Spanish Compliant Bonds
Spanish compliant investment bonds are a tax wrapper that may warrant consideration for your investments if you are a UK expat in Spain. The main benefits of investing in these bonds are a higher capital accumulation rate, deferral of your capital gains tax and (in some cases) mitigation of Spanish inheritance tax and/or wealth tax.
How do Spanish compliant bonds work?
The Spanish authorities, just as in the UK, provide favourable conditions for investments that encourage certain savings behaviours. In this case, life assurance policies are encouraged.
Spanish compliant bonds are provided by international life offices and contracted as unit-linked, whole of life assurance policies. However, whilst a benefit of such a policy is a degree of cover in the event of your death, the primary focus is on investment growth over the term of the policy.
The terms of these bonds can vary, as does your ability to withdraw your funds during the term. Careful selection is necessary and advice should be sought if you are unsure of the correct investment vehicle for your situation.
It is important to be aware that not all bonds available to Spanish residents are compliant. Non-compliant bonds do not avail of the same tax treatment and benefits, so it is important to check any investment thoroughly before making a commitment.
The advantages
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Investment growth
As your investment in a Spanish compliant bond grows, no tax is payable. Tax only becomes payable on the withdrawals you make. This allows you to leave your investment to accrue at a higher rate, enhancing the effects of compound interest. Over time, this can be a powerful advantage for a savvy investor.
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Capital gains tax
Spanish bonds are not taxed in the same way as in UK. In the UK, capital gains tax is payable on any withdrawals you make above an annual allowance, however investors in Spain qualify for proportionate tax relief.
Proportionate tax relief means that you will only pay capital gains tax on the proportion of the income withdrawal that represents your investment growth. In other words, if your investment has achieved +10% growth at the time of your first withdrawal, you will only be taxed on the proportion of the sum that corresponds to this growth.
A word to the wise: tax calculations on withdrawals can become complicated. Always consult with an adviser before withdrawing funds from an investment of this type to ensure your tax position is protected.
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Inheritance tax
As with all life policies, the option exists to write the contract on a joint life basis with your partner and/or name your children as beneficiaries. In some cases, you can even name your children as lives assured to ensure the investments are maintained upon your passing (useful for some single parents). Unlike UK life assurance policies, there is no need to set up complicated trust arrangements, and Spanish compliant bonds have the added benefit of avoiding the costly and time-consuming Spanish probate process.
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Wealth tax and Modelo 720
In Spain, unlike the UK, you are taxed on all assets held above a certain limit. This tax is taken each year, regardless of whether or not these assets are producing an income. However, Spanish compliant bonds do not need to be reported as part of your assets (via the Modelo 720 declaration), as your bond provider will communicate to Hacienda on your behalf. This can avoid an administrative headache when navigating the Spanish tax system. Spanish compliant bonds can also be used to mitigate a wealth tax liability in some cases – careful tax planning is required here.
If you are interested in adding Spanish compliant bonds to your portfolio, we would be more than happy to explain this further.
For a more detailed look at the Spanish tax system for UK expats, you can read my free guide by clicking the button below.
