Archive for the ‘Spanish Taxes’ Category
Britons need to make a “distinct break” with the UK for non-residency status – employees excluded
Britons who move abroad to live need to be able to show that they have made a “distinct break” with the UK if they wish to ensure that they cannot be treated as UK tax resident after leaving UK shores. If you do not clearly sever ties with the UK, HM Revenue & Customs (HMRC) could argue that you are liable for tax in the UK, even though you live elsewhere. The exception is if you leave the UK for full time employment abroad.
It has been suggested that employees leaving Britain will have to cut their ties with the UK like selling their home, and not set foot in the UK for at least a year to become non-UK resident, but this is not the case.
The recent judicial decision involving Robert Gaines-Cooper and UK residency reaffirmed that in order to become non-UK resident it is not necessary for an employee to do anything other than be employed overseas full time for at least a full UK tax year.
Lord Justice Moses said: “It is not enough that the taxpayer has left the UK, he must have left to work full time. Absence is not sufficient; it must be absence while engaged on a full-time employment for at least a whole tax year. No more however is required. The absence need be neither permanent nor indefinite. Accordingly, … there is no requirement, for a taxpayer to demonstrate that he has severed family and social ties within the UK.”
The employment must be on a full time contract as an employee and not simply your own company set up to give you an employment.
When Gaines-Cooper moved to the Seychelles in 1975 he did not take up full time employment there and had to rely on HM Revenue & Customs’ (HMRC) guidance in its booklet IR20 (now HMRC6) on residency and non-residency. Under the heading “Leaving the UK permanently or indefinitely”, the booklet stated: “If you go abroad permanently, you will be treated as remaining resident and ordinarily resident if your visits to the UK average 91 days or more a year.”
Gaines-Cooper argued this meant that all he had to do was leave the UK and thereafter spend less than 91 days a year there. The Court of Appeal referred to the words “permanently or indefinitely” in the heading:
“The adverbs “permanently or indefinitely” make, as a matter of construction, all the difference. The extent to which a taxpayer retains social and family ties within the United Kingdom must have a significant and often dispositive impact on the question whether a taxpayer has left permanently or indefinitely.”
IR20 has since been replaced by HMRC 6 and HMRC is adamant that the information given is for guidance only. However, it is clear that if you are not an employee – eg, you are retired, even if below retirement age – and wish not to be treated as a UK tax resident after leaving the country you must demonstrate that you are leaving the UK “permanently or indefinitely”.
Ties to sever to establish UK non-residency
- Set up a new main home outside the UK. It is not strictly necessary to give up having a home in the UK altogether providing it is “consistent with” you moving abroad to live “permanently or indefinitely”. So if you retain a UK home it would be prudent for your home abroad to be larger than the UK one. However retention of a UK home available for your use is a factor that connects you to the UK, so to strengthen a claim to non-UK residence we would recommend you sell or rent it out to a third party.
- Move personal effects, cars etc to your home abroad.
- Your spouse and any minor children should move abroad with you. There is however no need to sever all family and social ties – it is not necessary for adult children or aged parents to move with you as has been suggested in the UK press.
- Resign membership of sporting and social clubs and cut all UK business connections.
- Notify your UK doctor and dentist that you have left the UK and register with different ones in your new country of residence.
- Dispose of UK investments and plan to re-invest abroad.
- Close UK bank accounts and credit cards and open new ones in your new country.
Once you have made a ‘clear break’ with the UK, it is still possible to visit, providing you keep well within the 91 day limit – i.e. spend less than 91 days or nights there per UK tax year taken on average over four years.
If you have not made a ‘clear break’ with the UK, you may be treated as remaining UK resident, regardless of the number of days you spend in there each year.
A tax and wealth management firm like Blevins Franks can advise you on tax and residency issues in the UK and many other countries, including advice on how tax planning can reduce your tax liabilities, even if eventually you return to the UK to live.
By David Franks, Chief Executive, Blevins Franks
Paying Tax in Spain – Exploding the Myths
Many British expatriates arrive in Spain to live without fully understanding the local tax situation or any obligations that may remain to the UK taxman. There are quite a few myths around and unless you are properly informed you may get your tax planning wrong. This article looks at some of the common misconceptions and separates fact from fiction.
I am resident in Spain but complete a full tax return in the UK
► You become resident for tax purposes in Spain if:
- you spend more than 183 days in one calendar year in Spain (the days do not have to be consecutive), or
- your “centre of economic interests” is in Spain, or
- your “centre of vital interests” is in Spain, or
- your spouse is resident in Spain unless you can prove you are resident in another country.
► As a resident of Spain you are liable for income and capital gains taxes on your worldwide income.
► If you receive a gift or inheritance as a Spanish resident, you may be liable to Spanish succession tax.
► You must complete a Spanish tax return in respect of your worldwide income.
► A UK tax return only needs to be completed in respect of certain non-exempt income, such as rental income from UK property.
I am taxed at source on my UK assets and therefore I am not liable to tax in Spain on these assets
► You are entitled to double tax relief if you have income subject to tax at source in the UK which is also taxed in Spain.
► You can usually make arrangements for tax not to be deducted at source in the UK on certain types of income. This income would then be received gross and taxed solely in Spain.
I am taxed at source on my offshore bank accounts under the EU Savings Tax Directive and therefore am not liable to tax in Spain
► Paying withholding tax on offshore interest payments does not mean that you have no further tax liabilities on the same income in Spain.
► You still must declare such earnings on your Spanish tax return.
► If you pay the withholding tax and declare the income in Spain you are unlikely to receive any tax credit in Spain and could pay tax twice.
I can withdraw 5% of my UK/offshore insurance bond per year for 20 years without any liability to Spanish tax
► The 5% rule only applies to UK residents.
► As a Spanish tax resident, your offshore insurance bond will be taxed according to the Spanish rules.
There is no tax to pay if I have not taken withdrawals from my insurance bond
► The taxation of insurance bonds in Spain depends on whether the bond is ‘qualifying’ (issued by an EU country and compliant with Spanish regulations) or ‘non-qualifying’.
► Non-qualifying bonds are valued at 31st December each year and any increase in value from 1st January is taxed in full as income, even if there has been no withdrawal. The taxable income is taxed as savings income, so at 19% on the first €6,000 and 21% on any balance. For example, if an investment bond increases in value by 10% from €200,000 to €220,000 in any one year, the tax payable in Spain is €4,080 (€6,000 x19% = €1,140, + €14,000 × 21% = €2,940).
► Any fund located in a ‘tax haven’ (eg Isle of Man, Jersey, Guernsey) is non-qualifying and will receive this unfavourable tax treatment.
A withdrawal from a qualifying offshore bond will be taxed at 19% on the first €6,000 and 21% on any balance
► There is no tax to pay until a withdrawal is made from qualifying bonds in Spain.
► The taxation is very favourable because only the growth in value element is taxed, not the whole withdrawal. Using the above example, if you withdraw €20,000 you will only need to pay tax on roughly 10% of it. The taxable income is therefore €2,000 and your tax liability (at 19%) is only €380.
UK investment bonds are tax free in the UK for Spanish residents
► A UK investment bond is taxed at source in the UK.
► The tax deducted can be set against your tax liability in Spain, so you do not pay tax twice on the same income.
► If you have either a non-qualifying insurance bond or a UK investment bond it will be advantageous to transfer it to a qualifying, non-UK, bond.
I am a UK national and not liable to Spanish succession tax (SST)
► SST is payable if the inheritor or recipient of a gift is resident in Spain, or the asset being gifted or passed on death is situated in Spain.
► The tax rate can be as high as 34% for inheritances or gifts within the immediate family or higher for more distantly related recipients.
► Depending on which region you live in, there are usually deductions available according to the closeness in relationship between the recipient and the deceased, and other exemptions may be available.
► SST can often be avoided through use of an offshore trust.
Contact an experienced international tax and wealth management adviser like Blevins Franks for advice on tax mitigation strategies in Spain.
Note that the tax treatment(s) detailed above are current at the time of writing and may change in the future.
By Bill Blevins, Managing Director, Blevins Franks
Offshore Banking Moves Further Towards Tax Transparency
Few expatriates used to think twice about opening an offshore account. They provide a means of keeping Sterling outside the UK (useful to help prove your UK-non residency status); you can usually open and use them from anywhere in the world; interest rates were often higher than their onshore counterparts and they have also been popular for ‘tax planning’ purposes.
While the first two benefits listed above still apply, offshore banks do not necessarily offer the same interest rate advantages that they used to, and from a tax planning point of view the situation is very different today, with more developments on the horizon.
Following the collapse of Icelandic banks in the Isle of Man and Channel Islands, savers also began to question how safe their savings were, even through the jurisdictions did then implement or improve depositor protection schemes.
As a result of these changes, more savers today are considering alternative homes for their wealth.
Offshore banks were often used by people to hide capital and interest earnings away from the taxman. While they were legally obliged to declare worldwide income, the taxman had no means of tracing their account so there was little pressure to report it. Interest was usually paid gross and as offshore banks were not bound by the laws of your country of residence it was a case of ‘what the taxman doesn’t know about he can’t tax’.
The introduction of the EU Savings Tax Directive in 2005 served to change this. All Member States are required to operate automatic exchange of information on interest payments on accounts held by residents of other States. However, Belgium, Luxembourg and Austria were allowed to operate a withholding tax system with a view to change to automatic exchange of information after a transitional period.
The Isle of Man and the Channel Islands also operate withholding tax with the option for exchange of information. The withholding tax option effectively maintains banking secrecy. Although the interest earnings now have tax deducted at source, it still falls to the owner to declare it in his country of residence.
By this time next year this will have changed. In June the Isle of Man parliament agreed that from 1st July 2011 it will withdraw the withholding tax option and only operate automatic exchange of information – there will be no more banking confidentiality for EU residents. This was an endorsement of the commitment it made at the Organisation for Economic Co-operation and Development (OECD) Forum in June 2009. It was the first offshore jurisdiction to do this and the decision will impact on all expatriates who have not declared their Isle of Man accounts in their country of residence. Anyone affected by this will need to ensure that they have reported all their interest to their local tax authority … or bear the consequences.
Following quickly on the Isle of Man’s heels, on 28th July Guernsey’s Chief Minister announced that the jurisdiction will introduce automatic exchange of information, thereby abolishing the current option to pay a withholding tax and avoid disclosure. A government announcement said that Fiscal and Economic Policy Group has recommended to the Policy Committee that institutions in Guernsey should move to automatic exchange of information from 1st January 2011, and no later than 1st July 2011.
Following the announcement, other European jurisdictions which operate the withholding tax option, eg Switzerland, could come under increased pressure to follow suit. In any case, the withholding tax rates jumps from 20% to 35% next July.
High interest rates a distant memory
Currently interest earned in offshore banks is not generally more beneficial than onshore banks. The days have passed when they were in a position to offer high returns to attract investors.
With the money markets expecting the Bank of England base rate to stay low for some time, many offshore banks have cut the rates they offer on fixed rate bonds. In June, Michelle Slade of Moneyfacts warned that now that demand for savers’ money has eased, rates are being cut as banks readjust back to more normal margins. “Banks do not want to pay more than they have to on savings, so once a few cut rates, others will invariably follow,” she said.
While a couple of banks did increase rates on fixed term bonds in July, there are still very few attractive rates available to those who do not want to tie up their money for too long.
Who owns your bank?
Do you really know who owns the offshore bank you may be using and in which jurisdiction it is based? Since the credit crunch more countries have set up depositor protection schemes but you would need to check with the bank exactly what protection they offer. Banks are no longer considered to be 100% safe and in the event of another failure it could take a long time to receive compensation.
Offshore banks closing
At any time and without much warning offshore banks are being closed down, leaving savers with less options. In June Northern Rock announced that it is closing down its operation in Guernsey on 2nd September and Irish Permanent said it was shutting its Isle of Man branch by the end of the year. Other banks may follow as they retrench and reduce peripheral arms of their business. For example the Yorkshire Building Society is deciding whether to keep Yorkshire Guernsey open or not.
More and more foreign banks are closing their doors to US citizens as the US authorities take ever draconian measures to trace and prevent tax evasion. France started to close branches of French banks in tax havens from March 2010.
Many of advantages that offshore banks used to offer investors are gradually being eroded. There are investment structures available which can reduce tax liability, and offer the potential for capital growth and higher rates of return. Speak to an experienced tax and wealth manager like Blevins Franks for the most suitable tax planning and investment strategy to meet your specific circumstances.
By Bill Blevins, Managing Director, Blevins Franks
Were The EU Bank Tests Stressful Enough?
On 23rd July the results of the much anticipated stress tests on European banks were published. There were no surprises, with just seven out of the 91 banks tested across the 27 EU Member States failing. But does this mean that European banks are safely out of the woods? While the results will hopefully give the markets more confidence, there are concerns that the tests were too lenient.
The stress tests were carried out by the Committee of European Banking Supervisors (CEBS) in close cooperation with the European Central Bank (ECB). They tested Tier 1 capital ratios (the percentage of a bank’s equity capital to its risk weighted assets and a common measure of a bank’s resilience to shocks) under a benchmark scenario for 2010 and 2011.
The aim was to assess how resilient the EU banking system would be to another economic downturn and to what extent banks could absorb adverse movements in the sovereign debt and credit markets.
The regulatory minimum for Tier 1 capital is 4%, but for the purpose of the exercise it was set at 6%. Tests were carried out for the two-year period ending 31st December 2011 for an adverse scenario assuming a 3% deviation of gross domestic product for the EU compared to the European Commission’s forecasts cumulated over the period.
The seven banks whose Tier 1 capital ratio fell below 6%, with a capital shortfall of €3.5 billion, were Germany’s Hypo Real Estate, Greece’s ATE bank and five regional savings banks in Spain (Unnim, Cajasur, Diada, Espiga and Banca Civica).
There has been widespread criticism that the conditions were too easy.
A commentary released by Aberdeen said: “Arguably more banks would have failed had the CEBS adopted more strenuous modelling. Rather than a 3% deviation in the EU’s growth forecast they could have factored in a greater than 5% double-dip. Furthermore the CEBS assumed no sovereign default, with the worst case scenario a 23.1% haircut on Greek sovereign debt.”
Other analysts believe a 7% Tier 1 capital radio would have been a more credible benchmark. In this case Allied Irish Banks, Germany’s Postbank (one of its largest), Italy’s Monte del Paschi, Portugal’s Espirito Santo and Greece’s Piraeus would all have failed.
Credit Suisse pointed out that the tests based just on core Tier 1 would have been a more reliable test – and would resulted in the whole of the Greek banking system, plus many other lenders, failing.
The tests also assume that all States would contract at the same rate in a downturn, whereas the ‘Club Med’ states and Ireland would probably contract more if a downturn comes on top of their current fiscal tightening and debt-leveraging.
According to research by the Royal Bank of Scotland (RBS) at the end of May, Greece, Spain and Portugal had issued public and private debt worth €2.16 trillion between them, equating to 22% of the region’s gross domestic product.
Other responses to the stress tests were most positive. In its half yearly global outlook the Bank of America said they marked the “beginning of a return to normality”, with its chief European economist commenting: “Greece is staging an impressive fiscal turn-around. Spain has come through its July peak funding with flying colours. Europe can and will get its problems under control.”
Aberdeen’s communication concluded by saying that the European banking system appears reasonably well placed to withstand a conventional downturn… but the results tell us little about how banks would cope in more extreme scenarios. It called for greater disclosure by banks on the nature of their asset bases and liquidity profiles to help foster confidence in the banking system.
Confidence in European banks will not have been helped by an article entitled “Europe’s €30 trillion headache” published in The Telegraph on 29th July.
The article covers a new report by rating agency Standard & Poor’s (S&P) which reveals that European banks have amassed €30 trillion in liabilities and face a serious funding threat over the next two years.
With European banks, most of their mortgages and personal loans remain on their balance sheets and need funding. The three month loans offered by the ECB’s emergency lending effectively concentrated roll over risk for large amounts of debt. Banks will eventually have to refund these loans in a crowded market. S&P commented: “ECB loans have contributed to a shortening of liability maturities. The result is a growing funding mismatch for the European banking industry. This is happening as regulators prepare to introduce tougher liquidity standards. This is one of the greatest vulnerabilities of the industry”.
Around €1 trillion of debt in the Eurozone and Britain will become due by 2012. The stronger banks will cope, but what about the weaker ones?
Silvio Peruzzo from RBS told The Telegraph: “If down the line the markets start to question the debt trajectories of [Club Med] countries, the banking systems will be tested again. There is €1 trillion of private debt in Spain linked to just one asset: property.”
In its Financial Stability Report at the end of May, the ECB had also warned that Eurozone banks are now experiencing a second wave of writedowns. It predicted that they will suffer loan losses amounting to €195 billion over 2010 and 2011 – on top of the €238 billion written off in bad debts by the end of 2009.
None of this necessarily means that there will be more bank failures in future – but nor should we rule the possibility out completely. The European banking industry is not out of the woods yet.
Whether it is your bank accounts, insurance policies or your investments, you should always establish to what extent they are protected in the event of institutional failure. When it comes to your investments, try to use arrangements whereby your assets are not held on the institution’s balance sheet. This way your assets are segregated from potential creditors of the institution, giving you peace of mind that your capital is protected.
Seek professional advice from an authorised advisory firm such as Blevins Franks Financial Management Ltd on the arrangements which would provide the highest security for your wealth.
Blevins Franks Financial Management Ltd is authorised and regulated by the UK Financial Services Authority for the conduct of investment and pension business.
By Bill Blevins, Managing Director, Blevins Franks
Spanish Tax Rise to Target the Wealthy
Wealthy individuals living in Spain need to brace themselves for an unexpected tax shock. Spanish Prime Minister, José Luis Rodríguez Zapatero, has announced an imminent tax increase for “those who actually have more”. Whether this is the last of the tax rises or there are more to follow remains to be seen. It raises the importance of tax planning to minimise your tax liabilities and protect your wealth.
In giving warning of the impending tax rise on the wealthy, dubbed a “millionaire tax”, on 26th May Zapatero told parliament that it would affect only those with a “high economic capacity”. At the time of writing details have not been released on how the tax would apply or how long for.
It marks a clear u-turn by the government, which had only very recently rejected the idea of imposing a millionaire tax, with Zapatero explaining that the time was not right for such plans. While he now says that only the wealthiest will be affected, the middle classes will be concerned that he will also backtrack on his promise not to target them if the need arises.
Determined to save around €15 billion by 2011, the Spanish government earlier presented an austerity package, which includes a 5% pay cut for public sector employees and a freeze on pensions. Along with an already planned increase in VAT these deficit reduction measures will affect a broad section of Spanish taxpayers, but Zapatero feels that the better off should make a special effort. “In my opinion, any citizen feels that the effort should be greater from those who have more,” he told an EU news conference. It places a heavy burden on affluent taxpayers whom the authorities and public alike feel should pay for the bulk of the deficit bailout. Spain aims to reduce its budget deficit from 11.2% last year to 9.3% this year, 6% in 2011 and below the 3% EU threshold by 2013.
There has been some speculation about which taxes would rise, with an article in El Mundo on 19th May listing potential areas where the government could increase taxation.
Tax increase on income
The highest rate of income tax is currently 43%, applying to those earning over €53,407 in the current tax year. This tax rate could be increased for higher earners and tax bands potentially narrowed. Some reports had suggested a tax rate of 48% for those earning over €150,000.
The El Mundo article said that Ministry of Finance specialists, Gestha (Sindicato de tecnicos del ministerio de hacienda), had suggested targeting income over €600,000. 3.7% of taxpayers declare incomes above €60,000 a year which would not bring in an effective amount of revenue – so how large would the tax rise have to be on this group of high earners?
Wealth tax
Wealth tax could be another option for the government. The tax rate was effectively reduced to zero on 1st January 2008 by applying a 100% tax credit, leaving scope for this to be reversed. It is thought that the tax rate could be reintroduced for those having a net wealth in excess of €1.5 million, which could raise an additional €1,240 million annually.
SICAVs
An SICAV is a type of open-ended collective investment scheme and has been a controversial structure in Spain as this type of investment attracts a very low tax – as little as 1% – much lower tax than other investment funds. There are 440,000 investors in SICAVs in Spain, and although the government has rejected increasing the tax rate on these so far for fear that investors would leave the country for more tax advantageous jurisdictions, there is plenty of scope to raise the tax rate to collect more revenue.
In the 2010 Spanish Budget tax on savings income was raised to 19% from 18% on the first €6,000 and 21% on the excess.
Succession tax
The Institute of Fiscal Studies (IEF), an organisation linked to the Ministry for Economic Affairs, has carried out studies looking at a new tax on succession which would establish a common minimum tax across all of the autonomous regions. In recent years there has been a drop in the succession tax collected and this would go some way to shore up an historic deficit position in the autonomous communities.
Bank tax
The “bank tax” being discussed by the EU, otherwise known as the Tobin tax, would affect 295 Spanish financial institutions. Gestha estimates a tax here of five points could raise €1,285 million.
Excise and VAT
Even though tax on tobacco and fuel was raised last June, it could be hiked further, as well as an increase on alcohol.
The VAT rate is already due to increase from 16% to 18% from 1st July 2010. The reduced rate currently applied to services and food production will increase from 7% to 8%.
To limit the impact of the potential Spanish tax increases, wealthy taxpayers can often use effective tax planning measures to reduce their tax liabilities. This will protect your wealth giving you more to spend on the lifestyle to which you are accustomed and protect the inheritance you intend to leave to your family. A tax and wealth management specialist like Blevins Franks can advise you on the appropriate tax planning to suit your specific needs.
By Bill Blevins, Managing Director, Blevins Franks
Reduce Spanish and UK Inheritance Tax with A QNUPS
British expatriates living in Spain want to feel confident that their wealth will last them for the rest of their retirement and keep them in a comfortable lifestyle. Paying less tax is one way to protect your assets and legitimate tax planning methods can help with this. The latest arrangement available to British expatriates is QNUPS (Qualifying Non-UK Pension Schemes) which can reduce taxation in Spain –as well as UK inheritance tax (IHT).
Spanish tax savings which can be made with a QNUPS are:
- QNUPS can avoid succession tax in Spain as well as succession law.
- There is no Spanish tax on the transfer into a QNUPS.
- Funds within the scheme will grow free of Spanish income tax.
- If you make a withdrawal in the form of an annuity from the fund itself (as is usually the case), very favourable Spanish tax provisions may apply.
- There is no need to buy an annuity from an insurance company.
- You can withdraw up to 25% as a lump sum from a QNUPS. If a lump sum is taken Spanish tax is due, but is calculated only on the difference between the capital received and the contributions you made. The tax rate is 19% (on the first €6,000 of total savings income, including that from other sources) and 21% on the excess.
- The balance of your investment can pass onto your heirs on your death.
- A QNUPS can avoid wealth tax if a rate is reintroduced in the future.
No UK IHT with a QNUPS
If you are a British expatriate, you may be liable to UK IHT on your worldwide assets, even if you are Spanish tax resident. This is because liability to IHT is based on domicile and not residency.
Shaking off your domicile is not easy to do and usually takes at least three years and involves pruning your ties with the UK to the bare minimum. For example, you would need to sell your UK property or at least not have it available for use; close surplus bank accounts, credit and debit cards and other investments; sell your vehicles and cut down social and business connections in the UK. You need to be able to provide evidence that you do not intend to return to the UK, and establishing a permanent home in Spain and making a Spanish Will will help. Even if you do lose your UK domicile status, you would regain it as soon as you move back to the UK to live.
Many Britons who relocate to Spain do so without a thought of moving back to the UK. But the fact is that as the years go by many do for a variety of reasons, such as on the death of a spouse or partner or to be closer to grandchildren as they grow up. Returning to the UK means returning to a UK liability to IHT, currently at 40% above the nil-rate threshold of £325,000 per person or £650,000 for spouses and civil partners.
Investing in a QNUPS takes away the worry over whether or not you are still UK domiciled and liable to IHT, or whether you may later return to the UK. Assets in a QNUPS are immediately exempt for IHT – even if you are UK domiciled.
Other advantages of a QNUPS
- Investable wealth can be placed in a QNUPS. You cannot invest a UK pension plan directly into a QNUPS, although it is possible after you have been non-UK resident for five complete, consecutive UK tax years, as long as you go via the QROPS route first.
- There is no maximum age at which you can invest in a QNUPS.
- There is no maximum contribution.
- You do not need to have any earned income from an employment.
- Income and a lump sum can be taken from age 55, or can be deferred until the age of 75 (although if you take income earlier, the lump sum needs to be taken then).
- Assets can be invested and benefits taken in any currency of your choice, giving you the opportunity to remove currency risk.
- Income which is taken is drawn down from the fund, leaving your scheme assets invested and rolling-up free from tax.
A QNUPS provides an opportunity for flexible investing and choice. It doesn’t matter how old you are or how long you have been retired, investing in a QNUPS will give immediate tax benefits, especially for Spanish succession tax and UK IHT. Within QNUPS the funds will remain fully invested and will be subject to investment risk, in line with your investment objectives.
Blevins Franks is an established international wealth and tax management firm with full knowledge of the rules of taxation in both Spain and the UK. Contact an adviser such as Blevins Franks to learn how QNUPS can help you.
Note that the tax treatment(s) detailed above are current at the time of writing; these are based on our understanding of current UK and Spanish legislation and taxation practice, and may change in the future.
By David Franks, Chief Executive, Blevins Franks
Rise in Spanish IVA
From the 1st July, 2 of the 3 categories of Spanish VAT will rise.
16% to 18%
7% to 8%
4% (is to remain the same).
What does this mean for the Spanish Property market which is already struggling to survive the current climate?
It will certainly increase the cost of buying and selling property and obtaining a mortgage in an already crippled market.
What is the government thinking?
Of course it will generate income for them but may push the market further backwards and no doubt they are hoping that prices will fall still further and generate increased interest from buyers and steady the industry but at what cost? More likely it will force more builders, promoters and agencies out of business with knock on job losses. The banks will come under further pressure and there will be many owners caught in the trap of having mortgages far greater than the value of their property causing an increase in repossessions as people struggle with their own economic crisis, losing jobs and putting more people on the bread-line.
Then there is the knock on effect for furniture and electrical companies and many other suppliers with steady drops in sales already recorded.
Buyers and Investors
No doubt there are people watching the situation with interest and for the general buyer now is the time to buy a property before the IVA increases and with so many properties available at low prices.
For the investor, they will probably sit it out and wait for rock bottom distressed sales and then pounce as the drop in price will by far outweigh the increase in purchase costs.
With the pound rising against the euro, buying a property is looking even more attractive.
Mortgages
As the banks continue to come under pressure they will negotiate on distressed properties in order to clear their overflowing books and are currently making mortgage offers which pre crisis would be unheard of.
If you have the money now is the time to buy Spanish Property.
Admin: 5 May 2010
Spanish Capital Gains Tax Relief on the Main Home
Does It Apply On Overseas Properties?
The Spanish gains tax regulations can provide relief on the sale of the main home for Spanish tax residents whose property qualifies as their habitual main residence. If you are 65 years or older the gain is tax free even if you do not buy another property. If you are under 65, the exemption only applies if you reinvest the proceeds of sale into a new main residence within a four year period, starting from two years before the sale. There is some confusion about whether this relief applies if your new main home is located outside Spain, so this article looks into this issue.
How does the relief work?
For the property you are selling to qualify as your main home, you need to have lived in it for a continuous period of at least three years from the date the property was bought or construction was completed. If you have to sell earlier because of a change of job, marriage, separation or death of a partner, the tax relief can still apply.
The relief is based on the proportion of the total sales proceeds reinvested in the new home. If it costs more than the sale price of the old home, the full gain is exempt. If only half of the sale proceeds are reinvested, then only half of the gain is exempt and the other half is taxable in the year of sale.
If the property being sold has a mortgage on it, it is the net sale proceeds (after deducting the mortgage) which need to be fully reinvested to escape capital gains tax.
The taxpayer must declare the gain on his Spanish tax return together with his intention to reinvest the proceeds into a new main home, or the relief will not apply.
Location of the properties
While the tax relief is only available to Spanish tax residents (as the property cannot be your main home if you are not Spanish tax resident), the properties themselves do not need to be located in Spain – either the residence you are selling or the new one you are buying.
So, if you move to Spain and sell your main home in your former country of residence (eg the UK) after you become Spanish resident, you may be able to avoid Spanish capital gains tax under these provisions. You have to purchase your Spanish home within the two years preceding the date of sale of the UK property or within two years following the sale. The purchase price of the Spanish property should be at least the net sale proceeds of your UK property for full relief to apply.
If the Spanish property costs less than the amount you received from the sale of your UK property, you will be charged tax in Spain on a proportion of the gain equivalent to the sale proceeds not reinvested.
Similarly, if you sell your main home in Spain and move to another country, reinvestment relief can still apply to the former Spanish home even though the new home is not located in Spain, provided that you and your family make this property your new main home. The purchase of the new home must take place within the relevant time limits and the full sale proceeds must be reinvested for full relief to apply. If the family members move overseas to the new home, but the taxpayer remains in Spain, the relief will not apply as the property has not become the taxpayer’s new main home.
An example of relief applying in such a case is given in a formal response to a query submitted to the Spanish tax administration.
Furthermore, it would be a clear breach of EU law if Spain did not allow the relief for reinvestment in a new home situated within another EU country. This situation arose in Portugal, and so the European Commission took action, as below:
“In July 2004 the European Commission invited Portugal to change its rules which prohibit the capital gains tax relief where the new main home is situated outside Portugal. The European Commission considers these rules to be discriminatory and contrary to the EC Treaty rules on the free movement of people, etc.
“Portugal did not amend its legislation within the 2 months time limit given by the Commission, so in January 2005 the Commission decided to refer Portugal to the European Court of Justice.
“On 26 October 2006, the European Court of Justice ruled that the restriction of the relief to the purchase of a primary residence located in only Portugal was an infringement of the fundamental freedoms guaranteed by the EU Treaty.
“As a result of the European Court decision, taxpayers should be able to benefit from the main residence relief in Portugal, provided the proceeds are reinvested in another primary residence within the European Union.”
By David Franks, Chief Executive, Blevins Franks
Opportunities For British New Tax Planning Expatriates – QNUPS
On the 15th February 2010, a new UK HM Revenue & Customs (HMRC) statutory instrument came into force, the implications of which create significant opportunities for British expatriates to save local taxes in Spain as well as UK inheritance tax (IHT).
The UK legislation has now created a new type of trust known as Qualifying Non-UK Pension Schemes (QNUPS) – which should not be confused with Qualifying Recognised Overseas Pension Schemes (QROPS).
As pension schemes are one of the key ways that most governments incentivise their citizens to save for their retirement, the tax rules are generally more favourable than other investment structures.
The problem for most retired expatriates is that they believe that their days of being able to put money into pension schemes are behind them; however QNUPS may significantly change many retired expatriates’ view on this.
Firstly, there is no maximum age at which you can invest in a QNUPS.
Secondly, you do not need to have any earned income from an employment in order to make a contribution.
Thirdly, there is no maximum contribution that can be made into a QNUPS.
The rules are sufficiently flexible to allow someone who is 85 years of age and has been retired for 25 years to put large investments into a QNUPS and immediately create significant tax advantages for themselves.
So what benefits do QNUPS give to retired British expatriates?
The main thing to remember is that a QNUPS is a pension scheme trust and as such you are entitled to take a cash lump sum and income during your lifetime, with the remainder of your fund being able to be passed to your spouse or heirs on your death free from all taxes.
The following advantages are available to you through a QNUPS:
- As a pension scheme, a QNUPS is very tax efficient in most countries as it can avoid both local wealth taxes during your lifetime and succession taxes on your death.
- A QNUPS also avoids local succession law, so that you are free to choose exactly who inherits your money and in what shares.
- Income can be taken from age 55 (after 6th April 2010) or it can be deferred as it does not need to be taken until age 75. In certain countries it can be paid in a manner where a significant portion can be paid to you tax free.
- When income is taken it is drawn down from the fund, thus leaving your scheme assets invested. Otherwise the assets grow free from tax.
- On death the value of the QNUPS will be exempt from UK inheritance tax and local succession taxes.
- A QNUPS offers considerable investment flexibility and choice. Furthermore your assets can be invested and any benefits taken in a currency of your choice, giving you the opportunity to remove currency risk.
- The trustees of a QNUPS have no reporting obligations to HMRC unless the scheme also holds any assets transferred from an authorised UK pension scheme. You can have both a QROPS and a QNUPS.
In essence QNUPS allow retired British expatriates to put their investable wealth into a pension structure and significantly improve their personal tax position as a result.
Solving the UK inheritance tax conundrum with a QNUPS
The only way to avoid UK inheritance tax is to become a non-UK domicile, which is NOT the same thing as becoming a non-UK resident. It can be very difficult to shrug off your UK domicile even though you may have lived overseas for many years and so your estate on death can be liable for tax of 40% (or probably more if a Labour Government is re-elected).
QNUPS immediately solves this problem even if you were to return to live in the UK. In fact, it avoids the tax even if you never left the UK to live overseas in the first place. You do not have to wait seven years to avoid the tax (which is the case under the PET or potentially exempt gift rules), and you do not have to give the assets away either. You and your spouse or partner can continue to benefit from the assets. It couldn’t be better!
By David Franks, Chief Executive, Blevins Franks
PROPERTY MARKET
Homebuyers still prey to uncertainty: Should I buy now, wait… or what should I do?
It now appears that home prices have not fallen as much as everyone thought, or at least according to the most important statistics. And that is not all, as the Government also believes that the sector will stabilise in the “near” future. How soon this will happen is not clear, although it will probably not be before the VAT increase, which will increase home prices by an average of 2,000 euros, and may take place before 2011, when the deduction for habitual residence purchases is to be abolished, a measure which will bring about a hidden increase of 8% in average home prices, according to calculations by economists.
Therefore, and bearing in mind that buying a home is the biggest investment that most people make in their lives, is it worth buying now, while you can still take advantage of the deduction and without being penalised by higher VAT? Or is it better to wait until 2011, when the era of low-priced homes may have finished? Should I sell? Should I lease with an option to buy? There are too many questions, and the answer to all of them is discouraging: “It depends”. The experts consulted by EXPANSIÓN did not have any general solutions, although they did have an answer for each question
Is it a good time to buy a home?
If the price of a property has dropped considerably, don’t take too long over your decision, because house prices have probably hit the bottom.
Bear the following in mind: “Prices can fall between 20% to 25% on average in the housing cycle”, and: “It is a good time to shop around carefully, because there is a wide range of homes for sale, and you will find some properties at a good price.” However, a word of caution if you want to buy a property on the coast – it would be better to wait as “prices are going to fall further”.
Is it worth buying a home before the tax hike in July?
This year is a good time to buy your first home: “If depreciation rates were between 4% to 5%, the VAT increase and the elimination of the mortgage tax deduction would cancel out the lower prices. But in fact I do not believe that house prices have fallen 4%”. They must have fallen “by least 10% to 15% (depending on the area) in 2009, and in 2010 they will probably drop by around -10% to 20%, which means that this year will be a good time to buy a home, and a terrible year for selling”.
Does it make more financial sense to wait?
“The longer you wait the further house prices will fall, although it will be harder to find great home buying opportunities. If you buy now it means that you will not be affected by the VAT rise from 7% to 8% in July. In addition, you will be entitled to a deduction of up 15% on the first 9,015 euros spent on mortgage repayments each year in your personal income tax return, even though you earn over 24,000 euros a year. However, this must be balanced against the fact that next year promises to be a very good one for homebuyers.
What is going to happen in 2011?
The tax rise and the government’s promise to abolish the mortgage tax deduction “are going to encourage homebuyers to buy this year, even though the market has not yet bottomed out”.
What about if I want to buy a property in order to lease it for rental income?
This is another good option. Buying a rental property is a good investment at the moment, as due to the crisis there is a very wide range of opportunities to choose from. Now is a good time for medium and long term investments, even though “prices are bound to fall even further next year” according to real estate analysts. “Anyone who buys now will see a good return on their investment in ten years´ time” advises Izquierdo.
Should I sell?
The experts recommend that “sometimes it is better to make a loss than wait for the situation to get better”. If you set a realistic sale price, the property will sell. However, you should remember that t the property’s current worth will almost never be as high as during the property boom. THREE TIPS
1. “The whole of 2010 is a terrible year for selling, and a good one for buying. The best time to buy is probably before the summer”, as that is when VAT goes up.
2. “Now is the time to look for low-priced homes. The longer you wait, the more prices will fall, but it will be harder to find great home buying opportunities”.
3. Look for properties selling at very reduced prices, because it is unlikely that they will fall any further. “It would appear that the homes for sale at reduced prices are the homes that are selling”.
Credit:- www.spainsolicitors.com
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