Spanish Compliant Investment Bonds Explained

I think we can all agree that Spain is a beautiful place to live, however, one negative is the high rate of tax we have to pay as a Spanish tax resident.

As an investor, it’s important to have a good understanding of the most tax efficient options available to help you look after your long term financial goals – the Spanish Compliant Investment Bond (SCIB) is a great place to start.

A Spanish Compliant Investment Bond is a tax compliant, single premium unit linked life assurance policy.

One of the main benefits of Spanish compliant bonds is the capital gains tax deferral, meaning that any growth of the bond is not taxed until the policy is either surrendered or if a withdrawal takes place. This allows your funds to grow gross of tax which increases the benefits for compound interest and the overall investment growth.

Also consider: Your Comprehensive Guide to UK Treasury Bonds

Also consider:

• QROPS for Expats
• QNUPS for Expats
• Expat Pensions

How do Spanish compliant investment bonds differ to other investments?

SCIBs are different to other investments, as in Spain all residents are liable for annual taxation on their worldwide assets and investments and each one needs to be included on your annual Modelo 720, whereas SCIBs are only taxable upon withdrawal, and even then it is only on the proportionate growth. As there is no requirement to declare the growth annually, these do not need to be included on your Modelo 720.

Who can have a Spanish compliant investment bond?

To comply with the Spanish authorities, you can have an SCIB if you meet the following criteria:

• You are a legal Spanish resident (either a national or an expat)
• You are aged 18-89
• You have a minimum initial investment of €25,000

It’s also worth noting that you can set up an SCIB in single or joint names. You can even include your children if they are over the age of 14 years, which helps with inheritance tax and succession planning.

The Investment can be made up of Euros, USD and GBP.

Which companies offer Spanish compliant bonds?

Despite being compliant with the Spanish tax authorities, the SCIBs are not available through Spanish Banks as they are international investments provided by international insurance companies, and they are only available via selected Independent Financial Advisers.

For what purpose can I use a Spanish compliant investment bond?

This type of Bond can be used as a savings vehicle for any purpose. The two most popular reasons for choosing an SCIB are:

1. Retirement Planning. With many people wishing to retire in Spain, one of the most common questions I come across is how best to save for retirement. With the Spanish Government having reduced the personal pension contribution allowance from €8,000 to just €1,500 per year, this has further restricted people’s ability to save for retirement in a tax efficient way, making the SCIB a good long term solution.
2. Education. We all want to give our children the best education possible, but with the cost of education ever increasing, it’s important to ensure we have sufficient funds to pay the school and university fees. The SCIB is perfect for long term growth and also allows scheduled payments to be withdrawn each semester.

How will the Bond be taxed?

As mentioned above, any growth on the Spanish investment bond will not be taxed, it is only when you withdraw or surrender the policy will you be liable for capital gains. In Spain, your capital gains will be taxed at the savings rate, at the time of writing these are:

• €0-€6,000 at 19%
• €6,000-€50,000 at 21%
• €50,000 plus at 23%

To demonstrate the tax benefits of the SCIB, let’s look at the following scenario:

A client has invested €200,000, after some years the bond is worth €400,000, they decide to take their first annual withdrawal as an income of €20,000 (5% of the value). With the above savings taxation rates they would have to pay tax of €4,080.

Due to the beneficial tax deferral system of the SCIB, the tax is proportionate to the growth of the original capital, so in this instance tax is only applicable on the proportionate amount of the withdrawal (5% or €1,000) the €1,000 would then be taxed at 19% so you would only pay tax of €190. As you can see, this makes a considerable reduction to the taxes payable in the first year.

Where will my money be invested?

Whether you are a low risk or high risk investor, your adviser will build your portfolio across different asset classes and geographical locations, investing in a wide range of UCITS funds and ETFs. These funds follow the EU regulatory framework which ensures your investments are safe and well regulated.

Access to my money

Having access to your money is of course always a concern for investors, so it will please you to know that with an SCIB you can access your money in a variety of ways:

• You can withdraw a lump sum
• You can take ad-hoc withdrawals
• You can opt to take regular withdrawals, for example as a monthly income

Can I top up my Bond?

Yes! You can add to your bond at any time or you can choose to add on a regular basis – quarterly, biannually or annually. The minimum amount you may add at any one time will vary from one provider to another.

What happens upon my death?

Upon death 100% of your bond value will be paid to your chosen beneficiaries. It is advisable to include your partner and/or children on the policy as these assets can be passed over to them with no tax liability, including inheritance tax.

Cost awareness on a Spanish bond

Each provider will have different internal charges payable within the bond, advisers will also charge for setting up of the bond and for the original investment advice, but it is important to be aware that advisers can choose the level of commission that they charge, needless to say, the higher the commissions, the larger your annual charges will be.

Some advisers will also select investment funds within your portfolio which will include hidden commissions paid to the adviser, further reducing the growth element of the bond.

Please note: Setting up a Spanish compliant bond can be overwhelming, and requires financial planning from an independent financial advisor like myself. Such investments should be carefully considered and can carry high annual fees. Contact me, Dan Ward (an expat independent financial advisor) for more information.