You need to be extra careful with your tax planning these days.  Make sure it is up to date with all the various tax changes and is fully compliant.  You also want to check that you are not paying more tax than necessary.

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 –

  1. 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.
  2. 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.
Modelo 720

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 substantial penalties.  

Automatic exchange of information

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.

Tax efficient investment arrangements

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.

 Any questions? Ask our financial advisers for help.

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.