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Spanish Investment Bonds explained

In this article, we take an in-depth look at how expats can correctly analyse and manage their tax efficiency when considering Spanish investment bonds, to adjust for a current or upcoming Spanish residency.

Written on 30 October 2020

The common goal most hold when looking into this type of investment is to not only protect their financials, but to create potential growth of their wealth, but knowing all the underlying information is key to success in any finance management, which is exactly why we are breaking down some of the more crucial areas such as fees, preparation and risk analysis when it comes to Spanish Bonds.

Understanding Spanish Bonds

These bonds have specific benefits to Expats that currently are, or are planning to become a Spanish tax resident, and are used predominantly to provide regular income, or to accumulate capital, whilst trying to maintain the highest level of tax efficiency.

A Spanish Bond is a tax compliant, single premium investment linked life assurance policy. This type of Bond meets several technical conditions in order to be deemed compliant in Spain.

An initial minimum investment sum of £25,000 (or other currency equivalent) is needed and is designed to be a medium to long-term investment, which means that you should be in a position to comfortably hold it for at least 5-10 years.

Knowing how Spanish bonds differ from other investments

The key thing to remember is that the standard investment tax system that you may have come to understand well, whether in the UK or elsewhere, has some very substantial differences to Spain.

Spanish tax laws demand taxation on worldwide income, including any investments.

If you were already residing in Spain and had failed to take any action to change your UK investment bonds to Spanish Bonds, it would not be recognised under the double-tax agreement between the UK and Spain, which would consequently leave you with a hefty bill, which would be owed to the Spanish Tax authorities. A prime example of another reason why you should do your research and obtain the appropriate advice before/ when residing in Spain.

Tax Deferral

One of the most attractive elements for investors looking at a tax compliant policy is that any growth in the value of the policy cannot be taxed until the policy is either surrendered, or if a withdrawal takes place. The policyholder incurs liability to income tax only when money is taken from the policy and a gain is recognised.

Income tax authorities have also exempted owners of compliant policies specifically, from having to disclose their policy at all on their Modelo 720 (a declaration form of any overseas assets necessary for any Spanish resident).

Spanish compliant bonds are widely marketed as massively tax efficient due to this deferral tax fact alone. Very often also appearing as the only option when becoming a Spanish resident, but this is certainly not the case.

Fees, Miss-selling and hidden costs relating to Spanish bonds

So, are the returns really as promised as they sound? In short, the answer is no.

There can often be a multi-layering of internal charges within the insurance bonds which can consequently cancel-out the promoted tax efficiency benefit. Some of these charges can even become apparent within the first five years after the initial investment.

Many will hear facts about the Spanish compliant Bonds such as that if no withdrawals are made, your portfolio can grow effectively tax-free. This isn’t necessarily untrue, but the circumstances are vastly increasing of which expats are being miss-sold artificially inflated annual bond fees that their chosen Independent Financial Advisors have negotiated with the providers, rather than. Some investors are also being tied into bonds without realising for extremely lengthy periods of time without being made aware.

Annual charges can also catch others out that do not go through the means of an Independent Financial Advisor, dependent on who they sign up through. High annual fees with long tie-in periods could mean that your advisor would be receiving 7-12% in hidden commissions, which ultimately means extremely negative effects on your overall returns.

Spanish Investment Bonds, when offered correctly can be an excellent long-term investment solution, but for this, advice needs to be obtained from an impartial IFA, that has your needs at the forefront of their recommendations and not their own.

Be sure that you are aware of all fee’s and fine print before making a decision. If you feel as though an advisor has not covered certain things that you thought they would, there is most likely a reason…

Requesting assistance from a trusted independent financial advisor

As mentioned above, financial advisors will sometimes have their own needs above yours. This means that it is crucial to be aware that whenever you are seeking advice from a platform that promotes the selling of specific bonds, there could be some ties to products, and many hidden agendas upon recommendation.

These advisors tend to work on a commission basis, and despite this being much less common now, it will always give an incentive to push a heavier commitment bond at a higher price (but instead be presented to you as ‘maximum reward’!)

It is vital that the Independent Financial Advisor that you chose does a full financial evaluation and full risk analysis with you before making any suggestions or recommendations. This means that your important financial advice is tailored to your exact needs and will work for you as efficiently as possible.

It can sometimes be easy to become overly cautious due to all of the things to look out for that have been mentioned above, but remember that while caution is advised, not taking action can be just as detrimental to your investments and overall finances as seeking poor advice would be.

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