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Your Questions Answered Through a series of correspondence with clients, we highlight a lot of common questions and answers. You can read through the letters and often you will find answers to questions you hadn't even thought of. If you cannot find answers to your questions, simply send us your questions - by writing your questions in the 'ask us a question' box on the right. |
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Dr. Trevor Harp & Valarie Harp 28th August 2006 Dear Trevor & Valarie, re – OUR PROPOSITION REGARDING A PATRIMONIO FAMILIAR SHELTER. I refer to your meeting with Jenny Harris, held three weeks ago - where the subject of Wills in respect of your assets in Spain – and along with the possibly of you sheltering those assets within a Patrimonio Familiar shelter was raised - and discussed. Jenny came away with a list of questions – and wanting to provide you with further information. Some of this involves UK law and taxation and some Spanish law and taxation. We regret the delay in sending this letter – but - the month of August is almost a complete ‘down tools’ in Spain. Although our UK office has worked normally – we required the input of our Spanish office for some of what is attached and follows. We hope however that the delay means that the information is complete for your purposes. Some of the information that you require is contained in (or expanded by) other ‘parts’ of our information literature – enclosed - that would normally come to you during the process of the formation of your shelter. In order to enable you read this information in context, we are providing those parts referred to - attached. The problem with us doing this - however - is that it is possible for you to suffer an ‘overload’ of information. The entire subject of shelters is quite complex and quite lengthy – though we find it is perfectly possible for someone to grasp it all – if - the information is ‘spoon fed’ at a reasonable rate. For this reason please let us know when you have received this material and have had an opportunity to look at it – in order that Jenny can be sure that it satisfies your curiosity. FAMILY PROFILE My understanding is that you are a tax resident of the UK who owns a holiday property in Lanzarote, Spain - that you visit two or three times per year. Under the terms of your Spanish Assets Will as and when either of you dies - your respective ‘halves’ of your property in Spain - will be divided between your two young grandchildren (which is a little complex in itself as Spain does not recognise trusts or trustees – though Spain will uphold your English law Will as it is valid in the UK) referred to on page 4 of Part One of the Quill Birth of a shelter booklets. You see a shelter as a possibly more elegant – and tax saving process – subject to some specific information about its set up and ongoing costs – and about the specific taxes you will save. The exact processes regarding the valuation of a property - as it is pushed by the founders of the shelter into their shelter is covered in some detail on page 7-8 of P111 (formation). We do not imagine however that the set up costs will vary by much if at all from the €5,000 plus 1% of the value of your property – being a total of €6,500. There is a very small potential for the notary’s office to query this valuation – though we do not regard that at all likely - and therefore can quite categorically say that this will be the absolutely cost of setting up your shelter. On receipt of these funds - the necessary authorities and approvals are gathered together - within a period of around three weeks - and handed over to the Abogados (Spanish Solicitors) who complete the paperwork ahead of its notarisation. Notarisation and the formation of the shelter can take place either when you are next here – or through a notary in the UK – or by ourselves (on your behalf) with you ratifying on your next visit. This is all set out in Part III – page 5 and 6 – and 9 to 11. Our understanding is that you paid around £50,000 (or €80,000) for the property which the minimum realistic worth today is of around €150,000 and that the property generates a rental income. From the point of view of eliminating both UK and Spanish inheritance tax, your shelter can remain completely dormant – as a hoarding shelter. Later – that rental income can flow into the shelter – tax free. TAX SAVINGS A hoarding shelter pays no wealth tax – saving you around €1,000 a year. Wealth tax is discussed on page 1 and 5. The maintenance costs of the shelter – however - involving the four yearly returns (two tax and two Merchantile) is of €500 per year. If you were to sell your property, today, for – say – €200,000 – then your gain of €120,000 would attract €40,000 of Spain capital gains tax (you would also be eligible for UK capital gains tax – but - that would be removed by the double taxation treaty between Spain and the UK and you would only pay capital gains tax to Spain). The sale of your property - once inside your shelter however – although requiring some Accountants attention to making the return correctly – would involve no capital gains tax at all. There might in the above situation be tax of 3% on the profit to the shelter from the property - between its declared price of €150,000 and its selling price of €200,000 – being €1500 – but - even that would be unlikely - assuming that something constructive was done the capital created by the sale. In the event of the death of either of you - whilst the property was worth €200,000 – the inheritance tax payable in Spain within six months of death would be of 25% of ‘the deceased half’ of the property - being €25,000 - payable by your grandchildren - in order that they can receive the gift set out in your Will. Within a shelter however - there would be absolutely no inheritance tax whatsoever - nor any other kind of tax to pay upon first death. Upon death of the survivor - with the property still worth €200,000 - the same would apply once again. Therefore without a shelter your grandchildren would pay €50,000 in Spanish gift tax (gift upon succession) – but NIL tax – with a shelter fully in place. Because you are tax payers in the UK - however – and because there is no double taxation treaty covering Spanish gift tax and UK inheritance tax (which are different taxes) you would ALSO still be eligible to pay 40% inheritance tax on the second death - from your UK estate - assuming - that your UK estate is at that time greater than £600,000. For clarity therefore if your UK estate at the time of the death of the second of you is a value greater than £600,000 – then tax would be payable in the UK on this Spanish asset - of €80,000 - £56,000. With the property inside a shelter there would be NO UK inheritance tax on this asset. CONCLUSION These then are the specific taxes that will become payable in the event of you (1) selling your property in Spain or (2) dying whilst owning it (or any successor property) – AND - in the meantime - a yearly payment due to Spain of wealth tax. Also tax is due upon the income created by the property. It is possible to eliminate these taxes completely – and in the future for you to ship that rental income (and for that matter any other income) into the shelter where it again can be in a virtually tax free state. I hope this clarifies the relevant information following your discussion with Jenny. Regards enc,. |
Peter & Faith Wrightington 28th August 2006 peter30@arraqis.es Dear Peter & Faith, re – REGARDING A PATRIMONIO FAMILIAR SHELTER. I refer to your meeting with Jenny Harris on 2 August 2006 - where the subject of your assets in Spain - along with the possibly of you sheltering those assets within a Patrimonio Familiar shelter was raised - and discussed. Jenny came away with a list of your questions – and wanting to provide you with further general information. Some of this involves UK law and taxation and some Spanish law and taxation. We regret the delay in sending this letter – but - the month of August is almost a complete ‘down tools’ in Spain. Although our UK office has worked normally – we required the input of our Spanish office for some of what is attached and follows. We hope - however - that the delay means that the information is complete - for your purposes. QUILL LITERATURE Some of the information that you require is contained in (or expanded by) other ‘parts’ of our information literature - that would normally come to you during the process of the formation of your shelter. In order to enable you read this information in context, we are providing those parts referred to – attached as PDF files (please advise if you cannot open these). The problem with us doing this - however - is that it is possible for you to suffer an ‘overload’ of information. The entire subject of shelters is quite complex and quite lengthy – though we find it is perfectly possible for someone to grasp it all – if - the information is ‘spoon fed’ at a reasonable rate through the process. For this reason please advise Jenny when you have received this material - and have had an opportunity to look at it – in order to ensure that it satisfies your curiosity. These booklets are actually much easier to read in their printed format - and if you will let us have a delivery address – we will have them dropped off. ONGOING QUESTION AND ANSWER PROCESS We fully understand that no matter how much paperwork we publish (which is a lot !) and despite several meetings that occur in the shelter process – questions arise at the beginning of the shelter formation process - and throughout it - as minds becomes focused and engaged upon the impact – that can extend to families entire ‘asset universe’ of sheltering. You should be aware therefore that in addition to our staff and partners being available to assist you - the actual formation of the shelter will be at the notary’s office where both the official court translator and the notary are totally familiar with Quill’s shelter structures – for English speaking people - as are the firm of Abogados handling all legal aspects of the formation in Spain. In particular the Arrecife firm of lawyers used are tax specialists - whose partners include lecturers in law. The partner that you meet will not only be a Spanish lawyer - but also a Spanish tax specialist in fiscal. The question and answer process – therefore - need never end until you are ‘full’. YOUR FAMILY PROFILE Our understanding is that you and your wife are tax residents of Spain - living full time in Lanzarote - with a number of pensions received from the UK – on which you are paying some tax (either in the UK or Spain – I am not sure which ?). You have a property here in Lanzarote - purchased less than 18 months ago - for €500,000. Your total worldwide estate is of around £1 million (€1.4 million) which is partially invested with HSBC in offshore accounts in the Isle of Man and Jersey. You have around £130,000 (€200,000) – of this in the half ownership of a flat and shop in the UK. PITFALLS AS THINGS STAND – IN GENERAL With regard to your question 16 the possibly exists – in fact the probability is - that you have tax residency in both the UK and Spain : You will definitely have tax residency in the UK if you are making tax returns and paying tax in the UK (after allowances) from your pension which is derived from the UK. You will simultaneously have tax residence in Spain - if you have lived here for more than 183 days (and probably in any event because you have a centre of financial interest and importance here). The UK and Spain double taxation treaty will avoid you paying capital gains tax and income tax in both UK and Spain – BUT – there is NO double taxation treaty covering other taxes in Spain or the UK - thus Spanish gift tax, Spanish wealth tax and most importantly UK inheritance tax are exposed. It may be that you have already elected to have your UK pensions paid without deduction of tax to Spain - and are being taxed in Spain after allowances ? I would need this information to be more absolute in some of this information below. TREATMENT OF YOUR PENSIONS – IN GENERAL It is quite straightforward – and you should consider – to make the application for all of your UK pensions to come to Spain – gross - to be taxed here in Spain - and not in the UK. Your instructions to the respective pension companies would then be to waive your right to receive your money into your personal bank account / personally – but - to have it directed into your shelter structure shelter. You would not then declare any personal income – but your shelter would declare a ‘benign’ status – and income described in Part Four (p4) pages 8 - 10. The tax position therefore would be that you would be personally in receipt of none of your pension income - but - that all of it – untaxed in the UK (unless any of it is a civil servant pension in which case UK taxation still applies) - would reach your shelter – converting it from the hoarding shelter to a benign shelter. A shelter is said to be ‘hoarding’ when it is simply ‘a bubble’ into which properties are put - for their protection against tax and other issues - for the benefit of future generations. It is said to be ‘benign’ when sufficient income is gifted (which would be the case here) to the shelter - without it actually trading - sufficient to maintain and support the assets - and to some extent - the humans involved in that activity. YOUR SPECIFIC QUESTIONS – WITH ANSWERS 1. What type of Patrimonio Familiar shelter would apply to us ? If our summary of your situation above is correct then you require a Tontine shelter to absorb your Spanish property asset - which I anticipate would operate on a benign basis involving a set up cost of €10,000 (£7,000) – plus yearly costs of €800 for the necessary returns – which replaces your wealth tax. 2. What can be put into the PF ? There are no limitations to the assets that can be transferred into the shelter. All of those that you list – and more – are ‘shelterable’. Where assets are in the UK or any other EU country they can also easily be sheltered – BUT – where income is generated directly as a consequence of a UK asset (i.e. the income from the output of a factory) then that income always remains taxable in the UK – even though the asset itself (the factory and machinery) can be sheltered from UK capital taxes within the shelter. Property assets in the UK that are transferred into your shelter involve very little costs in Spain – and simple transfer conveyancing fees in the UK - plus any relevant stamp duty (over £150,000 per property). 3. What is the PF’s income and what can be set off against tax ? Everything that you have listed would be considered to be expended in support of the asset – in respect of a ‘benign’ shelter – including up to €8,000 per year that can be paid tax free to the human ‘night watchmen’ of the shelter – i.e. (presumably) you and your wife. 4. How is the PF taxed ? The PF shelter is taxed on profit – but in a very special way. There are three different accounting regimes that can apply to a shelter. The maintenance of these regimes increases in cost with the greater complexity - and greater profitability - that a shelter is handling. For simplicity these are divided into (1) ‘hoarding’, (2) ‘benign’ and (3) ‘virulent’. Hoarding and benign shelters are not really exposed to any tax at all - but - there is a limit to what can be classed a benign (the limit is how much income can be absorbed in the reasonable maintenance of the asset – and when does that income turn into ‘profit’). At the point that the shelter is ‘in profit’ – there comes a time when it is worth upgrading it to virulent - because - the cost of applying the virulent accounting regime can become for less than the tax saved by the application of that regime. In other words – as an example - if a shelter receives €40,000 income per year of which €5,000 is considered profit - then the ‘normal’ tax to the shelter on that €40,000 income is likely to be of €1,000. That tax could be eliminated completely - but - the accounting regime necessary to do that would probably cost €1200 - and might therefore be judged not to be ‘worthwhile’. If the benign shelter however receives €50,000 income – to make €15,000 profit – then the ‘normal’ tax payable by the shelter on that €50,000 might now be €4,000 or €5,000. In that situation it begins to become worthwhile to pay increased fiscal charges 0 of €1200 - for the quarterly returns - necessary to reduce that tax on €50,000 income - down from €4,000 to €5,000 to €400 to €500. Depending on its status a shelter treated either like a dormant family business - or a non profit making family business – or a profit making family business (again Part Four, pages 8 – 10). The treatment of these situations is treated identically to a standard Spanish company - BUT it is application of the special shelter accounting regime that leads to almost no taxes. 5. Is asset growth taxed within the PF ? No - there is no wealth tax nor any other tax based on the increasing value of the shelter’s assets. 6. Can one have asset and income both inside and outside the PF ? Yes. 7. What are the tax rates and allowances for assets and income streams within the PF and for other assets and income streams outside the PF ? In Spain income tax outside of the shelter is normally of around 30% - starting at 15% on €4080 and ending at 45% over €45,900 p.s. Capital gains taxes can reach similar levels (though inheritance taxes can reach as much 121% !). These are explained further in Part One, pages 3 – 7). Within the shelter structure all capital taxes are or can be eliminated – and income tax - need be no more than 3% to 5% of profit. 8. How are normal living expenses drawn out of the PF ? Though this may be an out of date figure – that has not increased significantly for years – the humans involves in maintaining a shelter can draw €8,000 per year tax free to keep them alive ! Furthermore there is no real limit on the number of humans that can be said to be engaged in supporting the asset – though for most practical family purposes this is two – between whom the €8,000 is shared. Where a human requires a personal income that is greater - then that does not affect the shelter in any way – but the human becomes eligible to make a normal tax return in Spain - and is taxed in the same way as any employee of a shelter. From our experience - given that ALL household and ancillary bills are paid by the shelter – and even though the figure is a little out of date - the tax free €8,000 per year per family (€150 per week) sufficient to cover wholly personal expenses – of wine, dining and hairdressing etc. 9. What exactly happens on a first death / second death ? Absolutely nothing – other than that votes are moved around – under the terms of the succession plan that is built into the constitution – so that the next generation of the family gain more votes - ready for the time when that generation will take over. None of this is a taxable event expanded in Part One, pages 12 - 18. 10. How can one take assets or income streams out of the PF ? Assets or income can be sold or given away by the shelter without implication – other than the normal implications of tax payable by the receiver. In other words if a shelter were to pay someone in the UK £50,000 per year – then there are no implications upon the shelter of doing that - but - the person in UK would (presumably) have to pay UK income tax on the £50,000 they received. There are much more elegant ways of dealing with the need for money – either abroad or in Spain – by those involved in a shelter – which is to use the shelter’s ‘cheque book’ (in Spain or the UK) to do the buying. In other words if someone in a sheltered family in the UK wants a new Range Rover - then rather than the shelter sending £50,000 to a individual who would have to declare it as UK income – the shelter should simply buy the Range Rover with its UK cheque book. The Range Rover would belong to the family shelter – with no tax implications at all – but - it would still be in the drive of the designated family member - with its keys in their pocket. 11. Can the PF be terminated and what are the implications ? A PF can be wound up at any time and its assets distributed in accordance with the decisions of ‘the family’. There are no implications in Spain other than for those humans who receive cash or property assets in the UK etc as a result – who may pay tax upon them as if they had received them from any other source. Advanced shelter structures however allow the full assets to be received tax free – offshore. 12. If we move to New Zealand permanently what would happen with the PF ? If there were still assets in Spain – or elsewhere – that you required to continue to protect – you would simply operate your PF from New Zealand. This might involve Quill making some changes – for practical purposes – to the overseas branch chamber of the shelter. 13. What is the PF income what would be taxed ? I think this is already covered ? 14. How would other personal income be taxed ? Other personal income that is not received into the shelter – is taxed by the UK or Spain in the normal way. Being a member of a shelter has no impact – either for better or worse – upon your status as a human. Our general advice however would be to ‘deflect’ as much income as possible from your family as humans – into the shelter to be dealt with as above. 15. Have any of these non Spanish PF’s been tested in the courts ? PF’s that Quill create are not ‘non Spanish’ – in that they are a Spanish entity. What we and our advisors do – with the complete understanding and acceptance of the notary’s and local Hacienda – is to make a Spanish entity that is under the language and law of Spain – usable by someone whose language is English (and where it is likely to be more convenient for matters in the future – if they ever arise – to be dealt with under English law). These alterations (referred to in our literature – Part One, pages 8 – 9 - as 70% Spanish grapes 30% English grapes) create no ripples on the surface of ‘the way’ in which the PF company in Spain operates. In short there is nothing of relevance to be tested in the Spanish courts - though that is - to some extent - because of European legislation governing the way countries in the Europe are able to interact with each other. 16. Need a worked example based on our financial situation of annual taxes and taxes etc, at death 1 and death 2 both with a PF and without a As regards a working example of your financial situation – there are three situations to consider :
I do not know enough of the circumstances of your Will to provide this information to you other than on a guestimated basis. If you had sold your house yesterday, which Jenny says you estimate might have a selling value of €700,000 – having purchased it on the escritura for €400,000 (though in actuality for €500,000) then you will be eligible to pay capital gains tax on the €300,000 gain – less your evidenceable purchase expenses and for any improvements that you have made. If you are a tax resident of Spain – i.e. have a residence card and are making tax returns in Spain – so long as you can evidence that, you will pay 15% income tax on the sale – being €45,000 assuming that you were leaving for New Zealand. If you were sell simply to buy a further home in Spain, then so long as you carry forward that capital gain (i.e. do not downscale) any capital gains tax would be rolled forward. If you do downscale you will pay pro-rata on the amount not reinvested. Income My understanding is that your income is of £35,000 – or €35,000 - per year from pensions. There is a separate area of advice that we would wish to discuss with you, if in the event that you do not shelter your assets including your income – because depending upon the type of income your tax position could vary. In the event that you do not shelter we would arrange for Janet Harper to visit you – if you wished – under our Explaining Spain scheme - and she would produce an accurate report of your position including advice relating to softening all of the taxes that you are eligible for under the terms of this question, by means other than sheltering. The Explaining Spain process which involves two visits and a full detailed written report costs €100. In general - tax on your income will work in slices after allowances. The tax rate will work upon the slices between 15% and 45%. My estimate is that you will taxed at a rate of approximately 20% to 25% being from €7,000 to €9,000. It is not certain however whether your £35,000 (sterling) or €35,000 (euros). The above assumes euros (if your income were £35,000 would be in the order of €50,000, which would take it into the 45% slice). Your tax base only begins however after around €7,000 of joint exemptions - though - as with most taxes in Spain the total situation is more complex. Inheritance Tax The most important aspect of gift tax on succession tax as is set out in detail in our Part One booklet is that there is virtually no tax free exemption between spouses as there is in the UK and nor is there the total exemption as in the UK between joint owners of property. Therefore if you are Spanish tax residents as things stand, you will pay gift tax on succession tax on your worldwide estate at €1,400,000. Assuming that your estate is balanced equally between the two of you - then - tax on first death will be upon on estate of €700,000 less a €16,000 exemption (because you are married). Just as with income tax, gift tax on succession tax rises in bands. The exact figure would be provided to you as part of an Explaining Spain report but my estimate of the tax payable on first death is in the order of €160,000. There is of course no UK inheritance tax on first death between spouses. The problem with the Spanish tax system for English speaking people – accustomed to our own system – is that by giving everything to each other (as opposed to the Spanish system which would require each of you to give your half to your children on your death) our English ‘mentality’ will invariably make the survivor twice as wealthy thus paying twice as much tax on their death. Thus on second death taxes are being paid for a second time - on the deceased half of the estate that has been given to the survivor – and is also being paid on the survivors half of the estate. Therefore assuming that by the time of the second death, the total worldwide estate was once again worth €1.4 million then tax payable by your inheriting children (if this is the terms of your Will) would be of a further €400,000 – making a total of around €600,000 tax. What then sounds incredible is that - so long as you are UK passport holder – and assuming that you have Wills relating to your UK and Spanish estate, which are valid, binding and take all of the above into account – then the UK government will be looking for tax at 40% on around £400,000 of your estate (above the approximately £300,000 that you are eligible to give tax free) of £160,000 less approximately €210,000. If your Wills are not written correctly - or with this optimum position in mind - and if you have had Spanish law Wills written - that is not possible. Then the UK inheritance tax on your estate on second death will be of 40% of £700,000 being £280,000 or €400,000. That – then - summaries what will happen outside of a shelter. The position inside a shelter would be that I would expect – though it would require close scrutiny to be certain – that there will be little or no tax payable if your benign shelter receives €34,000 (or even €50,000) income – because you are able to draw €8,000 per year tax free - and the remaining income may (or may not) run to surplus after all of the eligible allowances. In the event that it did run to surplus then there would be approximately 25% tax on the surplus on that profit – unless the profit was sufficient for you to ‘step your shelter up’ - to being virulent. As far as inheritance tax is concerned, there would be nil either on either first or second death – nor indeed on the death of your children or children’s children. As far as capital gains tax is concerned, there need be no capital gains tax - so long as the shelter was set up correctly with an impending sale in mind and its owners understood the necessary approach. Wealth Tax If you are residents of Spain you are each exempt from paying wealth tax in Spain on the first €150,000 of assets. Thereafter this tax is 2% per year on the €1,000,000 estate. Shelters pay no wealth tax. I hope that this assists. I regret that it is not possible to answer your 16 questions fully - in much less than a book – but that this précis response assists you to evaluate your situation. Please do not hesitate to contact the writer if you require any clarification. Regards enc,. Part One, Two, Three, Four |
James Fitzgerald 14th August 2006 Dear James, re – IRISH TAXATION AND SPANISH SHELTER STRUCTURES. I regret that the summer holiday period and a general high level of workload has stopped me from further researching a tax accountant living near you, who we might be able to brief sufficiently for him to help you with additional advice. The position however is relatively simple being – a matter of Ireland law – which it is possible for you to double check in a library or through a tax accountant. WHAT IS TAKING PLACE ? Our proposal to you is that you purchase your SANDS investment through a Spanish shelter structure. That will mean that a Spanish shelter company will purchase the property using a mortgage that it (and not you personally) obtain – though possibly that mortgage might be from an Irish bank as opposed to a Spanish bank. You and you family will not own (because this entity is not controlled by share but by votes) but will control that Spanish entity. As a consequence of this structure the deaths of individuals do not create a taxable event – nor need the sale of the property – and this Spanish entity is exempt of wealth tax – and can access many other advantages. No one in Ireland is going to help you to be able to understand the tax situation of a Spanish entity or company – though a Spanish fiscal could be sufficiently informed to be able to advise you that the information we are giving you (which of course comes from Spanish lawyers and fiscals and is accepted and notarised by a Spanish notary and the Spanish inland revenue and Merchantile Registry). Irish law does not really enter into things other than in one manner – being capital acquisition tax. You are perfectly free as an Irish person – where Ireland is part of the EU – to become involved in the creation of a Spanish shelter, which (it not you) will own property in Spain. That is a simple legal fact. It is also a simple legal fact that the income that flows to that Spanish company is a matter for Spain and not for Ireland. It is only if revenues from the shelter to you in Ireland that Ireland becomes interested in these matters. What Ireland does have an interest in – are any of your existing assets that you donate to this structure. You are of course entitled to buy shares in a company if you wish – with complete freedom. Those shares become your personal assets and you pay capital gains tax and other taxes upon your benefits derived from them. The difference in the case of a shelter structure is that there are no shares. You are literally donating cash and / or other assets to a Spanish legal entity – with no direct benefit – though you do of course share in the benefits of the assets inside the shelter for as long as you are a custodian. This is identical to a situation where you donate a sum of money to a charity or a club and then sit on its committee (along with other members of your family) sharing in whatever benefit might arise out of the activity of the club or charity. The only act therefore that is of relevance to Ireland and Irish taxation is your gift of property or cash to the ‘club’ the Patrimonio Familiar S.L. in Spain. Though many Irish people do not realise it, it is not possible to give money away freely without paying tax on the gift you are making. There are however substantial exemptions depending upon who the gift is going to. In order to provide advice upon taxation to a wide range of English speaking people, Quill has developed a library of taxation information that flows to us from specialists around the world. These documents are constantly maintained and updated. In response to your email request we enclose the current law and practice as regards capital acquisition tax in Ireland, which is the totality of the relevant legislation. Like everything law, it is possible to drill down to incredible detail. The numbers in brackets are points where we can link you to the wording of the act itself. I do not however think that that will be necessary. The bottom line as far as this transaction goes is that you are contemplating a relatively modest gift to your proposed shelter structure. You will see from sections that are highlighted (coloured red on the emailed version of this) – that you are able to give away up to E23,336 per year to a complete stranger – that is exemption from any taxation – plus a further E3,000 annually. There is therefore no taxable event in you donating this level of gift to any structure anywhere in the world. In this case a Spanish shelter structure. It is then that separate legally independent entity in Spain that will borrow the money to purchase the property and which will receive the income. That income is not your income – it belongs to the Spanish shelter entity that you and your family control. The tax position within Spain is that up to around E30,000 to E40,000 per year, there is no tax to the entity upon that income and where tax rises above that the becomes payable – by the entity - of around only 3% to 5%. What will occur is that SANDS will withhold 15% of the rental income, which it will pay to the Hacienda and as part of the annual E500 per annum maintenance fee – of your shelter – our fiscal will recover all or most of that withholding. Assuming that you and your family visit your investment once, twice or three times per year and that you pay interest on a mortgage on the property then your expenses claim will offset the withholding. Jenny will have provided (or will provide) parts of our literature giving you further information about these matters. A basic Conquistador shelter structure will protect you against inheritance tax, capital gains tax and income tax as above. More complex Castell shelter structure can more than pay for itself by eliminating the almost 7% purchase tax when you pay your property in the Canaries. Yours sincerely, enc. |
Tony Scott 4th September 2006 tonys1@tesco.net Dear Tony, re – WEALTH TAX. Thank you for your email to Jenny. Wealth tax is a confusing subject - not helped by the fact that it is variously illustrated by the Spanish authorities in some cases as a percentage – 0.7% and in some cases as a decimal - .07 (though that is not the same as .07%). The global expression ‘wealth tax’ – is also generally - a confusing one – and the overall subject is also confusing. In particular that we do not have wealth tax at all in the UK – though it is fairly common throughout Europe. In reality - what tends to be described in the English language as ‘wealth tax’ is actually a culmination of three taxes, which properly should be called property owners taxes. That unfortunately - however - would be confusable with rates - which are not related to these property owners taxes at all. The three property owner taxes that tend to be lumped together as ‘wealth tax’
PROPERTY OWNER IMPUTED INCOME TAX Property owner imputed income tax (POIIT) is not payable by any tax resident of Spain in respect of their principle residence. Non tax residents of Spain who own property in Spain must make payment of this tax annually though – which is 2% (0.02 or 2%) of the valor catastral– i.e. the ratable value. Tax residents of Spain also pay this tax in respect of any second property. Those who are subject to this tax have (this 2%) of their valor catastralattributed to them as an ‘imaginary income’. Tax residents who own more than one property then pay tax on this imaginary income – where that is applicable – as if it were additional earnings. This means that they tax at whatever is their ‘normal’ income tax rate upon this imaginary income. Thus if their incomes are modest they will pay 15% - and - if their incomes are high they will pay 30% or even 45%. Non residents of Spain are always taxed at a flat rate of 25% upon any income arising in Spain – including this imaginary income. As an example - if a non resident husband and wife owns a villa with a valor catastral of €120,000 – though a real value of €240,000, each will be considered to own €60,000 of property (i.e. half of the valor catastral) for these purposes. 2% of that is then €12,000 of ‘imaginary income’ attributed to each – which will now be taxed at 25%. This creates an €300 per year tax bill for EACH. Thus the first POIIT element of their annual wealth tax return - for a non resident is of €600. If they were a resident with a second home whose tax level of 25% then it would be of €600. In addition to this tax on an imaginary income – the Spanish resident - AND - non resident property owner - is liable for Spain’s tax on capital assets. This is known as Patrimonio and also sometimes as wealth tax. PATRIMONIO - WEALTH TAX Wealth tax is not correct legal terminology - but is an adequate term for this tax and quite a useful label for all three of these taxes – which are taxes that are based upon an individual’s wealth. Its actual name is impuesto extraordinario sobre el patrimonio (the extraordinary tax on assets). This tax is described as being .002 (two tenths of one percent) of assets - up to €167,129 - after that the rate goes up as the asset values increase – of all types including houses, cars and IPOD’s. Wealth tax is based on the real sales value declared in the contract, which is (almost always) higher than the valor catastral. Thus these two taxes are - confusingly – based on a different amount - and confusingly – are expressed in two different manners (POIIT as a percent and wealth tax as a decimal). A resident of Spain however pays no tax on the first €108,182 (husband and wife each). Where the asset is a principle residence then each tax resident person has an exemption of €150,253. In other words if a husband and wife own a property worth €300,000 they are able to take an exemption of more than €300,000 and thus have no patrimonio tax (IESEP) to pay. ANNUAL REAL ESTATE TAX (IBI) This is a further annual tax upon property owned in Spain – which is again based on the valor catastral. IBI’s full name is impuesto sobre bines inmuebles, which increases each year with inflation. It is difficult for you to calculate IBI because it varies whether your property in a village or a town. As a consequence of all of the above confusion – Quill – along with most fiscal advisors in Spain – describes the total of these three taxes – for non residents - as being 0.7% of the value of the property or (as a decimal) 0.07 of the value of the property. This is a rule of thumb but is generally very accurate. I hope that this assists you to understand this aspect of our material. Regards
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Bob Wainwright bobw@hotmail.com 18th October 2006 Dear Bob, re – YOUR QUESTIONS. Thank you for your email. QUESTION ONE - IHT The purpose of the LLP is as the shelter’s branch office. It is this that enables us (and in time you and your family) to ‘drive’ the shelter structure in the English language and law. In itself the LLP has little – or nothing to do with the protection against taxation of the assets in Spain. 1. The English based LLP – WAINWRIGHT ESTATE CONTROL LLP - is a UK tax paying entity (though it is its partners as individuals and not the LLP that are responsible for tax) upon profits made by the LLP that are distributed to them. 2. You as a UK tax payer are eligible to pay tax upon your worldwide assets – including property that you own in Spain. The reason that neither you - nor anyone - will ever pay IHT on property in Spain – as a consequence of your part of the LLP - is because your property in Spain will no longer be in your name – but owned by and in the name of the Spanish shelter entity – WAINWRIGHT PATRIMONIO FAMILIAR S.L. The property in Spain is to become an asset of WAINWRIGHT PATRIMONIO FAMILIAR S.L. – which you are not a shareholder or administrador of - though the LLP is. Therefore - by no mechanism can that property become eligible for IHT in Spain or the UK. The property is not owned by the LLP and so it – though this is a more complex issue – it cannot come under IHT either. For that matter it is perfectly possible for an LLP to own its own assets without them belonging to any specific partner but to itself. The more normal arrangement within an LLP (like any partnership) is that assets are the capital of the partnership, which are – if only notionally – allocated between the partners. In the event of the partnership being wound up those assets would then be distributed between the partners - according to that relationship. In the event of a partner dying therefore there is potentially an IHT liability with regard to any specified share of the partnership assets that belongs to a particular partner. It is equally acceptable and lawful - however - for the assets of the LLP to belong to it - and not specifically to any partner - and - in that event - then even if the LLP did come to own property (for the purposes of the shelter structure – however - it never does) – then still there would be no IHT payable - because there is no defined asset belonging to the testator / deceased. QUESTION TWO – RUNNING ORDER If as seems inevitable the shelter will be complete and fully operative before your villa is completed – then we will simply organise with you - to ‘push’ the villa into the shelter – as soon as you have the escritura. I hope this deals with everything. Regards Yours sincerely, Simon Harris |
Edward & Gloria Crimson 30th October 2006 denvercrimson@btopenworld.com re – YOUR SHELTER (CURRENTLY LANE PATRIMONIO FAMILIAR S.L.). I was pleased to have had the opportunity to speak to you by phone last week, following your conversation with Malcolm Briers of Casas Blancas Estate Agents. In that conversation I learned of one or two matters that were disturbing you - and was able to step through what had taken place – in that conversation - in some detail - to set some matters straight. I promised that I would follow that letter up with a recital – plus documentary evidence of your precise position - which is as follows : THE NOTARY FEE CONFUSION This whole process of providing your shelter – to shelter your existing assets in Spain was made a little more complicated – and urgent - by the fact that you were dealing with two separate organisations - about two entirely separate transactions, including a new purchase on a specific date. On one hand you were purchasing your new house through Malcolm Briers - (who was away in the UK at the time) of Casas Blancas working with his secretary. It was they – and not us – who set up your first visit to the notary - when your new property was purchased into the shelter we had (rapidly) pre-prepared. Also you were dealing with Quill upon the transfer of your shelter including your two existing properties. Quill did not want to confuse the notary staff – (or anyone). We felt that it would be best to have a first notary visit dealing with the new property issue – (i.e. not to add other properties you already owned into that first notary visit) and a second visit to deal with the balance of matters. The outcome of that first notarisation would be that a new escritura for your new property would be created by the notary to show the purchase of it by your shelter S.L. company - LANE PATRIMONIO FAMILIAR S.L. There was another task to be completed however - which had nothing to do with Malcolm Briers or Casas Blancas – but was to do with our construction of your complete shelter structure. This involved adding your two existing properties into LANE PATRIMONIO FAMILIAR S.L. We arranged this event on the second notary visit which would lead to further escrituras. DOCUMENTS As a consequence of all of this there would – in due course - be rather a lot of documents emerging from the notary’s office :
Thus the notary’s office was preparing three escritura documents associated with you and your shelter. You had made arrangements with Malcolm’s office that (perhaps to be reimbursed by them) that you would pay for and collect from the notary the escritura of the new property (bullet point one above). What you inadvertently collected - however – and paid for – was the escritura increasing the share capital in LANE PF - to accommodate the new property (bullet point two above). But you had – already paid us in regard to this cost - which the Abogado we instruct normally pays for when his office collects it. You felt a little cross - therefore - that you had paid for an escritura, which Owen Hollywood promptly took from you. He though would have been unaware – (and non plussed) - as to why you had been asked to pay for this escritura - required by Quill – which he would have expected Felipe Fernandez De Las Heras (Abogados) office to pay for. It was only during the subsequent ‘autopsy’ of all these matters that it was discovered what had occurred. The position as I understand it therefore is that someone may still have to track down and collect the ‘new property’ escritura - from the notary - which we imagine Malcolm Brier’s office will do - to give to you on your next visit. You have thus paid an unnecessary sum – effectively on our behalf – for the company constitution that you collected - which we shall reimburse to you by addition of that sum (if you would kindly confirm the amount) into your LANE PF S.L. shelter bank account. YOUR CONTROL OVER YOUR ASSETS As you are aware – in order that you could make a saving of property transfer tax - upon the purchase of your new property – (which is a substantial sum) – there was a rush - to make a shelter structure ready for your use. Normally these structures take 10 or 12 weeks to prepare - and especially so when they cross the summer months - when the notary’s and lawyers are respectively closed down for two or three weeks each. We were fortunate however in that a shelter structure (LANE PF S.L.) which was in the process of being prepared for another client became ‘redundant’ - when they ‘lost’ the property they were intending to purchase. We therefore had a shelter structure that was fully formed – ready to be able to purchase a property – (albeit for other clients / people). The process of changing the ownership of a shelter structure (which has been formed specifically for English speaking people) begins in the UK. I think you are probably aware by now - that the shelter structures that Quill creates - are different from those a normal Spanish family might have – because they become governed by English law - and controlled in the English language. This however means that legal documentation must be prepared in the UK and authenticated by the UK government - and then transported here and translated by an official Spanish translator. The important parts of this process had taken place by the time you came to purchase your property - but - we did not yet have the translation into Spanish. You are probably also aware from the booklet material we provide – that a shelter structure has two chambers, one is the controlling chamber and one is the property holding chamber. Both are legal entities joined together at the notary. For the reasons above one is a branch of the shelter situated in the UK - and the other is the main shelter holding compartment situated in Spain. Normally the Spain compartment controls the UK branch - but - in this structure – specifically designed for English speaking people – it is the reverse that applies. Therefore it is your control of the UK entity - LANE ESTATE CONTROL LLP - that is the all important factor – because LANE ESTATE CONTROL LLP totally owns and administers - and controls LANE PATRIMONIO FAMILIAR S.L. the Spanish shelter structure. On the day that LANE PATRIMONIO FAMILIAR S.L. purchased your new property – (and of course subsequently when the other two properties were added to it) – you were in total control (even though you did not know or feel it) - through your position in LANE ESTATE CONTROL LLP. I enclose a copy of the apostilled documentation received from the UK government confirming this, which you will see shows you two and ourselves as the designated members of LANE ESTATE CONTROL LLP. The Quill Group Company Secretary LLP is involved in the formation of your shelter structure - and - to give legal effect to our work - has to be on the inside of the shelter - whilst that formation takes place. Shelter structures are controlled by 1,000 votes. You both have 500 of those votes and are therefore – between you – in complete control. As is set out in all of the documentation including the company constitution – Quill borrows 100 of your votes in order that it can hold meetings, create minutes and act on behalf of LANE ESTATE CONTROL LLP in all of the matters that take in Spain – in your absence. Once all of these processes are finished – it is open to you to dispense with our services. Whilst we are in your shelter we make three separate declarations – (1) in our literature – (2) in the constitution and (3) by letter – confirming our position inside your shelter as being that of a servant without us having any rights upon your money or assets or property (beyond any fees that are owed to us). It is therefore the case that from several days before the LANE shelter structure purchased its first asset, as your behalf - you were wholly in control of that structure. THE ROLE OF OWEN HOLLYWOOD ON THE DAY - AND SUBSEQUENTLY The role of Owen Hollywood has been as follows :
In this case the process was of the company receiving the property on your behalf. Under normal circumstances you would have represented your own company yourselves. Because of the short timescale however we were unable to present the notary with the translated proof – i.e. that you owned the structure. The Quill Group Company Secretary LLP however had been involved in the structure when it formed for the LANE family and still remained involved when it was transferred into your ownership. It was therefore us – acting in front of yourselves – who acted for LANE PATRIMONIO FAMILIAR S.L. when it purchased the property. Owen Hollywood is one of eight partners of The Quill Group Company Secretary LLP empowered to act on its behalf – when it acts on your behalf. Hence his appearance. Owen Hollywood is a minority partner in The Quill Group Company Secretary LLP - which - in turn - is a minority partner in LANE ESTATE CONTROL LLP. Owen Hollywood has, individually no authority, power or ability to interfere with your assets - other than on your behalf when you are with him. On future occasions when you go to the notary however we will have provided you with the translated apostilled documents from the UK government, which the notary will make use of and you could act on your own – though we would wish to be there to assist.
As we have said the Spanish holding chamber LANE PATRIMONIO FAMILIAR S.L. was wholly owned by LANE ESTATE CONTROL LLP (and yourselves) - and the administrador is LANE ESTATE CONTROL LLP. There are – consequently - no humans involved in the Spanish chamber, which is one of the unique features of a shelter. The Hacienda however requires that there must be a human – who is a tax resident on the island that they can telephone or contact if required. This person is called the fiscal representative. It is effectively the task of a ‘runner’. This one of several tasks that Quill fulfils on your behalf – usually because even if you were able - and wanted - to fulfil this task - you cannot do so if you were in the UK. It is for this reason that the only ‘human’ named in the paperwork of the Spanish compartment of the shelter is – as things stand - Owen Hollywood. Anyone however can fulfil this role – so long as they are a tax resident of Spain - and we (Janet Harper of Quill Client Care) will discuss who you might prefer to be named in the escritura in this way for the future when we will make those changes in this regard. Looked at only from the point of view of the Spanish chamber therefore the only human seeming to be named is Owen Hollywood – acting on behalf of The Quill Group Company Secretary LLP. Looked at overall - however – the Spanish chamber is a wholly owned part of a structure where the control lies with LANE ESTATE CONTROL LLP. Throughout your involvement in these matters you have always held absolutely control of LANE ESTATE CONTROL LLP and thus the entire structure – (with Quill – through Owen Hollywood as your named servant). BANK ACCOUNT It is necessary to deposit €3,010 in a bank account in order to form any type legal Spanish entity. This money was originally deposited in Fuerteventura by Mr & Mrs Lane when the LANE shelter was first formed. You have provided us €3,000 to replace these funds and therefore during the period since we have working upon these matters - and - on the last day of October that account will be closed. Early in November we shall open a replacement bank account at the bank of your choice – transferring the €3,000 from Fuerteventura into it. By the time you come over in November, this shelter bank account should be open at your own selected bank – who will require you to visit it - to sign the necessary papers. It will have the relevant funds in it - on deposit – available for your use. CHANGE OF SHELTER NAME At the point at which Jenny Harris discussed with you the proposal that you should take over the LANE shelter – it was also suggested that we could change its name to CRIMSON or any other proposed name. The true title of the LANE shelter is – LANE ESTATE CONTROL LLP – and CAMINO PATRIMONIO FAMILIAR S.L. (Camino being lane or way - in Spanish). The current situation is that those names are about to be fixed in stone and so we have to make a decision whether to leave your shelter as : LANE ESTATE CONTROL LLP plus LANE PATRIMONIO FAMILIAR S.L. or (as it is about to be solidified as if we do not move quickly) LANE ESTATE CONTROL LLP plus CAMINO PATRIMONIO FAMILIAR S.L. and then the third one is : CRIMSON ESTATE CONTROL LLP plus CRIMSON PATRIMONIO FAMILIAR S.L. (or whatever the Spanish application of Carter might be). Or any combination of the above such as CRIMSON ESTATE CONTROL LLP and CAMINO PATRIMONIO FAMILIAR S.L. It would be helpful – for good order - if you were able to confirm exactly how you would like your shelter’s name to either remain or become – when we next see you. LATE ATTENDANCE UPON YOU Finally I should like to take this opportunity to apologise for the late attendance by Owen Hollywood upon you, leaving you stranded in Arrecife for a period of time. I trust this letter finds you well and that we are progressing matters ready for your next visit to the island and hope that this deals with all of those matters that you had both found disconcerting. Yours sincerely, Simon Harris |
James Derbyshire 20th December 2006
Dear James, re – THE POTENTIAL OF A SHELTER TO YOUR FAMILY. Thank you for your email of the 13 December 2006. I regret the delay in my reply. I have been in the UK for a few days. Open days are held on a weekly basis - in rotation - at Costa Teguise Golf Club, Puerto del Carmen harbour and in Playa Blanca at the Natura Palace Hotel. You will of course be welcome to attend when you are next out here. Numbers attending vary between 2 to 20. QUESTIONS 1. OUR ROLE Our advice in this regard is completely impartial - with the only objective being to ensure that your estate and succession plan is as perfect as it can be. Set against that - we have - with the help of Spanish lawyers, tax lawyers, fiscals, notaries and the Hacienda (tax office) - designed a variation of the traditional Spanish Patrimonio Familiar approach to succession matters – through a shelter structure - that is suitable to English speaking people. Because this variation – or hybrid – has been created by Quill as a specific answer to a series of problems very frequently experienced by our English speaking clients who own assets in Spain - we are rather biased towards it – as the perfect solution to their problems. 2. YOUR PARAGRAPH TWO 2a. Who creates the shelters ? For hundreds of years - and for a variety of reasons – many surrounding the necessary to encourage employment for all over massive areas of Spain - where there are few or no big businesses – i.e. big employers) – Spain has allowed accountancy rules to exist that give benefits to family businesses. In order to be able to take advantage of these benefits requires ‘a structure’ - which naturally in the past has been a wholly Spanish structure. That wholly Spanish structure usually comprises of two parts. A Fundacion (1) and a unipersonal Spanish company (2) – is what makes up a traditional Patrimonio Familiar structure. 2b. The four year statute of limitations It is through PF structures however - that around 2.5 million – fairly small through to very large - family businesses have protected themselves from inheritance and other taxes in such a manner that they did not need to resort to fraud. 2c. Why does Spain allow shelters ? It is certainly not credible any longer to expect that failing to report a death will effectively avoid inheritance taxes (now that the authorities throughout Spain have computers and increasingly accurate records). This ‘mute’ tax evasion method - of course - also - does nothing whatever by way of avoiding net asset value (wealth) tax nor capital gains tax in the way that a PF shelter does. 3. ANNUAL COSTS OF RUNNING A SHELTER Where a shelter is ‘hoarding’ (meaning that it simply holds property but nothing else) the cost is of €500 per year. Where the shelter holds property and receives pensions and other incomes - in order that they will become tax free (up to around €30,000 or €40,000 per year) the annual cost is €800 – and - where a shelter is a fully active trading entity - then the accounting costs are between €1200 and €2400 per year, just as they are for any other Spanish or UK trading entity. There is nothing magic about all these returns - and it is possible to do them all yourself, though the advisability of that rather depends upon which status – hoarding – benign – virulent – your shelter is likely to belong to. There are no shares in a shelter and there is no registry of who controls votes, either in Spain or anywhere else – which remains a family secret. Public records are kept of the fixed assets in Spain or elsewhere owned by the shelter and of its trading activities - and of the shelter’s profits. Tax on profits however is most likely to be 3% rather than the normal 30%. 4. TRADING ACTIVITY STAFF AND PREMISES It is not possible to access tax reliefs that are to do with ‘active trading’ (such as a 3% tax on profits instead of 30%) if one is not actually trading. The hallmarks of trading being some form of business premises (an orange grove) and some form of workers (orange pickers). A shelter structure requires no offices or staff - or anything - to avoid the basic taxes of inheritance – capital gain and wealth. Shelter structures and the PF accounting rules are said to have been in existence since the time of Don Quixote – and there are certainly many vineyards from the 17th and 18th century that have passed down through generations to the present day as a result of the application of the PF accounting rules and these types of structures. 5. TRANSFERS FROM A TO B – OR FROM A AND B TO THE STRUCTURE If you decide to construct a shelter and transfer your assets in Spain into it (whether that is one property owned by your both or several properties owned individually) – then - because you are transferring those assets into a shelter – there will be no property transfer tax. Once the assets are inside the shelter there will never be inheritance tax no matter how many generations the property passes down through the hands of. If any of those properties are to be sold then there – potentially - need be no capital gains tax. This is a totally legitimate position – in which the shelter structure is simply taking advantage of accounting rules that operate in a highly specialised area of advice relating to succession – which Quill has made its specialism – along with writing Wills. We are unusual – in that Quill has made this is speciality where most other advisors have not. 6. SETTING UP THE SHELTER As the Quill style shelters – for English speaking people with assets in Spain have become more popular – the speed of their production has slowed down - as we have been overburdening ‘officials’ in various government departments. We have therefore begun to pre-form shelters in other areas of Spain (and even using Spanish notaries surrounding the Spanish Embassy in London), which can be immediately available - or which involve much less construction time. If there is – for some reason – a huge rush to get assets into a shelter – that can now take a matter of two or three weeks - or otherwise a month or two - where construction of a shelter has already begun. To build a shelter from scratch – specifically for a families needs – generally takes three or four months. 7. RE-POSITIONING OF EXISTING SAVINGS A shelter structure that receives pension incomes and interest etc, is known as benign - which costs €800 per year to run complete with all fiscal returns in Spain or the UK (or wherever the English speaking branch is located). It is best to transfer capital currently on deposit in the UK into the shelter and then re-deposit that money, which would then receive its income gross – free of any UK tax. 8. EXPOSURE OF CREDITORS That in turn then might lead to an attack upon assets in her name at that time. It is absolutely legally impossible for any such attack to cross the boundary of a shelter structure. Your partner would no longer own the assets she had transferred into the shelter and nor would she own the shelter - but - with you would control it for her lifetime. A creditor cannot – in any legal system in the world – obtain access to assets inside a separate legal entity such as a trust or a company – simply on the basis that some amount of control is exercised over those assets by a creditor. To put this into a clearer light, it would be as if your partner was one of the Directors or trustees of a family charity. The charity owned assets, which had once been hers but which have been transferred absolutely and legally to the charity. The fact that a person is a Director or trustee to the charity would give neither a trustee in bankruptcy nor a court nor a creditor – any legal access to the funds owned by the charity - UNLESS – it could be proved that the gift had been fraudulently made - in order to avoid a legitimately existing debt. From what you describe your partner is looking at some remote possible future outcome against her in person – which – today – has not crystallised in any actual form at all. It is therefore a threat that can be taken no account of - until some form of debt were to crystallise against her – by which time the assets would be fully – legally - sheltered. IN SUMMARY We publish a series of booklets that provide information about shelters – that are provided to clients through their formation process, which do go into these matters in some depth - from which these answers have been taken. You may wish to speak to Jenny by telephone (0034 928 346 544) or in person to expand upon some of the answers above. Regards
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