Spanish Tax Compliant Portfolio Bonds

Whilst Spain is generally not considered a tax haven, there are savings plans which expats living in Spain can take advantage of that can potentially save them thousands of pounds in tax. By investing through a Spanish tax compliant Portfolio Bond, an investor who is resident in Spain can benefit from an investment vehicle which has the potential to substantially reduce their tax bill.

Compliant or Non-compliant Spanish Bond?

Portfolio bonds in Spain fall into two categories: ‘compliant’ bonds, and ‘non-compliant’ bonds. A compliant Spanish bond differs from a non-compliant bond in that there are restrictions on the types of investments which can be held within the bond. Generally speaking, a bond will be non-compliant unless the funds are restricted to the internal funds of the bond provider.

However, most bond providers (such as Irish Life (now known as SEB) and Skandia) offer a wide variety of internal funds, so it is possible to construct a well balanced investment portfolio whilst at the same time benefiting from the advantages of a Spanish compliant bond.

Compliant Spanish Bonds – Tax Efficient Investing

As a consequence of temporary tax changes introduced by the Spanish Government which came into effect from 1 January 2012, tax rates have increased from 19% as follows:

Profit on Investment:            Tax rate:

€0 to €6,000                           21%

€6,001 to €24,000                     25%

€24,001 +                              27%

As we shall see below, there are two distinct advantages in relation to the tax treatment of compliant portfolio bonds.

Timing of Tax Payable on a Compliant Spanish Portfolio Bond

The first advantage  of a Spanish Portfolio Bond relates to when tax becomes payable. With a non-compliant bond, there is a requirement to withhold tax every year on all investment gains.

This tax is payable irrespective of whether a withdrawal is made from the bond. However, with a tax compliant bond, no tax is payable until the policy holder makes a partial or total withdrawal. So all investment gains are rolled up, which over the long term can produce higher returns.

Let’s take a look at an example. Client A invests £100,000  in a non-compliant portfolio bond on 1 January 2012, and the fund is worth £110,000 on 1 January 2013.  He does not make any withdrawals from the bond.

Therefore,  the gains of (€110,000) – €100,000,  = €10,000 would be subject to income tax. The first €6,000 will be subject to tax at 21% and the next €4,000 would be subject to tax at 25%. The bond provider would have to withhold 21% of the total gain, and the policy holder would be responsible for paying the additional tax.  The total tax bill due would be €1,261 + €1,000) = €2,261 , reducing the balance on  the portfolio bond to €107,739.

However, if Client A had invested in a Spanish tax compliant bond, then no tax would be payable, as he had not made any withdrawals from the bond.

Tax on Partial Withdrawals

The second advantage of a compliant bond relates to how much tax is paid on withdrawals of any investment gains.  Partial withdrawals are apportioned between redemption of capital (part of the initial premium) and the profit made on the initial investment.

Let us take the case of Client A in the above example. If Client A made a withdrawal of €10,000, then the taxable gain will be calculated as follows: (10,000 / 110,000) x 10,000 = €909.09.

This taxable gain is then taxed at 21%, creating a tax liability of €190.91.
For more information about Spanish Tax Compliant Portfolio Bonds, please contact us.  Offshore Bond Investor offers significant rebates and increased allocation rates for clients who invest in a Spanish Portfolio Bond.

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