This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, it is subject to change and we are not responsible for any errors or omissions.
As a British expat, how should you invest your money? After all, many of the investment “vehicles” available to UK residents (e.g. ISAs) are not available to non-residents in Spain. One option to consider is Spanish Compliant Investment Bonds.
Below, our financial advisers explain how Spanish Compliant Investment Bonds work and how they could feature in an expat’s portfolio. We hope these insights are helpful to you. If you want to discuss your financial plan with a member of our team, please get in touch to arrange a no-obligation financial consultation, at our expense:
+34 966 460 407
info@scottsdale.eu
What are Spanish Compliant Investment Bonds?
Sometimes called the “Spanish ISA”, Spanish Compliant Investment Bonds are a tax-efficient way for expats to invest their money as Spanish tax residents.
To understand how they work, it can help to focus on the “bond” part. Confusingly, these Bonds have nothing to do with government bonds or corporate bonds (where you earn interest by lending your money to the aforementioned).
Rather, Spanish Compliant Investment Bonds (henceforth just “Bonds”) are sold by life insurance companies. They involve paying a lump sum to a provider, who then invests the money on your behalf.
A degree of life insurance is typically provided from the purchase. However, these Bonds are primarily intended for investment – i.e. for a period of 10 years or more. The fact that they are “Spanish Compliant” means that the provider does all of the financial reporting to Spanish tax authorities on your behalf.
This latter feature can make life a lot easier for many expats, especially those unfamiliar with financial reporting and/or Spanish language limitations.
Busting some myths about Bonds
These Bonds are sometimes colloquially called “Spanish ISAs” or “European ISAs”. However, they share little in common with ISAs as most British people understand them.
In 2024-25, a UK tax resident can contribute up to £20,000 to their ISAs in a given tax year. Inside, any capital gains, dividends and interest earned will be tax-free. However, Spanish Compliant Investment Bonds only offer tax deferral, not tax exemption (explained below).
There is sometimes confusion about Bonds and their relation to the Modelo 720. For those unfamiliar, the Modelo 720 is an online declaration that Spanish tax residents need to complete each calendar year – alongside income and wealth tax returns.
Modelo 720 is the way British expats are expected to declare their non-Spanish worldwide income and assets. However, Bonds do not need to be declared. Remember, the insurance company does this on your behalf.
Are Bonds worth it?
Spanish Compliant Investment Bonds are sometimes promoted as “tax efficient” because any growth is tax-free whilst invested. However, it is important to note that this is true for most investments until you sell them. For instance, you do not pay capital gains tax (CGT) on an additional property in the UK while you own it. CGT only comes into play when you sell it.
The fees for these Bonds should be noted. Compared to many other investments, the costs are typically uncompetitive and difficult to understand. It is not uncommon to see an annual fees between 1-3% for management and transactions. If this does not sound like a lot, remember that a £100,000 investment in Bonds could incur annual fees totalling £3,000.
There may be penalties if you cash in your investment before the minimum commitment (e.g. 5 years). So, you need to be confident that you will not need the money for a while before investing in Bonds.
With some of the disadvantages stated, what are the benefits? As briefly mentioned, Bonds offer a means of tax deferral. They also provide “proportional tax relief”, which means that the Spanish tax authority only taxes the growth part of a withdrawal.
There can also be inheritance tax (IHT) benefits. For instance, suppose you and your spouse (both British expats residing in Spain) buy a Bond as joint policyholders. If one of you dies, then all of the Bond ownership passes to the surviving person without Spanish tax or probate coming into play.
These Bonds are also widely considered relatively “safe” due to the legal protection components involved (e.g. life insurance companies cannot hold client assets on their balance sheets, thus ring-fencing the money if they go bankrupt). They can also offer a degree of diversification since providers often invest in a wide range of asset classes on their investors’ behalf.
Spanish Compliant Investment Bonds are not the only investment option for British expats in Spain. However, they can play a role in certain clients’ financial plans.
Invitation
Each individual will differ in their investment goals, circumstances, risk tolerance and investment horizons. Consider speaking with a financial adviser before committing to any big investment.
If you are interested in discussing your own financial plan or inheritance tax strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
+34 966 460 407
info@scottsdale.eu