SpanishPropertyBuyer.com

If your mortgage has a minimum interest rate, or mortgage floor, it can cost you money.

What is a mortgage with a minimum interest rate?

HelpMyCash.com, a mortgage portal, explains that a mortgage floor is a mortgage in which there is a lower limit on the amount of interest you pay on your mortgage each month, which means that if the Euribor falls below a certain level you do not benefit from the fall, even though, in these times of crisis, there are a lot of families whose monthly mortgage payments have been greatly reduced thanks to reductions in the Euribor.

Mortgage contracts which have a minimum interest rate also have a variable interest rate (Euribor + differential) and this means that banks can use the two rates in the following way:-
- If the Euribor + differential is below the minimum interest rate, the bank charges the minimum interest rate
- If the Euribor + differential is higher than the minimum interest rate, the bank charges the Euribor + differential.

This means that banks will always charge the higher amount, whatever the rates.

When does a mortgage floor constitute an unfair clause?

Although there are multiple irregularities regarding mortgage floors (confusing publicity, banks failing to provide sufficient information, being deemed unfair under Article 49 of the Consumer Act etc), from a legal point of view, mortgages with a minimum interest rate can only be considered to be unfair when they fulfill at least one of the two following conditions:-

1. The contract with a minimum interest rate does not have a cap. That is to say, the bank protects itself against reductions in the Euribor, but does not offer the mortgager any protection if the Euribor goes up.

2. There is no legally binding mortgage offer (document drawn up by the bank which contains the exact mortgage conditions agreed upon by the parties), the mortgage offer does not mention a floor, or it is not signed by the customer. For this reason, it is always best to start by negotiating with your bank. There are various ways to try and remove, or at least reduce, a mortgage floor.

Recommendations on how to remove a mortgage floor from your mortgage:-

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1. Negotiate with your bank before the periodic mortgage review.
As a result of the complaints made by several consumer associations and bank customers over recent months, banks are coming to realise that the era of “anything goes” is coming to an end. For this reason they are increasingly willing to remove these controversial clauses from the contracts, or at least reduce them, if customers ask them to do so before the periodic mortgage review. If you have a good financial reputation and an excellent payment history, the bank should do everything in its power to keep you as a customer.

2. Consider a mortgage subrogation (change of bank).
If the bank is unwilling to modify or negotiate the mortgage floor, you can consider the possibility of changing banks. If the new bank offers you better terms by removing the minimum interest rate, and puts this offer into writing in a legally binding mortgage offer, you can use this offer as a negotiating tool with your bank. It will only have two options: match the offer to keep you as a customer, or let you sign the better option.

3. Demand your rights through legal means.
If the negotiations with the bank are not successful, you can still claim your right to a mortgage with no unfair clauses by making a complaint. There are 3 main ways of doing this: (1) making a formal complaint by submitting an extrajudicial complaint to Banco de España (although Banco de España’s decisions are not legally binding); (2) taking private legal action against the bank, and; (3) becoming a member of an association such as ADICAE, ASUAPEDEFIN or similar organisations and becoming part of a joint complaint. As of the time of writing, these actions have prompted several banks against which complaints had been lodged into calling the affected parties, and offering them a reduced interest rate in exchange for withdrawing the complaint.

Recommendations from ADICAE when taking out a mortgage:-

The Banks and Insurance Consumers Association of Spain (ADICAE) recommends that all homebuyers should calculate how much they will pay for the mortgage on the basis of the whole mortgage term, and not just the first five years, as it believes that the latter approach is misleading. To help people avoid the worst mortgage traps, the Association offers several recommendations for anyone thinking of taking out a mortgage.

1: Customers should avoid any binding conditions which are unfair. It is important to take into account the fact that many financial institutions offer loans with a differential over the Euribor of less than 0.5%, but that this offer is conditional to contracting products, pension plans, or investment funds, all of which makes the mortgage much more expensive

2: The requirement for loan guarantees should not be accepted at any time, as it is the borrower, with the property, that is responsible for the loan, and not the guarantor.

3: Toxic products such as minimum interest rate clauses or swap contracts are high risk, and should be avoided. ADICAE thinks that a fair minimum interest rate clause would be one which had a 2% floor, and a 6% cap. If your mortgage has a floor, read these recommendations.

4: ADICAE advises against going to debt consolidators. The OCU also advised against using them because they earn substantial commissions from acting as intermediaries between clients and banks, and because the solutions they provide are the same ones that you would get by negotiating directly with the bank.

 Credit: Fuster & Associates. www.spainsolicitors.com

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

www.blevinsfranks.com 

 

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 31^st December each year and any increase in value from 1^st 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

 www.blevinsfranks.com

On 23^rd 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 31^st 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 29^th 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

www.blevinsfranks.com 

Wider UK trade deficit and falling factory gate prices dampen appetite for the pound. Stability returns to the euro as the Greek panic subsides.

Sterling spent a second week paying the bill for its post-budget honeymoon. It has now returned all the way to its position before the chancellor stood up to deliver his speech on 22 June. There was nothing dramatic about the decline and no sense of the panic that would have been typical six months or more ago. To some extent the fall was a completion of the technical head-and-shoulders formation that peaked a fortnight ago.

The UK economic data were mixed. Monday’s services sector purchasing managers’ index (PMI) fell by one point to a less-than expected 54.4. It suggested that companies were still growing their activity but at a progressively slower pace.  Wednesday’s production figures were good in parts. Although manufacturing production grew by only 0.3% in May instead of the +0.5% analysts had predicted, it was a far better result than April’s -0.8% decline. The broader industrial production figure, which includes such things as mining and energy, reversed the previous month’s decline with a +0.7% rise. The Halifax house price index went down for a second month, this time by -0.6%, leaving house prices 6.3% higher than a year earlier. 

The most disappointing data, at least as far as sterling was concerned, came on Friday with June’s producer price index (PPI) and the balance of trade for May. The input and output components of the PPI, representing manufacturers’ costs and factory gate prices, were lower in June by -0.2% and -0.3% respectively. The numbers supported the Bank of England’s projection that inflation will fall back towards its 2% target without the need for higher interest rates. The UK trade figures were also unhelpful. The deficit in goods widened to more than £8 billion while goods and services together registered a £4.5 billion shortfall. Both deficits were bigger than expected and cast renewed doubt on the alleged benefits of a weak pound.

Other events during the week saw an announcement from the new Office for Budgetary Responsibility (OBR) that its boss, Alan Budd, did not intend to renew his initial three month contract and that the two other members of the triumvirate would also be leaving before the end of the year. Critics of the new setup wondered why he was leaving.  Could it be because of lack of independence? Perhaps not, for the International Monetary Fund (IMF) came out later in the week with economic growth projections remarkably similar to those put together by the OBR. The IMF agrees with the OBR that Britain’s gross domestic product will grow by 1.2%.  Its forecast of 2.1% growth in 2011 is lower than the OBR’s 2.3% prediction.

After months of punishment as a result of the problems in Greece the euro has made a good fist of regaining some semblance of stability. There has been a correction to what commentators retrospectively describe as an ‘oversold’ condition, in much the same way that sterling recovered from its near-parity lows a year and a half ago.

The euro zone’s services PMI came in better than its British or US equivalents at 55.5, minutely higher than the previous month. Retail sales also performed better than forecast in June, rising by +0.3% instead of falling by that amount as analysts had predicted. Finalised figures for economic expansion in the first quarter of the year showed a +0.2% growth in gross domestic product (GDP), probably a tad short of the +0.3% growth that is expected to have demonstrated. Germany performed better than Britain on the industrial production front, with growth of +2.6% in May, while it demonstrated slower inflation at +0.8% in the year to June. If the Bank of England is under no pressure to raise interest rates in the War on Inflation, the European Central Bank (ECB) seems to be under no greater pressure.

Indeed, the ECB sided with the Bank of England in leaving its policy interest rate unchanged at Thursday’s meeting. President Jean-Claude Trichet expressed guarded optimism at the pace of economic growth but found no difficulty in containing his enthusiasm. Of more interest to investors was that he did not say about the ’stress tests’ that Euroland banks have recently undergone. The purpose of the tests is to examine how those banks would survive another serious economic or financial shock.  Investors are uneasy that the ’stresses’ to which the banks’ balance sheets are subjected might not in fact be real life worst-case situations. The results of the tests will come out in a couple of weeks’ time and are eagerly awaited.

That sterling spent the whole week on the slide does not bode well for it in the immediate future. With UK statistics for Gross domestic product, inflation, consumer confidence, employment and earnings all due this week there is scope for further setbacks if the numbers are not supportive.

Buyers of the euro should hedge half their requirement until sterling’s future course becomes clearer.

Credit:- Moneycorp  13 July 2010

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 26^th 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 19^th 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 1^st 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 1^st 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

www.blevinsfranks.com 

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

www.blevinsfranks.com

The scenes of long queues of people outside Northern Rock have faded somewhat from memory.  While not completely forgotten, they seem a long time ago now – it was in September 2007 after all.  The following autumn then saw the collapse of Lehman Brothers and less than a month later Icelandic banks Kaupthing and Landsbanki stopped trading, a move which impacted on the many expatriates who had savings in their offshore branches.

We then lived in suspense for a while, wondering if any other similar banks could fail.  Savers spread their money out over different banks to increase protection from depositor guarantee schemes, or moved money out of banks and into arrangements which provide protection from institutional failure. 

As the credit crisis slowly lifted, fears about bank failures abated.  The issue of bank debt, however, is now back squarely in the spotlight again thanks to the financial crisis in Greece and fears over contagion to Eurozone countries like Spain, Portugal, Italy and Ireland.

It is impossible to escape news about the crisis facing Europe and its currency at the moment.  Everyday seems to turn up something new.  One article which really stood out for me, though, was one published in the New York Times on 1^st May 2010 entitled “Europe’s Web of Debt”.  Using data supplied by the Bank for International Settlements, it highlighted the extent to which the “vulnerable” countries on the periphery of the Eurozone have become interwoven, all both owing money and being owed money to/from the others – and this is besides the vast sums owed to countries like Germany, France and the UK. 

This creates the risk of a domino effect if one country defaults.  For example, if Greece defaults on its debts to Portugal, how would the already struggling Portugal cope?  Would the losses impact on its ability to repay its debts to Spain, one of the weakest economies in Europe?

For example, here are the figures relating to Spain -

Spain is owed:

By Portugal – $86bn

By Italy – $47bn

By Ireland – $16bn

By Greece – $1.3bn

Spain owes:

To Portugal – $28bn

To Italy – $31bn

To Ireland – $30bn

To Greece – $0.4bn

Spain also owes:

To Germany – $238bn

To France – $220bn

To the UK – $114bn

Portugal, Italy, Ireland and Greece are in a similar situation.  Total debt is as follows -

Spain – $1.1 trillion

Italy – $1.4 trillion

Ireland – $867 billion

Portugal – $286 billion

Greece – $236 billion

As of 19^th May 2010, in an unexpected move, Germany’s financial regulator BaFin prohibited short trading on banks, insurers and Eurozone bonds and banned credit default swaps (CDS) on sovereign bonds until 31^st March 2011.  It said that the “extraordinary volatility” of debt securities from Eurozone countries justified its action, as did the fact that CDS movements “could jeopardise the stability of the financial system as a whole.”

The move has echoes of autumn 2008 when, following the collapse of Lehman Brothers, the UK and US temporarily banned shorting bank shares to prevent speculators causing another major bank to collapse.  It has led some commentators to wonder about the health of the German banking system.  Last May BaFin had warned that the toxic debt held by Germany’s banks could blow up “like a grenade” when hidden losses from the credit crisis came to light, and feared write offs could exceed €800 billion.  German lenders are now facing a second set of losses on so called “Club Med” holdings.

Tim Congdon from the International Monetary Research observed that in the second week of May, ECB data showed that there was a “major run” on Club Med banks, with €56 billion of interbank lending moving from periphery Eurozone countries to core ones. 

The BaFin ban on short trading then triggered a capital flight from Germany to Switzerland.  If money continues to move out of the core, affecting countries like the UK and France as well as Germany, Europe may soon find itself with depleted depository capital. 

On 31^st May, the European Central Bank warned that Eurozone banks face up to €195bn in a “second wave” of potential loan losses over the next 18 months.

We would be wise not to be complacent about how secure our savings are in the bank.  While it is unlikely that a country like the UK or Germany would allow a major bank to fail, there is a level of risk with smaller banks and those in the weaker southern European countries.  They do have depositor compensation schemes in place, but it would remain to be seen how long it would take for them to repay depositors if a bank failed. 

One lesson we learned from 2008 was that every investor should ask their adviser, bank or life assurance company to prove exactly how they are protected, and to what extent, in the event of institutional failure.  You can then understand the risks and decide accordingly.

Within Europe the level of investor protection from institutional failure varies significantly between each country and between the type of institution – e.g. bank, insurance company etc.  The difference can be significant; protection can be as low as nil.  Luxembourg, on the other hand, offers one of the best investor protection regimes – its state controlled protection law is designed to provide maximum security to investors without limit.  If you have an investment bond issued by a Luxembourg regulated insurance company, your investment assets are completely protected from the failing of the insurance company.

In all cases you should seek professional advice from an authorised advisory firm such as Blevins Franks Financial Management Ltd. 

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

www.blevinsfranks.com 

Poor bank rates and high charges for foreign exchange transactions mean individuals need to be savvier when transferring money overseas. Research by Moneycorp reveals that Brits are potentially losing over £101m a year by not shopping around for the best deals when transferring money abroad. Furthermore, uncompetitive exchange rates and high bank charges are costing individuals a lot of money, despite a concerted effort by most to reduce their outgoings on luxury and even staple items.

David Kerns, Head of Personal Clients at Moneycorp, comments:

“While many individuals are visiting comparison websites more frequently, checking voucher code sites and consulting online consumer forums before purchasing goods in order to save money, this mindset doesn’t seem to have extended to foreign exchange. As a result, individuals are missing out on a very large sum of money they could be saving, by transferring funds overseas through a foreign exchange specialist rather than a bank. Not surprisingly, high street banks are cashing in as a result of this surprisingly apathetic approach.”

People buying or selling property overseas and people emigrating or repatriating will be particularly affected, though this issue will affect all Brits who are transferring money overseas.

People who own additional properties abroad and make regular mortgage and/or utilities payments will also be badly affected, as every transfer is open to individual transfer charges, in addition to exchange rates.

Data from the UK’s number one property website, Rightmove Overseas, reveals that the average house price in the Costa del Sol in Spain is currently €369,860.68. With a deposit of 10% (€36,986), using a high street bank rather than Moneycorp would cost an individual, on average, an extra £558 on their deposit alone.

An individual who wants to transfer a lump sum of £100,000 to an account in Europe would lose out on an average of €1,690 by using their bank for the transfer into euros.

David Kerns concludes: “Despite the UK coming out of recession recently, individuals shouldn’t be lining the pockets of their bank managers and it’s in their best interest to maximise their investments. Prior to making any overseas payments, we always advocate that people shop around to get the best rates possible.”

Credit: Moneycorp – commercial foreign exchange – www.moneycorp.com

Note:- Follow our link for more information: -

http://www.moneycorp.com/affiliates/microsite/index.cfm?agentid=10082123

The government has accepted to reform the code of civil procedure to raise the threshold for salaries that cannot be seized when executing a mortgage in order to protect low income families and follow through with a proposal from the IU-ICV parliamentary group.

With the new legislation, pending final approval, the minimum salary limit that will be untouchable even when someone’s salary is seized for failure to pay a mortgage will be raised to a level 10% above the minimum inter-professional salary. In other words, whatever happens, such people would be left with 696.60 euros per month. This figure is increased by an extra 20% for each additional family member under their responsibility.

In practice, this means that if a bank has repossessed your home but you continue to owe the bank money, it will only be able to “take” the part of the salary you earn each month over this amount. For example, if someone earns 1,200 euros per month, the bank will be able to take 504.40 euros and leave them with 696.60 euros. If that person has a family member for whom they are responsible, the bank would have to leave them with 836 euros and 975 euros if that person was responsible for two family members.

Remember that in Spain, if someone has their home repossessed and the sale at auction of the property does not cover the mortgage, they continue to owe money to the bank.

WHAT HAPPENS IF I AM UNABLE TO PAY MY MORTGAGE?
We are living in unprecedented times and there is tension in the air. No-one can be sure of anything anymore and what was once unthinkable (not being able to pay the mortgage) is unfortunately becoming commonplace nowadays. With the constantly rising Euribor and increasing number of redundancies, paying the mortgage is moving away from being simply a chore towards becoming impossible. When we ourselves reach that situation, what can we do?

If you are unfortunate enough to be one of those people being suffocated by their mortgage and who cannot meet their monthly repayments, it is essential you read this before taking any decisions. The first think you need to know is that stopping to pay the mortgage would be an incredibly bad idea; far from ending the problem, you would only be aggravating it. From the moment you first fail to meet a repayment, the bank will remind you it is obliged to collect your debt and you can rest assured it will do so eventually. It will start out nice and politely at first but, over time, will eventually move from words to actions. If the situation is not resolved within a few months, it will ask the courts to initiate a process to auction your house and guarantee itself the collection of the money it lent you.

Be warned however, the auction of your property does not always put an end to the problem. If the bank is unable to settle your debt, you will continue to owe it money. To settle your mortgage, it is not simply enough to hand over the keys to your home to the bank. That system, which has grown exponentially in the United States, is not how things work in Spain. Here, when you sign a mortgage, you are subject to personal repayment. In other words, if the bank cannot cover the debt you hold with it by selling the house, it will continue to demand repayment of the remaining amount and could even partially seize your salary until it has recovered all the money it lent you.

THE PROCESS STEP-BY-STEP

Month one
After the first missed repayment, the bank will call you to rule out the possibility that there has been a misjudgment or error on either part. If you meet the repayment, plus the delay interest for the corresponding days since the repayment was due, the problem will end there.

Between months 2 and 5
If you accumulate between 2 and 5 months of missed repayments, the bank will do everything within its powers to make you pay. If it fails, it will make an appointment with you to negotiate changes to your mortgage conditions. It will ask you for proposals to pay less and will study their viability in an attempt to reach an agreement. Extending the term of the mortgage or paying the interest only for a certain time, are the most commonly used alternatives. If you have already reached this stage, you will now have several months’ worth of delay interest to pay, meaning your debt will have grown.

During this period, an important event takes place at the bank: if you do not pay, the entity must make provisions for your debt on its balance sheet. In other words, it must reserve monies equivalent to your credit, in accordance with regulations from the Bank of Spain. That money does not leave the bank but is “frozen”, let’s say. At that moment, you become a problem for the bank, whereas before you were simply a pain.

Month six
After, approximately half a year and once the bank has made written demands without a response from you, the bank will then consider recovery of the loan through ordinary channels as difficult. Therefore, the entity will execute your mortgage, which is nothing more than asking a judge to activate the guarantees you all signed in front of a notary public when you signed the mortgage papers. It is still possible for you to resolve the problem at this stage by paying everything you owe plus the delay interest, which will be adding up all the time.

After a year or a year and a half
The judge will set a date for the auction of your property. Until almost the very day they auction your property, you can still pay the debt and the corresponding delay interest (which will be quite considerable by now) and put a stop to the process. If you do not, you will reach a critical and painful moment: your home will be auctioned and you will be forced to leave.

THE AUCTION OF YOUR PROPERTY
Once the auction of your property has been appropriately announced, the auction itself will take place. The property will be put out to auction for the sum you owe to the bank plus the interests and other costs that may have been incurred to date.
It is possible that the property will not sell at the first auction, meaning the process will be repeated and could even be put out to auction with no reserve price for people to make whatever offer they want. If it does not sell, the judge will tell the bank what to do but the bank could keep the property even though your debt has not yet been settled.
If the property does get sold during these process, one of two things may happen:
1) the money obtained is more than the debt plus the costs, in which case the bank will settle, collect the debt and return the surplus money to you.
2) the debt is not covered, in which case the bank will keep the money from the sale but you will still have an outstanding debt to settle with your bank and it will come after you, and more importantly, after your guarantors should you have made use of any when you signed your mortgage. In this process, the judge must determine the best course of action to settle the outstanding amount. A decision may be taken to seize other assets that you own, those of your guarantors, part of your salary, etc. The objective of the bank will be to recover the money it lent you and that it was unable to recover through the sale of your home.

Credit: Fuster & Associates

www.spainsolicitors.com