As an expat in Spain, should I convert my British bonds to the Spanish version?
The following is a guest post by: David Evans, DipFA
International Financial Adviser
David represents Blacktower Financial Management (International) Limited UK Bonds Vs Spanish Bonds
I have met many clients whilst undertaking financial reviews that hold UK Bonds with Insurance companies. Such as AVIVA, Friends Life, Prudential, and Royal London.
These bonds can have some very attractive tax advantages for UK Tax Residents. Allowing for the deferment of paying higher or additional rate tax if you keep to the rules of only taking a 5% annual withdrawal. These bonds also allow you to roll up the 5%. So as an example if you don’t take it in one year you can take 10% in the following year and so on.
Many UK clients that have now moved to Spain continue to hold these investments. Often under the illusion that they remain tax efficient in Spain and many not realizing that the bond actually pays UK tax at source at a rate of 20%. This tax can not be reclaimed as a non-UK Tax Payer as it’s the bond provider that pays it on behalf of the client at the source.
Also, any growth on the Bond may also be taxable as a Capital Gain here in Spain and taxed at the marginal rate.
What options do we have if we hold one of these Bonds
There are Spanish compliant equivalents of these bonds. They are run by well-known insurance companies but are tax-efficient here in Spain. In fact, as a Spanish Tax Resident, it would be hard to find a product offering more tax advantages than these bonds are able to provide.
Firstly, from a potential Spanish Inheritance Tax (ISD) prospective. They are written as a life insurance product meaning that if they are written as joint lives and paying out on second death the proceeds are not added to the estate on the first death. And if your eventual beneficiaries are non-Spanish Resident they are paid out with any deduction to Spanish Inheritance Tax.
Secondly, the funds grow tax free. The funds are not taxed at the source and neither is the bond for either income tax or capital gains tax. Therefore when comparing against the UK version of the same product you are already 20% better off.
Thirdly, withdrawals are taxed at a lower rate than the standard savings tax margins. This will significantly decrease the amount of tax payable and can really assist in reducing your annual tax liability. Especially for those that already have pensions, investments, and rental income which may put you into a higher rate bracket.
Finally, no need to complete the modelo 720. As the bond is automatically reported each year to the Spanish Hacienda making them the easiest of products to administer.
These bonds not only offer some major tax advantages for those that already hold UK versions. But can also be a great home for funds held in cash or in UK ISA’s or NS&I products. None of which are tax-efficient here in Spain.
For further information please contact us here in Spanish Solutions and we’ll arrange a chat for you and David.
The above information was correct at the time of preparation and does not constitute investment advice. You should seek advice from a professional adviser before embarking on any financial planning activity
Can you comment on spanish inheritance tax as to how it relates to non con-sanguineous inheritors i.e. My inheritors are nieces and nephews and not living in spain
My concern is keeping funds in spain inheritors could be subject to up to 84 % with all the multipliers