How will Form 720 affect your tax position going forward? What should you be doing now to prepare for your next declaration?
If you were resident in Spain last year and own overseas assets worth €50,000 or more, you should have reported these assets on Form 720 last April. How will this affect your tax position going forward? What should you be doing now to prepare for your next declaration?
Over 131,000 taxpayers reported overseas assets worth €87 billion. It may take time for the tax authorities to go through them all, but we can expect them to compare the data received with that previously provided by the owner on their annual tax returns.
Over recent months I have noticed a growing awareness among taxpayers that they will have to pay more tax going forward as a result of the new declaration. It is now crucial that you review your financial plans, and in particular consider whether they are tax efficient in Spain.
Here are some of the key issues I come across in relation to Form 720.
The form was new to everyone, including accountants, and many have made the mistake of advising clients to report items which need not have been reported. For example, there was and remains no obligation to report a pension unless it gives rise to a temporary or lifetime annuity. However many people were advised to report the value of their company pensions, even though the income cannot legally be treated as an annuity. Perhaps more worryingly, some accountants have capitalised pension income from occupational pensions, and then reported this capitalised value as an asset. This will be a problem moving forward, as if you leave your estate to a Spanish resident when you die, the tax authorities will expect to assess these notional pension assets for succession tax at up to 34%, even though in practice the pension asset does not actually exist.
Many British expatriates living in Spain hold their investments in offshore portfolio bonds. These life assurance bonds can provide many tax advantages here – but only if they are approved as such for tax purposes in Spain. With approved policies, all growth within the contract is free from Spanish income or capital gains tax. If you do not take withdrawals, there is no tax to pay.
All UK and most offshore bonds are not approved. In the past people generally only declared their UK or offshore policies if they took a withdrawal, but this approach was incorrect. According to Spanish legislation, the profits must be assessed each year, regardless of whether a withdrawal is made, and are taxed at the savings income rates of 21% to 27%. With the advent of the new 720 the taxman is now likely to spot the discrepancy and could very well seek the tax due on previous years’ gains. There are circumstances in which an investor can end up paying Spanish tax on the same gains twice.
Approved life assurance bonds offer very attractive tax breaks in Spain which are well recognised by the Hacienda. You can gather much of your investment capital into one arrangement, generally making it much easier and cheaper to manage. If you can sign a Specific Disclosure Mandate, which means you comply with the Spanish tax regulations and taxes are paid on your behalf, you do not need to report the policy on Form 720 (according to the Agencia Tributaria website Q&As).
Anyone who reported assets for the first time in April, particularly those which produce income or gains, will probably see their tax bills rise. However going forward you may still be able to take advantage of tax efficient structures in Spain, and should seek specialist, personalised advice.
Those who did not report overseas assets on Form 720, or misrepresented them, could find themselves in trouble. With automatic exchange of information on the increase it is only a matter of time before they are discovered. The tax authorities are likely to assess them for income tax on the full value of the asset, and there is no time limit. The tax and penalties could amount to more than the value of the asset.
If you wish or need to review your assets to make them more tax efficient, fully compliant in Spain and less of a concern for Form 720, you need to do so now. While the next submission deadline is 31st March, you report on assets as at the previous 31st December, so everything must be sorted out before then.
You do not need to submit another Form 720 if you have not acquired or disposed of any assets since your previous submission, and existing assets do not increase by more than €20,000.
More issues relating to Form 720 will come to light over time. The Spanish taxman is determined to keep a close eye on offshore assets and extract as much tax as he can. However with specialist, up-to-date advice you can structure your assets so that this need not be a concern. You will have the peace of mind of knowing your assets are correctly structured and as tax efficient as they can possibly be.
14 September 2013
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 should take personalised advice