Tax planning remains an important part of
protecting your wealth and retirement income, but it can be quite a minefield
these days, particularly for expatriates who have cross-border interests. You need detailed, up-to-date knowledge of
local, UK and international tax regimes and regulations to be able to achieve
the best results for yourself and your heirs.
There are two key tax planning issues you need to consider –
That the arrangements you use are fully compliant in Spain (and anywhere you have assets or heirs), and that you are fully declaring your worldwide assets and income as required by law.
That the arrangements you use are suitable for you, and will achieve your aims and work well in Spain and the UK. While some arrangements can seem similar, the tax benefits they provide can vary significantly.
The Spanish Tax Authority is becoming very proficient at
detecting and preventing tax evasion. The introduction of the Modelo 720 in 2012 was a game changer in
terms of the information it collects and uses to monitor taxpayers’ overseas
assets. Everyone resident in Spain needs
to annually report their non-Spanish assets over €50,000. This is separate to income and wealth tax
returns, with its own reporting requirements.
The penalties for failing to declare assets are particularly harsh.
This obligation falls on the owner of the asset, or Spanish
resident beneficiary or authorised signatory, and includes assets held in a
trust. Make sure you know what assets
and values to include in your Modelo 720
and that you are submitting the correct information on time to avoid
Automatic exchange of
Next year tax authorities will start to receive information
on their taxpayers’ overseas assets and income under the Common Reporting
Standard. This is the new automatic exchange of information regime that is
being implemented by around 100 countries around the world.
The financial information to be reported includes the name,
address and tax identification number (where applicable) of the asset owner;
the balance/value, interest and dividend payments and gross proceeds from the
sale of financial assets.
The financial institutions that need to report include
banks, custodians, investment entities such as investment funds, certain
insurance companies, trusts and foundations.
The Spanish authorities will be in a position to compare the
information received on an individual with his tax returns and Modelo 720, and find any discrepancies.
If you have not already done so, this is the time to review
your tax planning arrangements to ensure you comply with your tax and reporting
obligations in Spain – including for income that is taxed another country, such
as UK government service pensions and rental income.
You should also look to shelter assets from tax using
compliant arrangements. Tax efficient
investment wrappers, offered through a Spanish compliant bond, can be very
effective. These ‘portfolio bonds’ – a specialised form of life assurance
arrangement - are successfully used by expatriates living here for tax and
succession planning, but there are various types of bonds available, with
different tax treatment. Both the type of product and jurisdiction can make a
difference to the advantages they offer.
The tax treatment of life assurance contracts in Spain
varies according to whether the contract is approved or not. An approved, or ‘compliant’, contract must
meet specific requirements. For example,
the life company must be an EU company and passported through their home
regulator into Spain, with the particular product approved by the Spanish
regulator of insurance companies. Note
that the Isle of Man, Jersey and Guernsey are not in the EU.
If you have a non-compliant bond, the investment growth is
taxable each year, regardless of whether you have made withdrawals or not.
If, however, you have a compliant bond, no tax is payable
until you make a withdrawal. So all investment gains are rolled up, which over
the long-term can produce higher returns.
Also, when you make partial withdrawals, only the gain element of the
amount withdrawn is taxable.
When it comes to estate planning, you may also find a trust
can be effective in helping you achieve your wishes for your heirs. However much depends on your circumstances
and objectives, as well as the type of trust you use.
In today’s world, specialist advice for your tax and
succession planning is essential to establish the most suitable approach for
you and your family. You need an adviser
who is fully conversant with Spanish and UK tax law, who analyses tax reforms
and keeps your wealth management up-to-date with any changes.
Partner, Blevins Franks
Tel: 952 809 212
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.
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