Many investors living in Spain are uncertain of where and in what form they should hold and manage their investments. This week I wish to remove a little of the uncertainty by providing a few practical tips for readers seeking to construct a portfolio, which will be tax friendly in Spain.
Cash investors Many investors holding cash are currently concerned about the possible imposition of withholding tax on their offshore investment accounts and the associated disclosure of information to the tax authorities where the investor is resident. To avoid this problem one possible solution would be to place their cash deposits into an insurance company investment bond based in a recognised European jurisdiction such as Dublin. Scottish Equitable International for example, a leading international insurance company, offer a deposit based investment bond which has no initial or exit charges specifically designed for cash investors. The bond offers investors a choice of instant access money market funds or traditional building society accounts and because of the tax status of this type of investment bond all interest will accrue without withholding tax and is not declarable for income tax purposes until the income is withdrawn and remitted to the investor’s country of residence.
Non-cash investors In some situations offshore investment bonds will provide investors with a cost and tax effective structure for the purposes of holding and/or managing an investment portfolio. They are not however a universal tax planning panacea due to the establishment and running costs, which dependent on personal circumstance can be higher that the potential tax savings. For example, the set up and running costs associated with some offshore investment bonds (excluding investment management fees) can be as much as 2.2% pa of the initial investment for the first five years. If therefore a £100,000 investment were to grow by 7% pa the charges would be equivalent to a tax on the growth of 27%, which is 12% higher than the fixed 15% rate of capital gains tax on collective investments. The second area where the tax efficiency of insurance company bonds needs careful analysis in relation to personal tax circumstances is when dividend or other income with attaching tax credits are being received. For example, dividend income received from a recognised collective investment scheme such as a unit or investment trust will carry a tax credit which can be offset against Spanish income tax liabilities. If the same income is paid into an offshore insurance company bond the tax credit is lost, which reduces the net benefit of holding assets via this medium. For some investors a more tax efficient option is to hold and manage investments in a nominee account, as used by all institutional and professional investors. These accounts are attractive because they do not have set up or exit charges and unlike offshore portfolio bonds dividends paid will retain their attaching tax credits. Nominee accounts managed of a discretionary basis have an additional attraction for Spanish based investors because collective investments such as Unit Trusts and Investment Trusts can be sold and reinvested into alternative collective investments without triggering an immediate charge to CGT. Only gains remitted are taxed at the flat capital gain tax rate of 15%. Please note the capital gains tax deferral does not apply where the investor is directly controlling the sale and reinvestment transactions. Spanish legislation lists a number of tax havens, included on the list are the Channel Islands and the Isle of Man, which are commonly used by British Expatriates and widely recommended by advisers. Spanish tax legislation states that investments held tax haven jurisdictions are subject to annual taxation based on an assumed growth rate of 15% unless the actual g
