Spanish International Investment Bond

The Spanish International Investment Bond (SIIB) is a single premium, whole of life, unit linked investment. It is a capital investment designed to be held for the medium to long term and is primarily for capital growth although withdrawals can be made on a frequent basis.

By placing your investment into a SIIB you are able to invest in a wide range of funds with the flexibility to switch from one to another whenever you wish without liability to tax or a switch charge (subject to a limit of 20 switches per annum). You can select funds with the aim of achieving growth, income or a mixture of both. You are also able to access your capital at any time; alternatively, you can make regular withdrawals.

The tax consequences of how the SIIB is held, how and when monies are withdrawn, implications on death or holding the investment in trust are outlined below.

Registration with the Spanish Authorities

In 2007, the Central Register of Life Assurance was created in Spain to provide information to the beneficiary of life assurance policies. This Register has no tax significance and is aimed purely to protect the beneficiaries of life assurance contracts. That being said Article 4.2(b) of the Law of Life Assurance Register excludes life policies where the investor is both the legal and beneficial owner. This will always be the case with the SIIB, which will not therefore appear on the register.

It should, of course, be noted that the Spanish Tax Authorities will be aware of the existence of the investment in the event any monies are paid out, either partial encashment (‘income’), total encashment or death of the last life assured. This is because St. James’s Place International is required to communicate this information to the Spanish Tax Authorities.

Total or Partial Encashment

Spanish income tax is only due when you cash in all or part of your SIIB. The owner is liable to tax on the difference between the contributions paid and the amounts received by making withdrawals from the Bond partially or in full. The profit is subject to tax at a rate of either 19% or 21% (see paragraph above on savings base income). Withholding tax of 19% will be deducted by St. James’s Place International and paid to the Spanish Tax Authorities and applies to all withdrawals. You may need to pay the additional tax of 2% depending on your individual circumstances.

EXAMPLE

You invested €100,000 into a SIIB and have been taking €5,000 withdrawals every year.

The annual withdrawal of €5,000 will be subject to tax. The amount liable to Spanish income tax is the difference between the contributions paid and the amounts received from the withdrawal. The amount that is treated as a return of contribution is calculated by determining the proportion of the plan being withdrawn and applying this to the amount of the original contribution remaining.

Assuming that €4,000 of the €5,000 withdrawn is a return of contribution only, the remainder is the investment gain and deemed taxable i.e. €1,000. Therefore, a liability of €190 (€1,000 at 19%) will arise in the year of withdrawal. We will deduct this from the €5,000 withdrawal, resulting in a net payment to you of €4,810. If the amount of ‘savings income’ received is in excess of €6,000 you will need to pay the additional 2% tax. Where multiple contributions are made at different times, the earlier contributions will be withdrawn first to work out the tax due on partial or regular withdrawals.

Losses

If when you cash in all or part of your SIIB there is a loss (ie the amounts received are less than the investment made) these losses can be used to offset other savings income which would otherwise be subject to tax in the current year. Alternatively the losses may be carried forward for the next 4 years. Any claim for losses is made through your annual tax return to the Spanish tax authority.

Joint Ownership

When the Bond is held in joint names (such as husband and wife) St. James’s Place International will assume the Bond is owned equally by the Investors. This means the profit from any Bond withdrawals will be allocated between the investors equally for Spanish income tax although this will make no difference to the amount of tax deducted.

Changes in Tax Residency

If you change your residence and as a result are no longer tax resident in Spain you will no longer be subject to Spanish tax. When we are informed of this, via a signed declaration from you, we can stop deducting tax from any withdrawals. If you have already made withdrawals in the year you become non-Spanish resident where tax has been withheld you can request a repayment of this tax from the Spanish tax authority.

If you have left Spain during the year, but will not be treated as non-Spanish resident until the following tax year, we will continue to deduct tax from any withdrawals where a liability to tax arises until the end of the tax year.

Taxation in the event you return to the UK?

Where Spanish tax has been paid as a result of withdrawals made whilst Spanish resident and you return to the UK, relief from UK tax on any gains will be provided by a combination of excluding the gain already assessed in Spain from the final gain calculated in the UK and ‘Time Apportionment Relief’ which broadly exempts any gains accumulated while UK non-resident.

EXAMPLE

You invested €100,000 into a SIIB 2 years ago. It is now worth €125,000 and you have decided to withdraw €50,000. The portion of the withdrawal treated as a gain at this point will be the total gain of €25,000 (€125,000 – €100,000) multiplied by the proportion of the Bond being withdrawn. This results in:

€25,000 x €50,000 = €10,000

€125,000

So the Spanish tax paid will be €1,900 (€10,000 at 19%). If the gain is €10,000 then the amount of the original investment producing this gain is €40,000. A year later you return to the UK and then 6 years after investing in the Bond you withdraw your remaining investment. At this point the Bond is worth €110,000.

TAXABLE GAIN

The total gains on the Bond are calculated as:

You spent 3 of the 6 years in Spain so Time Apportionment relief reduces the taxable gain to half of this i.e. €25,000. This will then be taxed in the UK.

Value at the end €110,000

Minus original investment remaining €60,000

Taxable gain in the UK €50,000

Spanish Inheritance and Gift Tax

The proceeds from the Bond may be subject to Spanish Inheritance Tax (IGT) but only if the recipient is a tax resident in Spain at the date of receipt. In Spain, the person liable for the tax is the recipient rather than the estate of the person who has died.

Jointly Owned Bonds

In the case of a jointly owned Bond, when one of the owners dies the surviving partner will become the sole owner of the whole Bond. If both owners are tax resident in Spain, half of the value of the Bond will be subject to IGT as an inheritance when the first person dies. This is because unlike the position in the UK with Inheritance Tax there is no exemption on transfers between spouses. It may be more appropriate, therefore, where joint funds are to be invested to have two separately owned Bonds. If the Bond is surrendered at this point the other half of the amount received will be subject to Spanish tax on any gain. If the Bond is surrendered later, then the gain on the portion of the Bond that was subject to IGT will be calculated with reference to the value inherited, rather than from the start of the Bond.

UK Inheritance Tax considerations for Spanish Tax Residents

If you die having established yourself as a tax resident in Spain but have remained a UK domicile, there may be a liability to UK Inheritance Tax as well as a charge to IGT in Spain. The amount of the potential liability in each country will depend upon the personal circumstances of the deceased. Where, as is the case between the UK and Spain, no ‘double tax treaty’ for death duties exists, relief is only available from the UK via ‘unilateral relief’ but this only provides partial exemption from paying Inheritance Tax in the UK and Spain. Further, there are particular difficulties where the beneficiary is a spouse. However, this is beyond the scope of this guide and you should seek separate tax advice.

If the recipient is not a Spanish tax resident then they should not be subject to Spanish IGT, but as UK IHT may still apply the use of trust may be appropriate. However, this can be a complex area so you should seek specialist tax advice.

Ownership by a Trust

The SIIB can be written in trust so that it can benefit an individual, or individuals, other than the planholder. Spanish law broadly does not recognise the concept of trusts. If the trustees make a distribution where the settlor is a tax resident in Spain then it is likely and best to assume that it will be subject to Spanish tax; the exception being that if the recipient of that distribution becomes subject to IGT then income tax should not be payable.

Even though trusts are not recognised by Spain and are broadly ‘looked through’ or ignored for the purposes of Spanish IGT and income tax, the trust will still have effect for the purposes of transfer of ownership and UK tax, if relevant. The only exception being where a Spanish national would otherwise have benefited from the death of the planholder under the forced heirship provisions and successfully applies to the court to have the trust set aside. However, again this is a complex area and specialist tax advice will be needed.

Taxation and Other Investments

As it currently stands, you would be subject to Spanish tax at a rate of 19% or 21% on income and gains obtained from most investments (ie there are no equivalent investments with optimised taxation). The taxation of the SIIB is very similar to unit trusts in Spain. Therefore any ultimate decision in deciding between investments should depend on the potential returns from that investment and charges rather than tax consequences.

There may be other investment bonds which are currently available in Spain that have not been adapted to comply with the Spanish tax rules. This type of investment can be disadvantageous to you as a Spanish resident from a tax perspective as you will be taxed each year on the realised and unrealised gains made on your investment rather than solely when you make a withdrawal.

The Spanish International Investment Bond is fully adapted to the Spanish market and you will only be subject to Spanish tax when withdrawals are taken.