Case Study Spanish Tax Resident Couple
Husband 60, wife 60, married, with 2 children who are financially independent and living in the UK
Viewing posts from: November 2000
Am I tax resident in Spain?
By Barry Davys
This article is published on: 24th January 2023
24.01.23
đ Pensions: ÂŁ930k
đ Investments ÂŁ60k
đ Cash Spain âŹ60k
đ House âŹ1.25 M
đ Wills – UK & Spain
đ Cash UK ÂŁ184k
Challenges
Build Understanding of Pension Situation
- Pensions will break UK Lifetime Allowance Rule even as Spanish Resident
- Difficulty estimating pension as coming from four different pension schemes
- When can I retire
- No overall investment strategy for pensions
- How to minimize tax on pensions
Better returns on Non Pension monies
- Bank accounts earning only 0.15%
Forward Planning including Inheritance tax
- Would Mrs X have enough to maintain property if current pensions provided only 50% pension on husbandâs death?
- What would be the Spanish Inheritance tax if one partner died?
- How would this Inheritance tax be paid?
- How is inheritance tax applied in Spain and UK?
- How can the UK and Spanish inheritance tax liability be managed?
What we did
- Completed a full financial review of present financial standing
- Undertook a cash flow forecast to establish if widowâs pension was sufficient, how to pay inheritance tax on first death and how long their money will last
- Provided a Transfer Value Analysis report by our qualified pension expert â a Fellow of the Chartered Insurance Institute
- As a pension was a defined benefit pension, a secondary full report provided by a FCA regulated adviser with full UK pensions permissions in line with UK, FCA rules
- Consolidated pensions to improve tax efficiency, improve widowâs pension and manage in line with their other assets
- Built investment strategy to improve return on their investments and cash
- Clarified how inheritance tax works in Spain and UK and gave an estimate of tax due
- Built an inheritance tax strategy, including sufficient money available to pay tax in Spain on first death
- Minimised Spanish Tax paperwork and liaised with Spanish Tax adviser
- Produced Family inheritance tax strategy document so whole family knew the strategy without disclosing amounts held by the parents
- Wrote to UK HMRC for confirmation that the family home in Spain will qualify for the Main Residence Nil Rate Band
- Identified a UK inheritance Tax saving on a UK life assurance policy
- Carried out regular reviews over 6 years (so far) to update investment and inheritance tax strategies and to adapt to changes to the law
The RESULTS
â
Clarity for clients and children on Inheritance Tax
â
Improved return on bank accounts to 3.5% pa giving an improvement of 4,200 pa
â
Removed pensions from UK Lifetime Allowance rules
â
By providing documentary evidence from UK HMRC for Main Residence Nil Rate Band confirmed an inheritance tax saving of up to ÂŁ140,000
â
Improved widows pension by ÂŁ7,000 pa
â
Kept clients compliant with changing tax rules
â
Answered the financial question âAm I going to be OK?â with a âYesâ
If you are a resident in Spain, or are planning to become a resident and would like any information on tax, pension transfers, investment planning or general financial planning you can contact me on:
barry.davys@spectrum-ifa.com or direct on 0034 645 257 525
Guide to Inheritance Tax in Catalonia
By Barry Davys
This article is published on: 16th December 2022
16.12.22
So, we have now managed to control the amount of wealth tax due (Wealth Tax in Catalunya). However, when we receive an inheritance or leave something to our family, we are taxed again. Inheritance tax or âimpuestos de successionesâ feels even worse than Wealth Tax. At this point we have now paid savings tax, income tax AND wealth tax. Now there is IHT on top! Like Wealth Tax, though, it is possible to manage your liability.
Inheritance Tax in Catalunya â How it works
Perhaps the most important aspect is that tax is charged to the recipient of a bequest or property physically located in Spain. For UK nationals living in Catalunya, this is a surprise, as in the UK it is on the estate of the person who has passed away.
Tax is due on the value of the bequest but the rate of tax is dependent on your relationship with the person who has passed away. A spouse, child, sister, uncle or non-related all have different methods of calculating the tax due. Once the tax has been calculated, there may be discounts to be applied to reduce the amount. Indeed, it takes at least four different steps when working out the tax due to end up with the final figure. Fortunately, help is at hand in calculating the amount.
It is also very important to understand that the tax return has to be submitted within 6 months of the death and the tax has to be paid by the same day. A common situation we see is where a person is due to inherit a share of a property but the property has not been sold within 6 months. The forms still have to be submitted to the Hacienda and tax paid based on an estimated value. Failure to do so results in a fine and interest.
How to Manage Your IHT
There are numerous strategies, but for British people, careful planning is required. In the UK it is the estate of the person who has passed away that is taxed, but in Catalunya it is the recipient; so we have two different systems with two sets of rules. Care is needed to ensure that planning in one system does not increase the liability in the other. Fortunately our qualifications and experience in the UK and in Catalunya mean we understand this issue.
Another issue specific to British people living in Catalunya is that they do not plan for RECEIVING a bequest. When asked to assist with planning for inheritance tax it is nearly always from a view of âwhat can I leave to my children?â. Yet before then people often receive bequests from their parents and family which triggers a tax charge. Planning for receiving a bequest can be as important as planning for leaving a bequest.
Certain assets are exempt from Inheritance Tax. Careful choice of where investments are kept can also help. Finally, dovetailing UK and Catalan Inheritance planning can also make a difference.
If you would like to discuss how to manage your Wealth Tax liability, please email me at barry.davys@spectrum-ifa.com, call me on 00 34 645 257 525, or use the contact form below.
How to build income from your investments
By Barry Davys
This article is published on: 5th October 2022
05.10.22
How do you pay for your Mistress?
An old Chinese proverb advises âOnly pay for your mistress from your income, never from your capitalâ It is not known if it was a wise woman or a wise man who came up with the proverb but it was a person who certainly knew about money.
I admit as a young man, before I heard of the proverb, I got this wrong. I bought a second hand Porsche 911 SC. It was fun, fast and purred fantastically. I had the money to buy the car, especially with the part exchange of my old car.
As a young RAF officer what I did not have was the income to service it. Simple repairs such as when the indicator glass broke stretched my income and I really struggled with the cost of the insurance.
The indicator glass, for example, went in a semi circle around the wing. It cost me ÂŁ68 for a new glass because of that bend in the glass. I still remember the price some 41 years later as back then ÂŁ68 was much more significant than it is today.
For those of us living here in Catalonia our mistress tends to come in the form of, for example,
- A boat with mooring costs, winter storage etc
- A car for touring on the continent. Often falls into the category of a big name brand of car or a vintage car with associated costs
- The temptation to eat and drink out every night, every other other night etc
- Swimming pool with maintenance
- A bigger house with associated costs including security systems, insurance, watering of the garden etc
In nearly all cases when you hear couples talking about the purchase, you will hear the question âCan we afford it?â. The thought process to answer that question is do we have enough money in the bank to buy it. If the answer is yes, the item is bought. It is much less usual to hear âcan we meet the ongoing costs?â.
Interestingly, even when we have accumulated significant wealth this proverb still stays true. With more capital we buy bigger things; house, super yacht, more expensive cars etc. and end up with bigger expenses.
We need to ensure that we have sufficient net income to meet the running costs of the purchase. If we do we can
- Enjoy our purchase without worry
- Not damage our financial position by having to spend capital to pay for running costs
- Still have capital left for our surviving spouse and/or our family
- Not suffer from buyerâs regret
How do we get sufficient income to pay for our mistress? We use our existing wealth to build up an income that pays out regularly. Preferably in a tax efficient manner where possible.
Nowadays investing in the latest tech company or perhaps even a crypto currency is deemed to be the way to make money by some people. It may build your capital. However, neither generates much income and in some cases, no income.
If you would like to discuss how to build income from your investments so you can enjoy your purchases without worrying about the ongoing costs please feel welcome to get in touch, in the first instance, by email at barry.davys@spectrum-ifa.com
I cannot guarantee to help you meet all your running costs but as I am passionate about financial planning I anticipate I can improve your situation.
Inheritance Tax in Catalunya
By Barry Davys
This article is published on: 11th July 2022
11.07.22
Inheritance Tax in Catalunya – A Guide
Inheritance tax in Catalunya is calculated using the same basic principles as the national system in Spain. As in the national system, the taxable entity is the person RECEIVING the bequest, not the person who has passed away.
However, the allowances (deductions) and rates of tax are different in the Automonous Community Catalunya from the national rate. The law that sets these rates and allowances is Catalunya Ley19/2010 which was amended in February 2014.
Who’s this article for?
- People living in Catalonia
- People who have recently inherited or are about to inherit
- People whose parents are doing inheritance tax planning
Overview
Inheritance tax in Catalonia is calculated in a different way than in many other countries and even in other autonomous communities in Spain. The tax to be paid is not necessarily bad. The tax can be less than in the UK for example.
What you get?
This guide gives a reasonable understanding of how Catalan inheritance tax works and the possible amount to pay. You get access to an adviser who specialises in this area and an introduction to an English speaking lawyer who specialises in helping International people living here.
Your Investment
The time taken to read the guide, and perhaps a second read as Catalan IHT tax takes some getting used to. You will also need to book an initial telephone call if you want advice specific to your situation.
If you are resident in Catalunya these are the rules that will apply. Here we have produced a guide to Catalan Inheritance Tax. The most important deductions available are as follows:
Personal Deductions
The starting point in making the calculation is to work out which Group the person receiving the inheritance belongs to as follows:
Group I Children, including adopted children, under the age of 21
Group II Children over 21, spouses, parents and grandchildren
Group III Close relatives such as brothers and sisters, aunts and uncles
Group IV More distant relatives or unrelated
Allowances/deductions available in Catalunya are:
Group I
Deduction of âŹ100,000 plus âŹ12,000 for each year under 21 years of age up to âŹ196,000
Group II
Spouse: âŹ100,000; Child: âŹ100,000; Other Descendants: âŹ50,000; Parents: âŹ30,000
Group III
âŹ8,000
Group IV
No deductions available
Disabled Heir
In addition to any personal deductions applicable a beneficiary who is disabled may add an additional âŹ275,000 deduction if the disability is determined to be greater than 33% or âŹ650,000 where it is greater than 65% disability
Heir over 75 years old
A deduction of âŹ275,000 may be applied where the heir is over 75 years of age who is a beneficiary within Group II though this deduction is applied instead of the other allowances.
Inheritance of the Family Home
Where a property inherited is the main family home then a reduction amounting to 95% of the value of the property up to âŹ500,000 may be made where the beneficiaries are the spouse, child or parent of the deceased as well as collateral relatives, older than 65, that lived with the deceased during the 2 years previous to the decease . The property may not be sold for a period of 5 years if the reduction is claimed.
Allowances available for the Inheritance of the Family Business
A tax deduction of 95% of the value of the interest held by the deceased in the business This applies to all beneficiaries who were related to the deceased to the third level of blood relative and persons in the employ of the business for at least 10 years.
Allowances available for income from Life Insurance Policies
A deduction of 100% is applicable on any income from a life insurance policy held by the deceased up to a maximum of âŹ25,000 where the beneficiary is the spouse, descendant or parent of the deceased.
Inheritance Tax Rates in Catalunya:
Once all deductions have been applied the final amount of tax payable is determined then it is necessary to apply the relevant rate:
| Taxable Sum | Tax Payable on this Sum | Any Reminder up to | Applicable Rate on Remainder % |
| 0 | 0 | 50,000 | 7% |
| 50,000 | 3,500 | 150,000 | 11% |
| 150,000 | 14,500 | 400,000 | 17% |
| 400,000 | 57,000 | 800,000 | 24% |
| 800,000 | 153,000 | Above 800,000 | 32% |
Existing Wealth:
Once the relevant tax has been calculated the result is multiplied by a coefficient determined by the existing wealth of the beneficiary as well as the group to which they belong:
Existing Wealth Multiplier Coefficien
| Existing Wealth in Euros | Group 1 & 2 | Group 3 | Group 4 |
| From 0 a 500.000 | 1,0000 | 1,5882 | 2,0000 |
| From 500.000, 01 to 2.000.000 | 1,1000 | 1,5882 | 2,0000 |
| From 2.000.000, 01 to 4.000.000 | 1,1500 | 1,5882 | 2,0000 |
| More than 4.000.000, 00 | 1,2000 | 1,5882 | 2,0000 |
As a reminder the Groups referred to consist of the following beneficiaries:
Group I Children, including adopted children, under the age of 21
Group II All other descendants, spouses, parents and grandchildren
Group III Close relatives such as brothers and sisters, aunts and uncles
Group IV Distant relatives and unrelated
Special Deductions – Spouse
After applying the tax rates and coefficients above a discount of 99% shall be applied to any tax payable.
Special Deductions – Other Relatives Groups I & II
For Group I & II beneficiaries, apart from the spouse, the following discounts may be applied to the calculated amount of tax due, depending on the amount inherited:
Group 1
| Bottom of Taxable Band Euros |
Total discount to this level % |
Top of Taxable Band Euros |
Discount for this band % |
| 0,00 | 0,00 | 100.000,00 | 99,00 |
| 100,000 | 99,00 | 100.000,00 | 97,00 |
| 200,000 | 98 | 100.000,00 | 95,00 |
| 300,000 | 97 | 200.000,00 | 90,00 |
| 500,000 | 94.20 | 250.000,00 | 80,00 |
| 750,000 | 89.47 | 250.000,00 | 70,00 |
| 1,000,000 | 84.60 | 500.000,00 | 60,00 |
| 1,500,000 | 76.40 | 500.000,00 | 50,00 |
| 2,000,000 | 69.80 | 500.000,00 | 40,00 |
| 2,500,000 | 63.84 | 500.000,00 | 25,00 |
| 3,000,000 | 57.37 | upwards | 20,00 |
Group II:
| Bottom of Taxable Band Euros | Total discount to this level % |
Top of Taxable Band Euros |
Discount for this band % |
| 0,00 | 0,00 | 100.000,00 | 60,00 |
| 100,000 | 60,00 | 100.000,00 | 55,00 |
| 200,000 | 57,50 | 100.000,00 | 50,00 |
| 300,000 | 55,00 | 200.000,00 | 45,00 |
| 500,000 | 51,00 | 250.000,00 | 40,00 |
| 750,000 | 47,33 | 250.000,00 | 35,00 |
| 1,000,000 | 44,25 | 500.000,00 | 30,00 |
| 1,500,000 | 39,50 | 500.000,00 | 25,00 |
| 2,000,000 | 35,88 | 500.000,00 | 20,00 |
| 2,500,000 | 32,70 | 500.000,00 | 10,00 |
| 3,000,000 | 28,92 | upwards | 00,00 |
Special Deductions â Other Relatives Groups I & II
The discount shall be reduced by 50% should the beneficiary apply any of the following deductions:
- Family Business
- Any other deduction to the amount of tax payable except the deduction applicable to the family home.
Many expats pay more tax on their inheritance than they should because they fail to follow some simple rules.
To discuss how to pay only the appropriate amount, please click the button below to get in touch with us.
This information is intended as a guide only. It is based on the current legislation for Inheritance tax in Catalunya as at August 2017. A suitable qualified tax lawyer should always be used to calculate a specific liability. If you require the assistance of a tax lawyer please contact barry.davys@spectrum-ifa.com who will introduce you to an appropriate lawyer. Please also note that this guide does not apply to Gifts (donaciĂłnes) which have their own rules.
Removing Confusion on Spain and UK Tax Situation Especially Pensions
By Barry Davys
This article is published on: 23rd May 2022
23.05.22
It is clear from calls and messages to me from people seeking advice there is much confusion regarding taxation when we live in Spain and have income or capital gains in the UK. Sometimes, these calls happen when people have received a letter from the Agencia Tributaria (Hacienda).
My wish is to clarify the situation so that there are no back taxes, fines nor interest to pay in Spain.
This framework will clarify the position and I include specifics regarding pensions. Tax can be, well taxing, so this framework is to help with understanding the overall situation, not to provide specific advice for your situation.
Whoâs this for?
This article is for all British people who live in Spain.
Overview
A framework to help explain how do we pay tax on pensions from the UK when living in Spain?
Why to read this article?
This article is written in response to a very sad situation where a pensioner here has been hit by fines, back tax and interest from four years ago because of a mis-understanding on how to organise his tax on his UK pension. It is likely that further fines will follow for other years. The total amount of fines and interest could amount to âŹ21,000
Your commitment
Taking the time to read the article and requesting an initial telephone or Zoom meeting below, if you want help for your specific situation.
Your Tax Framework
Top of the framework is to understand that when we have taxable events in more than one country, the country of our residency is the âcontrolling tax authorityâ. They have the final say on what tax must be paid.
If you live in Spain more than 183 days in a calendar year your controlling tax authority is Spain. It does not matter if you also pay tax in the UK.
How this works is as follows:
- Declare your worldwide gross income and capital gains on our La Renta (M100) Remember it is a self assessment form and so it is our responsibility to do so
- At the end of the La Renta form is a box for entering tax paid in a country with a double taxation agreement with Spain. Put the tax paid in this box or insist your gestor does so. Even post Brexit the double taxation agreement is still in force
- UK pensions gross income all have to be reported in Spain
If you live outside the UK and provide a certificate of tax residency in Spain you can claim dividends, bank interest and even private pensions without paying UK tax (because you will pay tax in Spain).
Pensions, however, are a great source of confusion. The UK retains the right to tax state pensions, military pensions, civil service pensions and a number of others. Previously these did not have to be reported in Spain. They do now!
Tips on pension tax
- On private pensions and most company pensions ask the provider to pay you gross
- If you have a UK pension where it is automatically taxed or is a state pension, record all tax paid in the UK and get proof of payment from the pension provider
- Report the gross figures in Spain
- Your state pension is paid weekly, not 12 monthly so remember to include all payments in the calendar year
- Ensure that any tax paid is listed in the La Renta box for countries with double taxation agreements. Result – no double taxation
- If the tax paid is missed off this box, try to make a Refund of Tax using UK HMRC form R43 and or form R40. It may be possible depending on your circumstances
- One word of warning. Do not use companies offering to reclaim your tax for you. They are expensive, some may be improper and you can easily send the form yourself
In my profession as a financial adviser for international people living in Spain I have a clear understanding of tax rules and recommend that you employ a good local tax adviser. This article is not tax advice as it may not reflect your personal circumstances. It is merely a framework to help with your understanding. I hope this article provides more clarity on the issue and helps when you do go to a tax adviser.
Working Life vs Life Savings When Living in Spain
By Barry Davys
This article is published on: 11th October 2021
11.10.21
Having worked hard for our money it is often the case that we forget to look after it with the same dedication as we put into our professions or businesses. We spend 40 hours plus a week (plus, plus if you run a business) working, but how much time do we spend on looking after the money we have spent all that time earning? The answer for most of us is âvery littleâ.
Whoâs this for?
This article is for all British people who live in Spain.
Overview
Work Life vs Life Savings. How we should apply our work life process to our life savings.
Why to read this article?
With a simple comparison between your work life and your âsavings lifeâ you will gain understanding on how to better look after your savings. The article even provides a solution at the end to help you implement these ideas.
Your commitment
Taking the time to read the article and requesting an initial telephone or Zoom meeting. if you want help for your specific situation.
The reasons are many fold from having a love of âthingsâ instead of savings and security. Social and peer pressure adds to the need to buy the latest iPhone, for example. We might not understand investments so do not spend time exploring the options. We might think our savings are just put away for a rainy day and not realise that they can be used to provide us with a feeling of security because they can also provide us with lifelong income.
The reason for our lack of attention, in part, is that there is no structure in place to make sure we do give the right amount of time to our money and savings. When we are at work we have a structure, a place you go to, probably training for the job, a boss, a company mission, company values, a product line which is specific and customers who keep you on your toes. The better we get at the job the more likely we are to get a promotion.
Donât worry. I am not suggesting you spend another 40 hours a week on top of working to look after your savings. What will make a difference, though, is if we apply these work elements to our savings.
Structure – perhaps as simple as saving regularly, or perhaps using savings type where tax is not paid whilst your money grows. Using a cashflow model to see what your financial future looks like.
A place to go – more difficult but if you have an adviser go to his/her office to discuss your situation and your requirements.
Training – there are many good books on looking after your savings. You will notice that the best concentrate on your approach to money and the process of making it grow. Not on an âinvestment productâ. Always start with your plan and then fit the products into your plan. Do not buy a product and then wonder why you have it. This is not as easy as we might think because the adverts for financial services are mostly offering products.
A boss – if you have an adviser you become the boss and the adviser becomes your employee. If this is not the case, get a new adviser!
Mission and values – have a list of requirements for your savings, investments and pensions. It may be that you have chosen a set date to retire or how much to leave the children or many, many more objectives. Your values may include making your money grow without causing harm to the environment.
Product line – emotions guide what you want from your money but make your decisions on how to achieve that based on data. Recognise that you should build your planning on emotion and implement the plan based on data. Your work company has a limited number of products. In Europe alone we have 16,000 different possibilities in just one investment class. Even if you have a really good knowledge of how investments work you still need help with sorting the data on 16,000 options. Use an adviser with tools to analyse that data on your behalf and to give you guidance on what will best fit your plan.
Customers who keep you on your toes – the customers who will keep you on your toes for your savings are interest rates, markets, tax, rules and regulation. All of these âcustomersâ change their minds. A very good recent example is in the markets, with the S&P 500 index of US shares from the start of Covid:
- 9th February 2020 – 3,380.16
- 15th March 2020 – 2304.92 (31.8% change)
- 12th April 2020 – 2874.56 (24.7% back up)
- 7th October 2021 – 4399.76%
*Source New York Stock Exchange
Of course this is an extreme example, but it does illustrate how you or your adviser needs to pay attention.
For those of us living in Spain we have to add in the additional issues of a tax system in the UK and a tax system in Spain. Exchange rates are another factor we need to consider.
If you would like to be the boss of your savings with an adviser who can guide you for building your plan and then use data to best work out how to implement your plan, myself and our team at the Spectrum IFA Group are here to help. With software systems for cashflow planning, an investment panel for reviewing investments, clear understanding of both UK and Spanish tax systems and ongoing support, all given in English by an adviser who lives in Spain.
For an initial call to find out more, choose a time for a phone call or Zoom meeting that is convenient for you with this link: initial telephone or Zoom meeting.
I look forward to converting our expertise and systems into easy to understand ways for you to make your plans become a reality.
External research
The better we get at the job the more likely we are to get a promotion.
Vanguard, the $7 trillion dollar fund management company, has conducted extensive analysis of the benefit of using a financial adviser. Here are some of the key findings:
People with financial advisers average a 3% better investment return.
Advisers often find ways of saving clients tax on their investments.
Some of the best opportunities to add value occur during market duress or euphoria when clients are tempted to abandon their well thought out investment plans.
One of the most important benefits is to give clients peace of mind
https://advisors.vanguard.com/insights/article/IWE_ResPuttingAValueOnValue
Bitcoin in your investment portfolio – what is Bitcoin, how to use it and what it will do
By Barry Davys
This article is published on: 18th January 2021
18.01.21
Love it or hate it seems to be the approach to Bitcoin. It will be the best investment ever or it is just a bubble controlled by the few people who can pull the strings, rumoured to be the Chinese.
Let’s start with âWhat is Bitcoin?â. Bitcoin is a piece of computer software with the ability to share pieces of the software with other people. Of course, the other people have to pay for their share of the software and the price varies according to supply and demand. In principle, there is nothing wrong with this. It worked for Bill Gates.
To get a better of understanding of Bitcoin it is worthwhile making that comparison with Microsoft. With Microsoft we know who owns the product, the products have set prices and perform a function that makes something happen, e.g. run our computer, allow us to write letters, make presentations and do our numbers on spreadsheets. Bitcoin has none of these attributes.
The way Bitcoin pricing works is much more like a commodity. If you go to Starbucks today and buy a coffee, let’s say you pay 4âŹ. Next week you want a coffee. The same coffee now costs 5âŹ. The coffee has not changed, only the price. The difference may be due to shortages, logistical difficulties during a pandemic, many more people wanting a Starbucks coffee, exchange rate movements etc. Bitcoin works in the same way. The price of Bitcoin is primarily set by demand as the supply is fixed. There are only so many Bitcoins in the World. At least you can do something nice with a coffee bean. Bitcoinâs primary purpose is just as something you can sell to someone else. It has no other purpose at the moment.
You would now have a valid point if you were to pull me up on this analysis. âYou can use it to buy goods and servicesâ is a fair comment to make, however, there is a âbutâ that should follow that statement. Whilst the number of places you can use Bitcoin to make a purchase is increasing it is not widespread.
Bitcoin is super volatile, which is great on the way up and terrible when it falls after you have just bought it. Here are some important figures which tell you about Bitcoinâs volatility.
2009 – 2017 little price movement
Autumn 2017 the price rises
October 2017 $5,000
November 2017 $10,000
17th December 2017 $19,783
April 2018 $7,000
November 2018 $3,500
14th March 2020 $5,165
It has bounced again in recent weeks and is now at $40,714 as I write this article (9th Jan 2021). Institutional investors (fund managers, hedge funds etc) are now buying Bitcoin. Increased demand of a fixed supply commodity pushes up the price. Will this last? I do not know. Is it a bubble? Again, I do not know. However, what I do know is that institutional investors invest to a plan. They systematically take profits i.e. sell some of their holdings. They are disciplined. They manage risk by keeping a balance of different investments. Should these institutional investors take profits, other fund managers will follow and sell so as not to get caught out by a large price fall. Their careers depend on getting it right. The ability to feed their family depends on it. They analyse, have large teams doing research, watch and wait before buying and sound out other professional colleagues to ensure they sell in a timely manner. The field of behavioural finance has shown that as individual investors we use the part of our brain driven by emotion when making investment decisions, especially when there is a big price movement in an asset. This emotion based decision making often leads to poor decision making.
There is a body of opinion from Bitcoin exchanges and advocates that is putting forward the theory that Bitcoin is going to become a national currency in some countries and therefore the price is going to go ballistic (their phrase). It is unlikely that a non regulated, very volatile commodity will be used as a national currency.
Here is an example from me of the practical problems. A solicitor practice in Barcelona started to accept Bitcoin for settlement of their fees. It looked like a superb idea to show they were a forward-looking firm.
The problem comes with the volatility. Between issuing the invoice and payment by the client there is a delay. Having charged 1.03874 Bitcoins, for example, they had no idea how much they would get in the currency that would pay all the bills of the firm, such as their staff (Can we pay you in Bitcoins Mrs staff member? Ah, no!), electricity company etc. So having chosen 1.03874 Bitcoins as the fee because that would generate 4,000 in Euros, at the date of payment it could have been just âŹ2,000 value. For this reason it is very unlikely that Bitcoin will become a national currency!
If you wish to invest in Bitcoins, it is worthwhile separating them from your primary investments. Bitcoins will then not influence your investment decisions on your main portfolio in the way that they might be if they are on the same investment platform. How much should you invest in Bitcoin? Set aside a percentage of your savings and only invest that much. Whether it is 1% or 10% will depend on your overall circumstances. However, with Bitcoin it is very worthwhile applying the rule that only invest what you can afford to lose. That way, if you lose it all it has not damaged your financial wellbeing. If it goes up 400% next week, you will be able to take some profit and perhaps spend your winnings on something frivolous.
Bitcoin profits will be taxed. Remember to put money aside from your winnings to pay tax. The amount of tax will depend on your country of residence. The annual declaration can be very difficult so keep track of all your transactions. A figure of 23% of the profit is a good guideline as the amount to put aside if you live in Spain.
Practical Tip. A more mainstream alternative to investing in Bitcoin is the technology that Bitcoin is based on called blockchain. Blockchain has lots of uses and is good news. Uses include electronic voting in national elections, supply change management, payment systems, and anti-counterfeiting software. It can also allow companies to work together and share only what they need to for a specific project.
As an example of what is possible, there are also many Blockchain propositions for supply chain management for Covid 19 vaccines and contact tracing. For more information on blockchain, you could read âBlockchain Revolutionâ by Don and Alex Tapscott. You can already find many investments to include in your main portfolio such as ETFs and funds. For more information on these funds email barry.davys@spectrum-ifa.com
A final point on Bitcoin. When someone sells a Bitcoin what does the buyer pay with? It is one of the major currencies. Sellers still want good old fashioned US dollars, Euros or Sterling when they part with their coin. That tells us something!
Whatâs the story with ESG investing and what can it do for your savings?
By Barry Davys
This article is published on: 7th January 2021
07.01.21
ESG investing is now a mainstream type of investing and a useful part of a portfolio. But what is it and why is it good for me?
A year ago, someone came to ask for advice on moving investments from UK investments to Spain investment. We discussed their position, their requirements, their reasoning behind moving the money to Spain. All the reasoning behind the thought process was very sound. However, there were some practical aspects that I highlighted that needed addressing before making the move. The issues were taxation in Spain and their requirement for sustainable and/or responsible investments.
These people were really pleased with their investments with returns over 120% in 8 years. The increase in value in these funds had been so spectacular that there was a large capital gains tax liability in Spain if they were to sell. Also, the funds also still meet their belief in ESG values.My advice was for them to keep their investments.
So what is ESG investing and why have the returns been so good? Why is it a good type of investing for the coming years? ESG is short for Environmental, Social and Governance. ESG investing is investing in the shares of companies that have good practices in these three areas.
An example of a company that would tick all three elements is a company that sells solar panels and a maintenance contract for them but does not charge for the electricity that the panels produce. Many of the established players in the market sell panels and then charge for the electricity in the same way as a normal electricity company.
This is my view, but charging for the electricity produced is wrong. The source of the power, sunlight, is free. Sunlight costs the seller of the solar panels nothing and should not therefore be charged to the panel buyer. Companies that sell solar panels without charging for the electricity meet the governance criteria. They also meet the environmental aspect because it is a renewable energy. These companies are now providing social benefit because they are setting up systems for communities, e.g. apartment blocks. They are a good example of a company that meets the ESG requirements.
Why is this good for your portfolio? When the âgoodâ companies highlight that energy is free once you have bought their panels, sales will increase. We would all like free energy having bought the panels. Other recent ESG examples include Zoom and other companies that allow us to work from home (+400% share price increase in 12 months), Geely who owns Volvo, Lotus and other brands all converting to electric cars (+70.66%) and BlackRock Inc, the worldâs largest asset manager who has just declared it is moving to ESG screening for every investment it makes (+41%).
BlackRock assets are $7.81 trillion as at 31st December 2020. They are joined, in varying degrees, by the following fund managers in ESG vetting of and investing in companies with ESG credentials.
- Fidelity
- JP Morgan Asset Management
- Morgan Stanley
- PIMCO (Worldâs biggest bond fund manager)
- Vanguard $6 Trn fund manager
This is a small number of the fund managers that have declared their intentions to invest in ESG assets. Are they doing this because of a collective social consciousness? They may tell us that, but the reality is the companies that can be classed as ESG are often the companies of the future. This is where the growth is and with this much collective demand from the above managers and more the sector will be well supported.
At Spectrum we believe in the benefits of ESG investing; it goes alongside our support of a number of charities. However, we also believe in it as a method of adding future value to our clientsâ investments.
If you have a question about ESG investing and would like to discover more, please feel welcome to get in touch. We are also happy to review your investments to see how you can incorporate ESG investing into your savings.
You can be an ESG investor today!
As individuals, you can join the ESG movement.
What is the point of having money?
By Barry Davys
This article is published on: 14th June 2020
14.06.20
The point of having money is personal to you. Looking after your money should always start with your requirements. Your life has its own twists and turns. Your hopes and dreams are just that; YOUR hopes and dreams. How you feel about money is personal to you.
In this article I give you a framework for why you may want money. Once you have the framework, you can colour in the detail in a way that suits your requirements.
Knowing your answer to the question, âWhatâs the point of having money?â is the starting point. Money, savings, investments, whichever you wish to call it, provides you with choice. The reason for having money is that it gives you one of three things; security, freedom or opportunity. Which choice you choose is up to you. The answer may be correct for you but different for your neighbour, even if you live next door in the same size house.
Security
Security means that you have enough money to be able to settle your debts, pay nursing fees if required, pay for medical treatment and perhaps be able to help the children to buy a house. People who want security often have a home free of mortgage; their little piece of heaven that they own.
To settle on having security means you need capital. Often people choose not to take risk with their money because they want to be certain it is there if they need it. A fall in the stockmarket will not damage the security blanket of money in the bank. Your savings are just one big emergency fund. In these times of extremely low interest rates there are only a few places to get a little investment return for this option.
More and more, I see that this form of planning is undermined by long life expectancy and inflation. Hoarding the capital without making it work can lead to the erosion of the buying power of these savings. Sadly, insecurity comes after years in retirement when people realise that what they thought was enough money, is not.
Freedom
Freedom is gained when your savings are invested to provide you with sufficient income to live on, whether or not you continue to work.
To achieve this position depends on what lifestyle you have. The more flamboyant the lifestyle, the harder your money will need to work.
To achieve a feeling of freedom, money is required, and it needs to work hard. You yourself should feel in a âlife is goodâ state of mind. Your money must be making money and it must later be able to provide you with income if you want or need it. Making money means that you need to invest in shares, bonds and perhaps some property (in addition to the home where you live). If you do not have the inclination or skill to do this yourself, you should work with a professional adviser or use funds. Some investments can provide you income now and others with capital growth. The growth parts will protect against inflation and can mean you can increase your income later.
Opportunity
Do you want your life to be full of opportunities? To be a space tourist? To ride a Harley Davidson to Lapland from Denmark like Steve Forbes (Forbes magazine) did, just to see the Northern Lights? Or both? What an opportunity that would be seeing the Northern Lights from earth AND then see them from space. Or to be one of the first investors in the company that makes the software for all the driverless cars in the world? As your world is a world of opportunity there are many, many more things that you can do with your life; most people will never ever get the opportunities you do.
To build this life takes more money. You may have sold a business, for example. Or received an inheritance. And this money will have to work hard for you. You may have some core holdings to give you a diversified portfolio, but you will also have to take some risks to make your money work hard enough to provide you with a life full of opportunities. Take more risk with your investments, but be able to withstand an investment that doesnât perform well. In addition to the investments used by someone looking for freedom, you may also invest in a new business, for example. This takes skill to analyse the potential of investments and you will benefit by taking advice from qualified and experienced people.
Whether you need help with deciding on your choice or you wish to discuss how to execute your plan, please contact me for assistance. An understanding of your concerns when discussing your aims and choices together with the expertise to execute the plan for your benefit can make for a strong and trusting professional relationship.
Tax increases in Spain
By Barry Davys
This article is published on: 16th May 2020
16.05.20
This is an article for those of us who live in Spain but will apply in every developed country around the world.
The Covid-19 pandemic has led to a worldwide lockdown, including here in Spain. The economy has been shut down with the likes of Seat in Barcelona stopping production and Barcelona tourist numbers collapsing. We all know this because we are all a living part of the lockdown.
In response to what looks like the worst economic crisis in the 300 years of modern data collection, governments and central banks around the world have provided some $7 trillion dollars of stimulus packages to economies and workers. It is the fastest and biggest reaction EVER to an economic crisis. Well done, the central banks! It genuinely is helping to make sure that as we slowly exit lockdown, individuals and companies will be in a little better condition to start up again.
Would I have it any other way? No! However, the question we now need to answer comes from Angela Merkel when asked to provide a European bailout in the 2009 crisis; âBut where will the money come from?â A valid question. And even more so for the crisis that has come from the coronavirus pandemic.
The money will come, in part, from higher taxation. In the UK today, a menu of proposed increases in taxation has been leaked. In Spain, a loophole in wealth tax legislation that allowed some unit linked insurance savings plans to be exempt from wealth tax has been closed. What is significant is that these changes are coming now, before we are even clear of the lockdown and virus.
The changes to taxation in Spain are likely to include savings tax, inheritance tax and wealth tax in particular. Changes were already being discussed and the economic fallout from the pandemic provides the reason to bring forward these changes. Specifically, the EU has told us to harmonise inheritance tax across Autonomous Communities as there are big differences in the amount of tax to be paid.
In the draft budget for 2020, there is a proposal to change savings tax. At present, we have three bands of tax. The top rate for gains and investment income over âŹ50,000 is 23%. A new band will be introduced for gains and investment income over âŹ160,000 of 27%. We should expect this change to happen soon as it is already in the budget which is going before Parliament for approval. The first case I have seen where this will apply would lead to an additional âŹ48,000 in tax. It is pertinent to bear in mind that these tax rates can apply to the gain on some property sales.
In addition to the wealth tax change described above, we understand that others may now be considered.
Planning actions
Help is at hand. There are planning actions that can be taken to minimise the tax issues. Here is a three point plan to minimise the effect of these changes:
1. Savings Tax. Move investments into Spanish tax efficient investments. These are available and you do not have to move your investment to Spain to qualify. They are available in Sterling as well as Euros and USD. If you would like confirmation on which of your current investments are tax efficient in Spain, I am happy to review them with you.
2. Inheritance Tax. This requires very careful consideration before making decisions to manage inheritance tax. Making sure you can maintain your lifestyle is an important part of this planning, especially for the survivor in the event of one half of a couple passing away. Once these criteria have been met, planning is feasible. A recent case of planning has saved ÂŁ87,719 in UK inheritance tax for a couple living here in Spain. For nearly all of us from the UK, our estate at death will be assessed for UK inheritance tax.
3. Wealth Tax. Sometimes, the planning for wealth tax is simple. In other cases, not so simple. Care is needed and it is worthwhile asking for a review.
We have had our cake in the form of stimulus to protect the economy. We will shortly find we will have indigestion from eating the cake in the form of higher taxes. Fortunately, we still have a few indigestion tablets available to relieve our pain.
If you wish to discuss tax on your savings, inheritance tax or wealth tax please feel welcome to call. If this helps, you can match your availability for a call with mine online here.