We have met many clients who have relocated to Spain and hold UK Bonds with Insurance companies such as AVIVA, Friends Life, Prudential and Royal London.
These bonds can have some very attractive tax advantages for UK Tax Residents. They allow for the deferment of paying higher or additional rate tax if you keep to the rules of only taking a 5% annual withdrawal. These bonds also allow you to roll up the 5% so, as an example, if you don’t take it in one year you can take 10% in the following year and so on.
Many UK clients that have now moved to Spain continue to hold these investments often believing that they remain tax efficient in Spain. Many don’t realise that the bond actually pays UK tax at source at a rate of 20%. This tax cannot be reclaimed as a non-UK Tax Payer as it is the bond provider that pays it on behalf of the policy holder at source. Also, any growth on the Bond may also be taxable as a Capital Gain here in Spain and taxed at the marginal rate.
What are your options if you hold any of these Bonds?
There are Spanish compliant equivalents of these bonds. They are run by well-known insurance companies and are tax efficient here in Spain. As a Spanish Tax Resident it would be hard to find a product offering more tax advantages than these bonds can provide.
Firstly, from a potential Spanish Inheritance Tax (ISD) perspective, they are written as a life insurance product meaning that if they are written as joint lives and paying out on second death, the proceeds are not added to the estate on first death and if your eventual beneficiaries are non Spanish Resident they are paid out with any deduction to Spanish Inheritance Tax.
Secondly, the funds grow tax free. The funds are not taxed at source and neither is the bond for either income tax or capital gains tax. Therefore when comparing against the UK version of the same product you are already 20% better off.
Thirdly, withdrawals are taxed at a lower rate than the standard savings tax margins. This will decrease significantly the amount of tax payable and will help reduce your annual tax liability. Useful, for those that already have pensions, investments and rental income which may put you into a higher rate bracket.
No Modelo 720 form to complete
Finally, no need to complete the Modelo 720 form. The bond is automatically reported each year to the Spanish Hacienda making them the easiest of products to administer.
These bonds not only offer some major tax advantages for those that already hold UK versions but can also be a great home for funds held in cash or in UK ISA’s or NS&I products, non of which are tax efficient here in Spain.
The European Central Bank announced recently its wish to maintain low interest rates for at least the new couple of years. Plus with inflation climbing in both Spain and the UK, can you afford not to look at alternative ways of making the most of your funds?
Contact us about any investment queries you may have
The above information was correct at the time of preparation and does not constitute investment advice. You should seek advice from a professional adviser before embarking on any financial planning activity