Hacienda, or the Spanish taxman to you and me, has granted significant tax advantages for savings & investment plans held by Spanish Tax Residents, under certain conditions.
The advantages are considerable and further compounded as the Hacienda treats non-compliant investments negatively with extra reporting and punitive taxation every year.
Are your existing investments safe from punitive tax?
What needs to be declared on modelo 720
Spanish Tax Residents (are you certain you are not considered tax resident in Spain? (see below)) must declare overseas assets worth more than €50000, including:
- Property (home in the UK perhaps).
- ISA’s, PEP’s, Investment Bonds both Onshore and Offshore, etc.
- Bank accounts both onshore and offshore.
- National Savings and Premium Bonds.
- Protection policies.
Are you a Spanish Tax Resident?
Seems complicated, but establishing tax residency in Spain is very simple. You are a Spanish Tax Resident if:
- You’ve live in Spain for more than half a year in total
- You have your ‘centre of vital interests’ in Spain (home, kids school, dog, work etc.)
These rules have been tightened up to include those who deliberately spend less than 183 days a year in Spain to avoid being tax-resident. We know of cases where car hire, flight details & credit card bills have all been used to prove time spent in Spain.
What can be done to avoid this?
Using Spanish Compliant Bonds offer a direct tax advantage. Specifically designed plans for expats in Spain offer income tax and succession tax advantages. The Hacienda recognises them as tax-efficient. Probably the best way to illustrate this is by a direct comparison between non-compliant investments and Spanish compliant investments.
Mr Expat invested €100,000 in a non-compliant offshore investment bond in April 2016, and a year later the bond had grown by 10% to €110,000. Good news so far, until the taxation is considered as follows:
- No withdrawals have been taken at all.
- The Gain is €10,000, taxable as savings income (renta del ahorro).
- The first €6,000 is taxed at 19%, the remaining €4,000 at 21%. The calculation needs to be made by Mr Expat (or he could pay a Gestor or Accountant to do it) and the tax paid on the annual tax return.
- The total savings tax bill would be €1,140 + €840 = €1,980 (19.8% tax).
Had Mr Expat invested in a Spanish Tax Compliant Bond instead, no savings tax would be payable as no withdrawal was taken and he would not even need to declare the plan to the Hacienda.
Spanish compliant bond taxation
Firstly, if no withdrawal is made, there is no tax to pay – a huge saving in tax.
Now assume the €10,000 gain is withdrawn. The important consideration here is that partial withdrawals are apportioned partly between “redemption of capital” (from the original investment) and partly from the gain.
Most clients I meet wrongly assume the tax would be the same as their current non-compliant investment of €1,980 (19.8% of the gain). But this is not the case at all. The tax due would be reduced significantly as calculated in the three stages below:
- €110,000 minus €100,000 = gain €10,000, straightforward so far.
- New value €110,000 / gain €10,000 = 9.09% Therefore €10,000 x 9.09% = €909 (slightly confusing but bear with me).
- The €909 is the taxable gain as the Hacienda sees it. Therefore €909 taxed at 19% = €172.71 (1.72% of the gain).
Mr Expat would be taxed €1,980 in a non-compliant investment even if no withdrawals had been made, whereas in a Spanish tax compliant bond he would only have a tax bill of €172.71 even when taking the full €10,000 and zero if no withdrawal was made. A tax saving of €1,807.29 in the first year.
This is a spectacular difference in a country’s treatment of investments where tax is concerned.
If these dramatic tax savings have not made your ears prick up, then consider these additional advantages of Spanish compliant investments:
- No need to declare on Modelo 720.
- They are “tax-compliant” as seen by the Hacienda.
- Tax is calculated by the bond provider and paid direct to the Hacienda on your behalf with no need for you to do any calculations or to pay someone else to do it.
- No need for probate on death.
- Multiple currencies available €, £, $ etc.
- They are Inheritance Tax efficient.
- Large range of available investments whether you like investment risk or not, including some capital protected funds for low-risk investors.
Your current investments may be causing you problems with non-declaration or draconian tax bills. The time to review your investments in line with your Spanish tax Residency is now.