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Viewing posts categorised under: Tax Efficient Savings

Tax increases in Spain

By Barry Davys - Topics: Barcelona, Inheritance Tax, Spain, Tax, tax advice, Tax Efficient Savings, Wealth Tax
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; “But where will the money come from?” A valid question. And even more so for the crisis that has come from the coronavirus pandemic.

Saving in Spain, ISA, Tax Free Saving in Spain

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 €50,000 is 23%. A new band will be introduced for gains and investment income over €160,000 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 €48,000 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 £87,719 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.

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

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?

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

Tax Efficient Savings

£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.

 

 

 

 

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