The Spanish Portfolio Bond is a term that is heard and used a lot all over Spain. This article is here to make it very clear, very simple on what you, the client, should be asking and should be looking out for, and really for us to explain in a clear manner, what is a Spanish Portfolio Bond.
The portfolio bond is a technical term for what is a life assurance contract. These contracts are issued by large institutions like Axa Life, Quilter, Aviva, Utmost, SEB, OneLife, Lombard and others. All these institutions will be typically regulated in jurisdictions such as Luxembourg, Dublin, the Isle of Man or the Channel Islands.
A portfolio bond is a life assurance contract wrapper. It is an investment wrapper that provides potential tax advantages if you wrap around your investments such as funds and stocks and shares. Much like an ISA that wraps around funds and stocks and shares provides potential tax advantage.
What makes a Portfolio Bond, a Spanish Portfolio Bond, so making things compliant and in line with the taxation rules for Spain? Well, first off they have to be issued by institutions that are regulated within the European Union. Most popular you'll find them in Ireland, Dublin, or in Luxembourg. They must also have fiscal representation here in Spain.
The Spanish Compliant Bond will provide 3 big advantages that we have named the big three zeroes.
Zero number one, anything held within a Spanish Portfolio Bond that is fully compliant, you have zero obligation to report those assets within your Modelo 720.
One of the biggest issues in Spain, as you may already know or will come to know, is the need to report your non Spanish-based assets on the Modelo 720. For those of you who've only just arrived towards the end of last year or arrive this year, you will not have to do this until by March next year. But you'll need to know what information is needed.
Simply put, the Modelo 720, is a declaration report for you to declare your assets, three categories: property, cash, investments. It is important to understand what your obligations are.
Zero number two, as you trade or as your advisor makes changes, recommends changes within the Spanish Portfolio Bond, the action of realizing a gain when making those trades are not reportable and are not a taxable event.
The third important zero, if you hold assets within your Spanish Portfolio Bond that are paying an income dividend as they're known or distribution as they're know, as long as it's within the Spanish Portfolio Bond, there is zero reporting liability and zero taxation.
These three big zeros in itself makes a Spanish Portfolio Bond an extremely tax efficient vehicle and also provides tax simplifcation. For those who've done a Modelo 720, you will know full well if your investments exceed or if your investments change in value to the tune of 20,000 Euro, whether that's the value's gone up, whether that's the value gone down, whether that's you decided to take some money out and spend it, you have to report it on the Modelo 720 on the subsequent return.
But if these assets are all in a Spanish compliant bond, well guess what? It does not matter what the level of change is. There is zero reporting liability on the 720. So, it will simplify Your life. There are a huge number of additional benefits of why one might want to use a Spanish Portfolio Bond. For example, for those who are fortunate enough to have accumulated or amassed a certain level of wealth, you will know that you have Spanish wealth tax to consider.
Especially for those who perhaps rely on their investments and savings to provide part or the majority of their income, by having those assets within a Spanish Portfolio Bond and that Spanish Portfolio Bond paying you an income, it can actually help to reduce your tax liability on wealth tax purely because when it comes to wealth tax, you will only pay a maximum of 60% in taxes on your total taxable income. Gets complicated, so I'm not going to expand on that subject too much. That is for a separate article.
Other benefits include succession planning. As mention the Spanish Portfolio Bond is a life assurance contract. You are able to name beneficiaries of that contract. If your beneficiaries are outside of Spain when you pass away, because the portfolio bond is either in Ireland or Luxembourg, the chances are your beneficiaries may not need to go through probate nor the Spanish Modelo 600 declaration in order for the life assurance company to pay out those benefits to your beneficiary.
It doesn't mitigate potential tax liabilities that they have, but what it does do, it gives them the money just in case there are significant taxes due. So, what a great way to pass on residual wealth to your loved ones. Furthermore, the Spanish Portfolio Bond if designed correctly, you are able to potentially gift some of that portfolio whilst you're alive to your chosen beneficiaries. One of the best ways to reduce one's wealth from an inheritance tax calculation, is either to spend it or to give it away.
So, just to recap, we have the benefits listed below.
- No Modelo 720 reporting required.
- No reporting of taxes on gains within the portfolio.
- No reporting on taxes every time you receive a distribution or a dividend within the portfolio.
- Helps mitigate potential tax when it comes to wealth tax.
- Helps to pass on assets to your loved ones when you die.
- Gives you the option to gift your assets to your loved ones whilst you're alive.
As favourable as the bond is unfortunately, a Spanish Portfolio Bond is not completely tax-free. You will pay tax, but the great news is it reduces the effective rate of tax.. The effective rate of tax on withdrawals is greatly reduced because it's only the gain portion of that withdrawal that is taxed.
So, we've now heard about the benefits of the portfolio. I'm just going to touch on a very important subject that a lot of people within Spain do feel that a Spanish Portfolio Bond is either too expensive or does not grow. These are, unfortunately, not myths, and that is because it's all down the levels of fees and commissions being charged by so called advisors. Unfortunately, in any industry we're going to get cowboys, and I do sympathize with those who have been caught up in the past.
With a Spanish Portfolio Bond, the cost of having it is actually not really any different to a simple investment platform that you may already have. For example, those of you who are British coming in from the UK, may have your investments in a Hargreaves Lansdown Vantage account with a series of funds in them. If you manage it yourself the cost you're going to pay high-end is just under half a percent to Hargreaves Lansdown.
A cost of a portfolio bond is under half a percent a year. It's actually not expensive at all but becomes expensive because advisors not only tie you in for a long period of time and give you charging structures that have big penalty clauses, but they then subsequently recommend very expensive investment funds.
One of the biggest drains on a Spanish Portfolio Bond and why a Spanish Portfolio Bond can unfortunately have a bad reputation is because so called advisors are greedy and are using expensive funds that do not work. Worse yet, they're using derivatives, structured notes all to generate extra fees and commissions. Thankfully, over the years the institutions have recognized this, and most institutions now will not allow a lot of expensive assets to be placed within a Spanish Portfolio Bond.
To end on a positive note, the Spanish Portfolio Bond is a great solution to run alongside your retirement. It will simplify your retirement. It will save you on unnecessary taxes. It will ensure that in the eventuality that your loved ones are taken care of in a simple, easy manner, and not having to go through probate processes, which for anyone who has experience of probate will tell you can be anything between as fast as six months, or as long as three years.
