If you’re a UK expat living in Spain or you’re thinking of relocating to Spain soon, you’ve probably heard of Spanish compliant bonds.
Often marketed as the “Spanish ISA,” these offer a tax-efficient way to grow your investments. But exactly how do they work, how are they taxed, and are they actually beneficial? We’ll be explaining everything you need to know in this guide.
What Are Spanish Compliant Investment Bonds?
Spanish compliant bonds are a type of investment bond tailored for Spanish residents (not UK tax residents). These bonds have been packaged by life investment companies and allow you to invest a lump sum, which the company will then allocate across several different funds, like equities and bonds.
What makes these bonds different from traditional investments? The main point of difference is that they offer tax deferral, which means you won’t pay taxes on your gains until you make a withdrawal. This setup helps your money grow faster because you’re not having to pay tax on gains each year.
There’s typically some element of life insurance included in Spanish compliant investment bonds, but their primary purpose is for investment growth.
Tax Advantages of Spanish Compliant Bonds
Let’s start by looking at one of the main selling points of Spanish compliant bonds: their tax efficiency.
The way these bonds work is that, when you withdraw funds, only the growth portion is subject to tax (not the entire amount). As an example, let’s say you invest €500,000 and this grows to €750,000. If you want to withdraw €100,000, this would only have €33,333 considered taxable income.
Here are the savings income tax rates on the growth portion, depending on the withdrawal you want to make:
- 19% for the first €6,000
- 21% for between €6,001 and €50,000
- 23% for between €50,001 and €200,000
- 27% for between €200,001 and €300,000
- 28% for over €300,000
More good news: tax reporting isn’t a nightmare with these investment bonds. You don’t have to declare them on the Modelo 720 (Spain’s overseas asset declaration form), so you can invest more easily and with less admin.
Do Spanish Complaint Bonds Offer Investment Flexibility?
You’ll have plenty of flexibility in your investment choices, and even currencies, with Spanish compliant bonds. You’ll have the choice of a few different underlying assets, including equities, bonds, and funds, and you can tailor these to your risk tolerance, based on your financial goals.
The fact that you can hold bonds in multiple currencies, like GBP, EUR, and USD, is also an advantage, meaning that you can adapt better to market conditions.
Offshore Bonds vs Compliant Bonds
If you already hold an offshore bond, like a prudential offshore bond, it’s worth noting that these aren’t usually Spanish compliant (unless they’re specifically designed to be).
This means that if your offshore bond sees any growth, this could be taxable each year, depending on the tax authority’s interpretation. Some offshore bonds, like the prudential Spanish compliant bond, are structured to meet Spanish rules, but a lot of them aren’t.
If you’re living in Spain full-time, your best choice is to use a bond that’s designed for the local tax system—this should be specifically marketed as a Spanish bond.
Why do Expats Use Spanish Compliant Bonds?
If you’ve come to Spain from the UK, you probably already have an ISA. Spanish tax authorities don’t recognise a UK ISA, though, which means your ISA will become fully taxable under the Spanish tax system once you register as a Spanish resident—and that, by the way, is regardless of whether or not you touch the money.
With that in mind, British expats searching for a Spanish Isa (which doesn’t exist in a legal sense) usually turn to compliant bonds. This gives you access to similar tax deferral benefits that you’d get in an ISA, but in a format that’s recognised in Spain.
Are Spanish Compliant Bonds Worth It?
As with any investment product, Spanish Compliant bonds aren’t always the best choice for your own specific circumstances. But with that said, they’re a great solution if:
- You’re already a Spanish tax resident or plan to become one.
- You want the benefits of tax deferral on capital gains and are planning to withdraw your investments gradually over time.
- You’re comfortable locking in capital for a medium to long period.
If you’re looking for compound growth, Spanish compliant bonds make a lot of sense. Since there’s no annual tax payable on your gains, you can reinvest the full amount, so you’ll be able to build your investment funds faster than if you were using a taxed account.
These bonds also have estate planning benefits. Something that sets a Spanish compliant investment bond apart from UK trusts or ISAs is that it can be assigned to beneficiaries. That means you might be able to avoid some local inheritance rules and pay less tax when you’re passing on your money.
Ultimately, whether or not these bonds are worth it will depend on your personal situation and investment goals. Yes, they have alluring tax benefits, but they’re obviously not a good option if you want to keep your money out of Spain for any reason (for example, for inheritance tax).
Regardless, it’s worth contacting a financial advisor before you move any existing assets.
