Residents of Spain need to be certain that their investment bonds comply with Spanish taxation legislation. Spain has two ways of taxing investment bonds:
- On a “qualifying” basis – here gains from the offshore investment bond are “tax deferred” and tax becomes liable when you make a withdrawal from the bond. The underlying assets held by the bond can grow without an immediate liability to tax. This can allow you to time and control how much tax is paid.
- On a “non-qualifying” basis where gains from the bond are taxed on a yearly basis, regardless of whether you have made any withdrawals from the investment. Sometimes referred to as the “imputation” basis, the Spanish tax authorities look through the investment bond which then no longer becomes tax deferred. If you take out a “non- qualifying bond or it becomes “non-qualifying” you will need to fill in a self-assessment form each year regardless of whether you take any withdrawals and if there is a gain on the bond you will have to pay tax.
Partial Withdrawals for a “qualifying” investment bond:
Spain does not have the cumulative 5% tax deferred allowance which applies to a UK resident. Instead partial withdrawals are taxed as a proportion of the bond gain. The Spanish tax system regards a partial withdrawal as the investor taking back some of their original investment as well as some of the gain from the bond.
This can be understood as follows:
The amount of withdrawal from the investment bond less (amount of withdrawal divided by the full current surrender value of the bond multiplied by the original amount invested).
For example, if the owner of a Spanish qualifying investment bond who originally invested E300,000 which they have held for 5 complete policy years and is now worth E400,000 decides to make a partial surrender of E75,000, we can see the difference in tax treatment between the UK and Spain.
In the UK the bondholder would be able to apply their cumulative 5% tax deferred allowances. Assuming they have not made any previous withdrawals, this would mean they could apply 5 years of 5% of the original amount invested, which was E300,000 with no immediate liability to income tax. So 5 times 5% of E300,000 allows the bondholder to withdraw 25% of the original amount invested, or E75,000.
This contrasts with the tax treatment for the same scenario for a Spanish resident. Here we take the amount to be withdrawn from the investment bond, which is E75,000 from which we deduct the amount of the withdrawal (E75,000) divided by the current valuation of the bond (in this case E400,000) multiplied by the original amount invested (which is E300,000.
E75,000 – (E75,000 / E400,000 x E300,000) = E18,750
This proportion of the partial surrender which is deemed to be a gain is then taxed at the appropriate rate of Spanish Savings tax. So the first E6,000 of the gain is taxed at 19%, the next E12,750 is taxed at 21%. So the tax immediately due is E1,140 plus E2,677.50 = E3,817.50.
Full surrender of a “qualifying” investment bond:
If the above bond was fully surrendered in the same tax year as the partial withdrawal was made, the tax treatment of any gain also differs between Spain and the UK.
In the UK the earlier partial surrender of E75,000 is added to the current surrender value of the bond and the original amount invested is deducted.
So, E75,000 + E325,000 less E300,000 gives us a gain of E100,000. This gain can be “top sliced” by dividing it by the number of complete policy years the bond has been held for before this top sliced gain is added to the bondholders income in the tax year of full surrender to see whether it pushes them into a higher rate tax threshold.
Conversely, in Spain credit is given for the tax paid on the earlier partial surrender before working out additional tax to pay.
Hence we take the surrender value of the bond, which is E325,000 and deduct the original amount invested (which is E300,000) less the earlier withdrawal of E75,000 less the tax paid of E3,817.50.
This gives us E325,000 minus (E300,000 – E71,182.50) = £96,182.50.
Spanish savings tax
Gains from investment bonds are taxed in Spain as savings income, even if you are not taking any withdrawals. In 2017, these tax rates are as follows:
- First 6,000 Euros: 19%
- 6,001 – 50,000 Euros: 21%
- 50,000 Euros + : 23%
A couple of investment bond providers have issued “Spanish compliant” investment bonds which avoid being taxed on a “qualifying” basis. The two most widely used products for Spanish residents are from Old Mutual International who offer the Spanish Collective Bond which has access to nearly 1000 funds and the Prudential International who have the International Prudence Bond (Spain) which offers access to 10 internal funds. Both of these investment bonds are domiciled in Dublin. You would not become liable for Irish tax unless you became resident in Ireland. For an up to date list of available funds which you can access through one of the bespoke investment bonds compliant with the Spanish qualifying taxation rules please feel free to contact us and we will be happy to send you an up to date list.
Other offshore investment bond providers can ensure compliance with the Spanish tax laws but this may involve switching funds to ensure they are UCITS compliant. If you were not resident in Spain before taking out the investment bond but become Spanish resident later it is essential you tell us so we can review the funds held within your investment bond to ensure compliance. Moreover if you are Spanish resident and wish to switch funds within your investment bond you need to notify us first so we can ensure the fund you wish to switch into is suitable.
Examples of funds which are compliant.
- Undertaking for Collective Investments in Transferable Securities (UCITS) which adhere to the regulatory standards of the European Commission and are similar to Open Ended Investment Companies (OEICs). UCITs offer robust investor protection and it is often the case that a fund will make it clear whether it is UCIT compliant. These funds can be actively managed by a fund manager or they can be passive funds, such as Exchange Traded funds.
- You can also invest in cash or deposit accounts as long as these are offered by a European Economic Area deposit taker.
Examples of funds which are not compliant.
- Closed ended funds, where the number of shares issued is fixed and not redeemable from the fund. An example of a closed ended fund would be an investment trust.
- Funds which are not available to the general public.
- Funds which invest in physical commodities.
- Funds sold exclusively outside of the European Union.
Spain has similar taxation issues for offshore bonds as some other European countries, notably France, Italy, Cyprus and Malta. We can help ensure that the tax efficiency of your investment bond remains preserved should you become resident in these countries. However, it is vital that you inform us of before you move there so that we can send you a form called P85 which tells HMRC about your change in residency. We need to review the funds held within the bond to ensure it remains “qualifying” and it may be necessary to switch funds before you become resident in Spain. We also need to ensure the bond provider reports to the tax authorities of the country where the offshore bond is domiciled to ensure compliant reporting standards are met. Spain will give you an NIE number, which is similar to the UK National Insurance Number and we need to obtain this, as well as the date your residency changed and your new address. If you have made past “top ups” to the bond in the form of additional contributions, we need to know about these. Once we have ensured compliance with the qualifying rules and you are resident in Spain, you must let us know before making any additional contributions to the bond.
It is possible to have a Spanish investment bond denominated in different currencies. You can choose UK pound sterling, Euros or US dollars.
Other issues to consider:
Spain has a “Wealth Tax” and you need to be aware of whether your investment bond removes assets from your Estate for the purpose of this tax. We can assist you with this but will need to know more about the basis your investment bond has been established, in particular whether it was set up on a life assured basis or a capital redemption basis. There are regional variations in the way in which Spanish Wealth Tax is calculated and this will have a bearing on the rates and allowances applicable.
Unlike the UK, Spanish taxation is due in the year after the charge was triggered. The Spanish tax year runs from 1st January to 31st December and the deadline for reporting tax due from investment bonds is usually 30th June in the tax year after the chargeable event occurred.
Most investment bonds written after 2016 contain a Cash Account from where the bond provider and adviser charges are paid. It is important not to allow this cash account to become overfunded in case this changes the tax treatment of the bond. We recommend that the cash account is maintained at no more than 5% of the value of the bond.
If you leave Spain and become tax resident in a different country a withholding tax is applied to any withdrawals you make from your bond. In the EU this is 19%, outside the EU it is 24%. However, if the country which you reside in has a dual taxation treaty with Spain, you can elect to receive a tax credit against this liability.
If you incur a loss from your Spanish bond this can be offset against gains from other savings income and can be carried forward for up to four years.
You can name a beneficiary to receive the proceeds of your investment bond and this does not have to be through your will or by a trust.
Spanish law does not recognise trusts so if your investment bond was written in a trust it is unlikely to be effective if you move to Spain. Equally setting up a new trust whilst Spanish resident is not an option to mitigate inheritance tax.
The above article is based on our interpretation of Spanish law and we cannot accept any responsibility for any actions taken without us giving advice.