Ever since taxes were first imposed, people have been finding ways of avoiding them. In today’s world, though, tax planning has become highly complex, with the Spanish, UK and international tax agencies declaring war on tax evasion and teaming up to track down evaders. In July 2005 we also entered into a new era in how expatriates structure their financial affairs with the start of the EU wide Savings Tax Directive.
One of the first things many Britons do on moving overseas is to open an offshore bank account. These accounts have many practical uses, particularly if you will be spending time in more than one country, and banks in the Isle of Man and the Channel Islands offer services specifically geared to expatriates.
Another reason many people choose to deposit their capital offshore is because they believe it’s an effective means of tax avoidance. However, according to the law in both Spain and the UK you must declare your worldwide income, so you are as obliged to declare your offshore interest earnings as those from onshore banks. Failure to do so is tax evasion – a crime under money laundering laws.
The EU savings Tax Directive ensures that these offshore savings will be taxed regardless of whether they are declared or not, and will help the tax authorities find out who has been illegally under declaring their income.
The key points of the Directive are:
- Most EU States automatically exchange information on your personal tax situation, including identity, residence and interest earnings.
- Your tax authority will compare this information with your tax return. If the figures do not match up, they are likely to investigate.
- Some jurisdictions, including Jersey, Guernsey, Isle of Man, Switzerland and Luxembourg are, instead of automatic information exchange of information, applying a withholding tax for a transitional period. It is currently 15% but rises to 35% in 2011.
- The definition of “savings income” is broad and includes interest earnings from bank accounts and some income producing investment funds.
- UK investments like PEPs, ISAs and premium bonds are not tax free in Spain, and fall under the scope of the Directive.
- Some income payments are excluded from the Directive. These include pensions, dividends from shares, income withdrawals from life assurance policies and payments to companies or trusts.
The fact that life assurance policies are not subject to the Directive is particularly good news, especially as they benefit from a very advantageous tax treatment in Spain.
Insurance bonds therefore provide a possible solution to a wide range of tax planning concerns. They have a variety of names, including Personal Portfolio Bonds (PPB) and Offshore Bonds, and they are also sometimes referred to as tax “wrappers”. It is basically a specialised form of life assurance arrangement, specifically designed to enable investors to hold their own choice of assets.
The PPB offers many unique tax benefits, but when held within a suitable Trust the advantages are exceptional.
In summary, the benefits of a PPB in Spain are:
Income and capital gains:
These are not taxed when retained with the Bond. If you do not need to take withdrawals you do not pay tax, allowing the gain to accumulate entirely tax free within the Bond.
In the event of a withdrawal, only the gain element is taxed and not the whole value of the withdrawal. For example, if your bond has increased by 10% and you withdraw €10,000, only €1,000 is liable to tax and €9,000 is tax-free. Of the amount taxable, there is a further reduction depending on the length of time you own the Bond. It is reduced by 40% if held between two and five years and by 75% if over five years (although only one withdrawal per year qualifies for this remarkable tax benefit).
Holding your assets inside a Bond usually leads to a significant reduction in wealth tax too. This helps high net worth individuals lower their tax bills considerably. It is also possible to set up your Bond so that is has no value at all for wealth tax purposes and will therefore be excluded from your wealth tax return.
On death, if the contract is not a Spanish one and it is left to an individual who is not resident in Spain (or is held in trust for such beneficiaries), succession tax is not payable either.
Assigning your Bond to a Trust arrangement can create some very unique tax and other advantages. However this is a very specialised field and it is therefore essential that you seek professional guidance about what is appropriate to your personal circumstances.
Some of the advantages of a Trust include:
The assets in the Trust are not liable to succession tax in Spain.
If the settlor dies in Spain as a non-UK domicile there is no liability to UK inheritance tax.
No probate is required and your heirs can obtain benefit from the Trust quickly and easily.
With a Trust the Trustees act to look after your beneficiaries without the assets being dissipated. For example, the Trustees can ensure that your children do not lose any of the Trust assets if they get divorced. The Trustees will look after the money if they think any of your dependants could be a spendthrift or simply incapable of managing the money, for whatever reason. The Trustees will be guided by you.
Assets in Trust are normally protected from personal creditors.
If you are looking for a “home” for your investments which is both tax efficient and capable of producing above average returns, a Personal Portfolio Bond, with your choice of underlying investments and which is held in Trust, is highly likely to be a possible solution to both your tax and investment requirements.
When it comes to tax planning, the earlier you start thinking about it the better. You can evaluate your options, quantify your tax liabilities, plan your investment strategy, decide on ownership structures and take steps to avoid tax on leaving the UK (if you have not already done so) at the same time as minimising them in Spain.
Expert professional advice is essential. The tax experts at Blevins Franks have in depth knowledge of both the UK and Spanish tax rules and can guide you through the process. The PPB can be a beneficial structure for both Spanish and UK residents, as long as you set up your financial affairs correctly and, ideally, from the outset.
The above are summaries of complex issues and usually specific advice should be sought.
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