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Modelo 720 New Reporting Requirements 2013 Part 2


As this year’s deadline fast approaches (30 April 2013), many of you will have recently read various views and interpretations of the new ‘information’ return for overseas assets held by residents of Spain.

I detail below some of the questions posed to Speed Financial Solutions and our view on how to deal with this new requirement. But first, I want to reassure our expat community that there are tax breaks available to you as residents of Spain, just as there are in the UK. For example, in the UK we have ISAs which grow tax free. However, we need to remember that what is tax efficient in one country isn’t necessarily tax efficient in another. Taking the ISA example further, as a Spanish tax resident, any growth added to your ISAs in the UK each year should be declared and is taxable here in Spain, whether you choose to take that growth or not!

But just because ISAs are not tax efficient in Spain, it doesn’t mean that there is no equivalent available to you. It’s merely a case of familiarising yourself with what you CAN do as a Spanish resident.

The biggest fear for many of our clients is not only tax efficiency whilst alive, but tax efficiency on death. As you know, in the UK assets (including savings) pass from spouse to spouse on death free from Inheritance Tax. Unfortunately, the same is not the case in Spain. However, by making simple adjustments to the way that your savings are held it is extremely easy to take advantage of tax breaks available to you here, ensuring that your savings are not ‘frozen’ or liable for a hefty tax bill on your death before your surviving partner can make use of them. To clarify, to be ‘Spanish Compliant’ and ‘Tax Efficient in Spain’ does not mean bringing your savings into Spain – please ask us for further information.

Now, back to the Questions and Answers:

Q – I have a property in the UK – do I need to declare this?

A – Yes, the full value of the property should be declared, irrespective of any mortgage outstanding.

Q – I have a QROPS – do I need to declare the full value of my QROPS?

A – No, QROPS fall under UK Pension legislation, and as such you have no ‘outright’ entitlement to the full value of your pension. However, any entitlement to your pension commencement lump sum (previously referred to as 25% tax free cash) should be reported, unless you have already taken it or are below age 55 and so unable to take it.

Q – I have an Offshore Life Assurance Bond – do I need to declare the value of this?

A – This depends on the Bond Provider and how the Bond is set up – some offshore bonds (or wrappers as they are often referred to) are not Spanish Compliant. Some are Spanish Compliant but as always the devil is in the detail. The chances are that it is only going to be ‘compliant’ if it is from a recognised EU jurisdiction, and only if there is a Fiscal Rep involved. For example, Wrappers/Life Assurance Bonds held in the Isle of Man, Jersey, Luxembourg or the UK do not avoid Spanish Inheritance Tax on first death, and the surrender values also need to be added to the new Information Return. It’s important to ascertain how the new reporting requirement affects your particular bond.

Q – I have annuity income – do I need to declare this?

A – Let’s remember here that the word ‘annuity’ means different things in different countries. In the UK, when you buy an annuity you are giving away a lump sum in return for a guaranteed income for life. In Spain, this is not necessarily the case. The question here is whether you have a right to take the fund itself – Usually, for our UK expats, annuity income is being taken from UK tax relieved pension funds, because they are tax relieved, pension legislation dictates that most of the ‘fund’ must be used to provide an income in retirement. On this basis, the only outright entitlement to the fund itself is the ability to take the 25% pension commencement lump sum, not the full pension fund value.

Q – I have a discretionary trust – do I need to declare this?

A – Depends who you ask! We have completed considerable research into the tax efficiency of discretionary trusts held by Spanish residents. In fact, my own qualifications include additional studies around taxation and trusts in particular. One could argue that Spain DOES recognise trusts, the use of an Uso fructo (the right to live in a property owned by someone else) is a trust used frequently in Spain. However, every legal expert we have approached has come back with only their ‘view’. The consensus seems to be that a trust may work, provided the authorities do not investigate and strip it further on death. The description of the legal owner here is ‘in relation to which he holds a power of disposition, ie; IS THE ACTUAL BUT CONCEALED HOLDER’. The reality is that if your main concern is to have the ability to use your savings as your wish, and pass them onto your surviving spouse free of tax, why have the additional cost and hassle of a discretionary trust? There are alternatives available to you that will satisfy this objective for you.

If you wish to discuss your own situation further please contact us.

Andrea J Speed Principal 10 April 2013

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