Expatriates often keep UK investments like Premium Bonds, ISAs, savings accounts, shares and bonds, but are they suitable for Spain?
However well we have settled into our new lives in Spain, most UK nationals living there maintain some British habits. Whether it is a Sunday roast, following the football or watching British soaps, there are some ties we do not want to lose.
The same often applies for UK savings and investments. While many expatriates prefer to stick with what’s familiar, just how suitable are these arrangements for Spain?
Premium Bonds and ISAs
Launched 65 years ago, around 23 million Britons have over £100 billion in Premium Bonds today. Even though they do not provide any interest earnings or capital growth – which means their value will be eroded over time by inflation – the possibility of winning a large prize continues to appeal.
According to MoneySavingExpert’s Martin Lewis, while the National Lottery offers a 1 in 45 million chance of winning the jackpot, your chance of becoming a millionaire through a single Premium Bond is 1 in over 51 billion! Even with the maximum £50,000 invested, chances are just 1 in 84,037.
Despite these slight odds, a key drawcard is that winnings have always been tax-free in the UK. However, once you are resident in Spain, any bond winnings become taxable here.
How investments are taxed in Spain
In Spain, investment income is added to your general income for the year and taxed at the scale rates of tax of up to:
- 48.2% in Andalucía
- 49.5% in the Balearic Islands
- 50.5% in the Canary Islands
- 50% in Cataluña
- 54% in Comunidad Valenciana
- 45.5% in Madrid
- 47.4% in Murcia
ISAs too are fully taxable in Spain in the hands of Spanish residents at the corresponding savings income tax rates (19%, 21%, 23% and 26%). This applies to income and gains from cash and share ISAs.
Some expatriates mistakenly think that since they are UK investments they do not need to be declared in Spain, but if you are tax resident here they need to be declared and taxed.
With global automatic exchange of information now in full flow under the Common Reporting Standard, the Spanish tax authorities are informed about some of your UK investments and compare to your tax returns.
Download our guide to Spanish taxes
Similarly, although bank interest in the UK is tax-free under a certain threshold for UK residents, it is taxable for Spanish residents at the savings rates between 19% and 26%.
With interest rates stuck at all-time lows while the cost of living creeps up, many UK savings accounts are failing to outpace inflation, so it is worth exploring alternative structures for your money.
Other UK investments
You also need to look at your other UK investments, such as shares, unit trusts, OEICs and investment bonds and consider how these are taxed in Spain. Are they the most tax-efficient way of holding your capital? Besides income tax, what tax will you have to pay on the gains when you sell them?
In the UK long-term residents benefit from a 5% tax-deferred allowance when making withdrawals from UK investment bonds. However this does not extend to Spanish residents. In many cases the Spanish tax treatment of such investments is not particularly beneficial, so seek advice if you have these products.
UK rental income
If you are resident in Spain and rent out property in the UK, the income could be taxable in both countries, though the UK tax paid can be offset against the Spanish liability.
In Spain it is taxed at the scale rates of income tax. A 60% reduction is available in Spain against the net rental income, but only for long-term lettings where the tenant uses the property as their main home.
Alternative investment structures for Spain
Highly tax-efficient opportunities are available to residents of Spain. For example, many expatriates benefit from holding capital in a structure similar to an offshore life assurance policy or bond that acts as an investment wrapper to a conventional portfolio.
With a Spanish approved life assurance contract, no tax is payable on the underlying investment income (interest, dividends and gains) until a withdrawal is made and then only the gain element is subject to tax. Plus they offer many other benefits too.
For the best results, speak to an adviser who can guide you on both UK and Spanish taxation, the interaction between them and tax planning opportunities.
For the best results, speak to a locally-based adviser who can guide you on both UK and Spanish taxation, the interaction between them and the tax planning opportunities.
It’s not all about tax
There are other compelling reasons to regularly review how your savings and investments are structured. Crucially, you need to ensure they meet your income and currency requirements as well as your current objectives, time horizon and risk tolerance. Unfortunately, many people hold portfolios which do not work as hard as they can and are no longer suitable for them.
With opportunities to enjoy extremely favourable tax treatment on your capital investments in Spain, breaking old habits here can prove profitable, so take time to explore your options.
Contact us for an investment review