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Changes to Personal Income Tax in Spain
Changes to Personal Income Tax in Spain
Do you hold an Investment Bond product issued by a non-eu jurisdiction like the Isle of Man, for example Friends Provident International or Scottish Widows International or still sit on investments arranged whilst resident in the UK? If the answer is yes you would be advised to make a cup of tea and get a plate of Digestives and continue reading.
The previous PSOE Government, made a temporary amendment to the personal income tax law in Spain, before the recent General Elections, that could leave investors in non-tax-compliant offshore bonds facing a higher tax bill in 2014. Whilst many though that the newly elected PP Government would reverse this, this has not been the case.
On 1 January, the Spanish personal income tax regime was temporarily modified resulting in a rise in income tax for 2012 and 2013. While the changes will have “little or no impact” on those who hold tax-compliant offshore bond policies until at least 2014, normally issued out of jurisdictions like Dublin, those using non-compliant tax-compliant products will pay up to 3% more each year in tax both this year and next.
So what does this mean? Well Skandia have said that from the 1 January this year to the end of 2013, gains on tax-compliant offshore bonds will be taxed at a rate of 21% (as opposed to the normal rate of 19%) which is then withheld by tax-compliant providers. There will be no further personal income tax liability for the policyholder if the gains amount to less than €6,000 (£4,981, $7,661) savings income in a tax year – including interest earned on savings accounts and dividends received in the same tax year. A further 4% personal income tax liability will need to be accounted for by the policyholder on the next €18,000 savings income and a further 6% if the overall savings income for that tax year is above €24,000. If the policy suffers a loss over the tax period, the loss can be offset against other income tax liabilities.
In contrast, non-tax-compliant policies are required to withhold tax every year and so will be further affected by the increase during the next two years. Skandia also went on to advise that, in instances where the provider of a non-compliant policy fails to withhold tax correctly, and in a timely manner, policyholders may become subject to penalties for non-reporting, and these can range from 50% to 150%.
However, Skandia conceded that non tax-compliant policies have their merits as such policies can offer other features which can make them attractive to certain types of investors – for example, by providing access to a wider investment universe of assets and the ability offset losses on an annual basis.
What is clear is that in today’s world, the choices available to investors can be overwhelming. It is crucial investors understand the implications of choosing the right product in order to utilise the available tax advantages to the full.
For example, tax-compliant bonds reduce the burden of reporting on individuals classed as tax-resident in Spain and can be affected by changes in tax regimes to a lesser degree than non tax-complaint alternatives. The recent changes introduced on 1st January 2012 illustrate these advantages perfectly.
But please don’t make a ‘hasty’ decision without first reviewing what you have and the tax implications with a qualified financial adviser.
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