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New Spanish tax rules for UK ISAs and investment funds

By John Hayward - Topics: Spain, Spanish Compliant, UK investments, Wealth Tax
This article is published on: 28th May 2021

Brexit increases tax woes for UK nationals living in Spain

Slowly but surely, the impact of the United Kingdom’s exit from the European Union is taking shape. For those UK nationals living in Spain, this could mean higher, and possibly new, taxes. As I wrote last week in my Wealth Tax in Spain article, the Spanish government and regional governments are in desperate need of revenue to cover pensions and the consequences of Covid-19. One source of this revenue will be through applying taxes to people from the UK who hold investments that do not qualify for special treatment in Spain.

At The Spectrum IFA Group, trading as Baskerville Advisers S.L. in Spain, we encourage those who wish to invest to make more from their money in the bank, or those already invested, to use a “wrapper” that is tax compliant in Spain. The main benefit of this is that any tax on gains is deferred until the account holder receives benefits in the form of a withdrawal. There are also other tax advantages that Spanish compliant investments have over those that do not qualify for special tax treatment in Spain.

Part of the “compliant” nature of the products that we recommend is that the companies used to hold the investments report the values, and hence gains, to the Spanish tax authorities. They are also responsible for deducting tax from any withdrawals.

Other important factors to make an investment Spanish compliant are that the distributor (the company offering their products in Spain) must be officially registered with the Spanish authorities and that the funds invested in are based in the EU*.

Tax in Spain and the UK

We meet many people who have UK based investments such as Individual Savings Accounts (ISAs). Others invest in funds using platforms (Online investment facilities) or insurance bonds through UK based companies. Up until 31st December 2020, although gains on these investments may not have been reported to Spain annually by Spanish tax residents, they seem to have been largely ignored by accountants and gestors when completing the annual tax return in Spain. This is possibly due to the fact that the UK was part of the EU and at least part of the compliance stipulations were being satisfied. That is, the funds used were in the EU.

People think that completing the asset declaration using the Modelo 720 is some kind of tax return. It is not. Of course, it gives the Spanish tax office a snapshot of wealth, which in turn could possibly lead to wealth tax being charged, but it is not specifically designed to give the detail of the annual gains, or losses, that occurred in a particular tax year.

The picture has changed dramatically due to Brexit. If you hold investment funds in the UK, these will be some of your responsibilities moving forward:

  • You will have to report any gains each year
  • You have to itemise each element of the investment so that if, for example, you hold 20 different funds, you must detail each one
  • In addition, if your portfolio is made up of income paying funds, any dividends/coupons have to be itemised. Even cash within a portfolio has to be shown separately
  • You need to know exactly when you bought each fund

There is a lot more to consider but, as you can imagine, this is going to be a nightmare situation for many, especially for those who have bought, sold, and then bought funds again over the years.

tax in spain

We can simplify all of this.
For those who have yet to become Spanish tax resident, we can organise your investments so that you never have to experience this incredibly difficult situation. For those who are already tax resident in Spain, we can switch your non-compliant, and potentially painful, investments to compliant ones. If you wish, you can select the same types of fund that you currently hold but in a Spanish tax compliant manner. This is extremely important because it means that, if you move back to the UK without having withdrawn any money from the investment, you will have escaped Spanish taxation on gains made whilst resident in Spain. Added to that, through investment structures that we can guide you to, if you return to the UK, any gains made whilst you lived in Spain, are ignored for UK tax purposes (I will write more on this in another article).

If you would like to legally avoid annual Spanish taxation on your investments, as well as the headaches and additional accountancy costs, you need to act now. The problem is not going to go away unless you leave Spain, which might be an extreme measure. It might be that your investments are in poor shape or that your UK adviser can simply no longer deal with you since Brexit. There is a host of other ways that I might be able to help you so contact me today for a free and no obligation discussion.

*Source: JC&A Abogados

Article by John Hayward

If you are based in the Costa Blanca area you can contact John at: john.hayward@spectrum-ifa.com for more information. If you are based in another area within Europe, please complete the form below and we will put a local adviser in touch with you.

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