quite a few choices on how to receive your pension. Depending on the type of pension and whether you have started drawing income, there may be ways to improve your pension fund and earn more from it. A pensions expert will be able to point you in the right direction.

Finally, you paid income tax when you earned your money in the first place, so paying tax again on interest and dividends can be very frustrating. One way to increase your income in retirement is through careful tax planning. Don’t even think about tax evasion – it’s illegal - but there are legitimate vehicles you can use to defer, reduce or avoid tax completely. The less tax you pay, the more you have to spend in retirement. Retirement should be the time when you take it easy and reward yourself for all those years of hard work. You shouldn’t have to worry about money all the way through. The earlier you get your financial planning in order, the better. Then you can sit back and enjoy yourself!

The above are summaries of complex issues and usually specific advice should be sought. Blevins Franks is one of the largest firms of wealth management specialists in Europe and have been advising expatriates on all aspects of successful financial planning – including wealth management, tax planning, estate planning, European mortgages and pensions analysis - for over 30 years. Our 11 Spanish offices, located in the main expatriate areas, are backed up by Blevins Frank's unique UK based Tax Advisory Service, ensuring continuity of advice both before and after your move.

www.blevinsfranks.com

international@blevinsfranks.com

February 23, 2006 | Permalink