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Not All Portfolio Bonds Are The Same
Tuesday, 10 November 2015

With the Common Reporting Standard – the new global regime for the automatic exchange of financial information – commencing in January, this is a good time to review your tax planning to ensure it is fully compliant in Spain and also that it is as effective as it can be. 

Tax efficient investment wrappers, offered through a Spanish compliant bond, can be very effective in Spain.  You can hold different types of investment within a bond, and they provide considerable tax advantages as well as succession planning benefits.


These ‘portfolio bonds’ are successfully used by expatriates living here for tax and succession planning, but there are different types of bonds available, with different tax treatment.  They can be based in various jurisdictions, and both the type of product and jurisdiction can make a difference to the advantages they offer.

 

Portfolio bonds are a specialised form of life assurance arrangement which allows you to hold a versatile choice of assets (shares, bonds, etc.) as the investment content of the policy, to suit your objectives and risk profile. They enable you to gather different investments into one arrangement, which makes managing them much easier and will provide peace of mind once Common Reporting Standard starts.

 

However, the tax treatment of life assurance contracts in Spain will vary according to whether the contract is approved or not.   An approved, or ‘compliant’, contract is one that meets specific requirements.  It must be unitised; offer a 15-day cooling off period, and the investment choice within the policy is limited to EU harmonised funds. 

 

Under Spanish rules, in order for a non-Spanish life insurance company to accept business from an individual habitually resident in Spain, they must have passported by way of establishment into Spain. This means that the insurance company has to be in the EU, has passported through their home regulator into Spain, and had the particular product approved by the Spanish regulator of insurance companies, the DGS.

 

It should be noted that the Isle of Man, Jersey and Guernsey are not in the EU. 

 

There are two distinct advantages in relation to the tax treatment of Spanish compliant portfolio bonds.

 

1. Tax payable

 

The first advantage of a Spanish tax compliant portfolio bond relates to when tax becomes payable.

 

With a non-compliant bond, the insurance company is required to withhold tax every year on all investment gains. This tax is payable irrespective of whether you take a withdrawal or not from the bond.

 

However if you have a compliant bond, no tax is payable until you make a partial or total withdrawal. This way all investment gains are rolled up, which over the long-term can produce higher returns.

 

For example, Mr A. invests €100,000 in a non-compliant portfolio bond on 1st January 2015, and the fund is worth €110,000 on 1 January 2016. No withdrawals are made from the bond, and the gains of €10,000 are subject to income tax at the rates charged on savings income.  At today’s rates, this results in a tax bill of €2,030.

 

Mr B. also invests €100,000 on 1st January 2015, which grows to €110,000 in 12 months.  He invests in a Spanish tax compliant bond, and also makes no withdrawals.  He does not have any tax to pay – an immediate tax savings of €2,030.

 

2. Tax on partial withdrawals

 

The second advantage of a compliant bond relates to how much tax is paid on withdrawals of any investment gains. Partial withdrawals are apportioned between redemption of capital (part of the initial premium) and the profit made on the initial investment. In other words, only the gain element of the amount withdrawn is taxable. 

 

So if Mr B. above makes a withdrawal of €10,000, the taxable gain will be calculated as follows: (10,000 / 110,000) x 10,000 = €909.09.  This results in a tax liability of only €177.27, deducted at source by the life company. This is clearly more tax-efficient than having to pay a tax bill of €2,030.

 

Note that there are also differences between Spanish compliant bonds.   There are regular bonds; mixed term policies with irrevocable beneficiaries; mixed term policies with revocable beneficiaries, etc. Each of these has different tax treatment.

 

You need to establish what the differences are, and which of these will be most suitable for you.  This will depend on your personal circumstances and how you wish to be able to pass the investments on to your heirs.  You also want to avoid paying any more tax than necessary.  You need specialist advice tailor made for your family’s needs. 

 

Tax rates, scope and reliefs may change.  Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change.  Tax information has been summarised; an individual is advised to seek personalised advice.

 

David Bowern, Partner, Blevins Franks
Email:
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Tel: 952 809 212

 

Learn more about Blevins Franks.

 

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