You have moved to Spain … and you are now tax resident here.
You do not want the volatility or risk of investments, but want more earnings than you get out of a savings account.
Is there a middle ground solution?
Viewing posts categorised under: Tax Efficient Savings
Tax Efficient Savings
By Antony Poole - Topics: Costa del Sol, Spain, Spanish Compliant, Tax Efficient Savings
This article is published on: 10th October 2019
10.10.19
The majority of expats in Spain move over here for the weather, the more relaxed way of life and let’s face it, because they can afford to do it!
The savings, investments and pensions they built up are used to fund their lifestyle in Spain. The problem many are facing now is the changing financial environment; we have seen the pound devalue against the Euro and interest rates drop due to quantative easing, amongst other factors. This is great if you are looking at taking out a loan to start a business or to buy a house, but most expats are past this stage, so not good news.
That sum of money held in savings is absolutely vital, as it is readily accessible and, in the majority of cases, protected from what the markets are doing, i.e. when the markets go down, it doesn’t affect the cash held on deposit! However, the low interest rates mean that, due to inflation (which affects retirees the most), the purchasing power of that cash is going down.
The investment route does give you the possibility of earning more from your cash, but it also takes away all that protection. The markets have been pretty steady for the last few years, however, with quantative easing at the time of writing looking at coming to an end, so will the volatility of investments increase. The problem most expats face is that they do not have the luxury of time on their side to ride out the dips in the markets. Sorry to be so blunt, but it is what it is. When the markets climb it is all good, however, two weeks later when they are down then it can be very stressful, especially if this is when you need to access some of the money held in the investment!
So what do we do? Is there any middle ground?
Yes, there is, but it is not very sexy! It is for people who are willing to sacrifice the spikes in market prices (this is the unsexy part) while limiting exposure to drops in market prices. It is a very prudent scheme that works like this: The investment you make is combined with a pot of around
£500 billion and when this investment makes money they hold some of the gain back, so you do not get it. The flip side is that when there is a dip in the performance, they put the profit back in so you are not overly affected. This is called smoothing and this chart reflects how it works. The expected return is published every three months and is currently running at around 5% (August 2019).
This is a popular product in the UK for those who are either looking at putting a portion of their savings somewhere to earn more than just interest, or for those who are looking at a stable investment fund for their pensions. It can also be set up as last life policy, so can be used to limit IHT. Many expats also use this type of policy, which is now available Spanish tax compliant (your English policy is not, so speak to me about making it Spanish compliant). This is a low risk option for those preparing for market volatility and who want a stress free life!
Tax and Savings in Spain
By Barry Davys - Topics: Barcelona, Saving, Spain, Tax, Tax Efficient Savings
This article is published on: 28th March 2018
28.03.18
This is an introduction to the differences between the UK and Spanish tax systems and an introduction to a European ISA equivalent. It has been produced to help answer two regularly asked questions. : “What is the difference in taxation between Spain and in the UK?” – followed by “Is there a tax free savings account in Spain similar to an ISA?”.
For those of you not from the UK, I hope that the Spanish part of the table below will still be useful in allowing you to compare it with your home country tax situation.
| Tax | UK | Spain |
| Tax Year Dates | 6th April – 5th April | 1st January – 31st December |
| Income Tax Allowance | £11,500 | €9250 up to age 64 €10,400 age 65+ €11,800 age 75+ |
| Capital Gains Tax Allowance | £11,300 | N/A but some gains can be offset against some losses |
| Savings Tax Rates (interest and capital gains) | N/A Income Tax and CGT calculated separately |
19% to €6,000, then 21% for the next €44,000 and 23% above €50,000 |
| Tax Free Interest | £1,000 | Nil |
| Tax Free Dividends | £5,000 Falling to £2,000 in 2018/19 |
Nil |
| Annual ISA Allowance | £20,000 | Unlimited (see Euro ISA below) |
| Pension Contributions Limits | 100% of your earnings up to £40,000 pa |
€8,000 pa |
| Inheritance Tax | Above £325,000 at 40% plus possible allowance against main residence of £125,000 in 2018/19 | Autonomous community rules.
Catalonia and Madrid have large discounts for immediate family |
| Wealth Tax Limit | N/A at present | Autonomous community rules. Catalonia: over €500,000 with a €300,000 allowance for main residence, rates from 0.21% to 2.75% |
The main differences are in Wealth Tax, Inheritance Tax and the way savings are taxed.
Wealth Tax in Spain
In the UK there is not currently any Wealth Tax. There is in Spain and the rates and method of calculation are set by the autonomous communities. In Catalunya the rate is banded, starting at 0.21% and rising to 2.75%.
Inheritance Tax in Spain
In the UK, the estate of the deceased person is taxed as a whole, whilst in Spain, the person receiving the bequest is taxed based just on the amount they personally receive from the estate. The allowances and method of taxation also differ. The rates of inheritance tax in Barcelona and the Costa Brava are the same but will be very different if you live in Andalucia. For more information, please see Inheritance Tax in Catalunya as an example.
Tax Free Savings in Spain
In the UK, since January 1987 with the introduction of Personal Equity Plans (PEPS), we have been used to having tax free savings. Peps are now called ISAs and the allowance is now £20,000 per annum. If you live in Spain and have an ISA please note it is taxable in Spain. The fact that it is tax free in the UK does not transfer to Spain and you should look at the alternative below.
Spain does not have an ISA system as such but there is a similar investment, sometimes known as the “European ISA”. It is tax free whilst invested and has a very beneficial low taxation basis, especially if you require income from your investment. It is a little more restrictive than the UK ISA but is still worthwhile.
The two big advantages are that there is no limit and it is portable to other countries. If you would like to invest 10,000,000 euros in one year in the “European ISA” you can do! Unlike a UK ISA, the European ISA can go with you if you move country (not to all countries). If you return to the UK, the tax will be proportional to the amount of time you have been in the UK against the time you have had the European ISA. So if you have a Euro ISA for 10 years in total and have moved back to the UK for the last two years of the 10 years, the tax will be reduced. Specifically, the tax will be calculated and multiplied by 2/10ths. An 80% tax saving!
*Sources: www.gov.uk/government/organisations/hm-revenue-customs
www.agenciatributaria.es/
If you would like more information on Inheritance Tax, Wealth Tax or the European ISA, please contact me on barry.davys@spectrum-ifa.com or telephone on +34 645 257 525. If you have UK ISAs, I will also be happy to advise you on how to make these tax efficient in Spain.