Financial Advisors in Spain

SAVINGS AND INVESTMENTS IN SPAIN

Introduction
Although the idea of investing saved capital to provide for your future financial security is gaining wider acceptance, for the would-be investor, finding the most appropriate investment can be a daunting prospect. This can be fraught with problems when seeking advice abroad or in anticipation of living abroad.

Consulting an Independent Financial Adviser (IFA) should be the first step, particularly those who are looking at the various types of collective investment vehicles available.
There are many savings products designed for specific purposes and a whole range of opportunities open to the investor wishing to generate extra income or build up a capital sum for the future. Additionally, the investor can address the need to provide for dependants in the event of an unexpected loss of earnings through illness for example.

Directly Held Investments
All the forms of investment open to investors can, broadly speaking, be split into two main categories – direct investments, such as stocks & shares, or collective investment schemes where clients pool capital with others seeking the same goals.

Firstly, direct investment. For investors, this generally means shares, bonds or gilts. Although the spread of share ownership has widened considerably in Europe and with it public awareness of what share ownership means, it is worth highlighting the basic principles.
The price of a company’s shares is best described as determined by the value of its assets and its potential to generate further revenue. If shareholders begin to see the estimates of future revenue as unduly optimistic, or if the value of the company’s assets declines, they are likely to sell their shares and this may cause the share price to fall. If the reverse happens, demand from buyers will increase – thus pushing the share price up – and any portfolio holding reflects these changes.
The trade in stocks and shares, facilitated by market makers whose role is to quote both a buying and selling price for listed stocks and shares, is known collectively as the stockmarket. We see the share prices obtained on the stockmarkets of the world as the “FTSE 100”, or the “Dow Jones Industrial Average” – and there are many such indices.
Public Limited Companies (PLCs) in the UK are listed on the FTSE All-Share index, the 100 largest by capitalisation listed on the aforementioned FTSE 100.

Companies wishing to issue shares but lacking financial muscle or new start-up companies, may opt for the Alternative Investment Market (AIM), which means that, in most cases, companies listed on
AIM carry higher risk than those listed on the main stockmarket because they face higher business risks as they attempt to grow and attract investors. For the individual investor, the drawback to investing in AIM stocks is their lack of liquidity. Market makers will constantly quote buy and sell prices for FTSE stocks, but as trading volumes on AIM are much lower, transactions are conducted in a specialist manner and shares are not so readily valued.

Bonds and Gilts
The second principle form of direct investment is Bonds and Gilts. Bonds are basically debt. In buying a bond, the investor is effectively lending money to the bond’s issuer. The investor knows in advance what sort of return they will get on their investment and bonds are generally regarded as a much lower risk category of investment than shares.
Gilts are bonds issued by the UK government – the name derives from the term “gilt-edged stock” – so by buying gilts the investor is lending money to the UK government. As the UK is regarded as a safe bet to honour its commitment to buyers of its government stock, gilts are in turn regarded as one of the safest forms of investment. The issuer – in this case the government – is guaranteeing to repay your capital at the end of the bond’s term, (if there is a redemption date) and you also get a guaranteed coupon (return) throughout its life.
A bond with a face value of £100 will also pay a pre-set figure in interest every year to the holder – the coupon rate. When the rate is set it must be competitive with current interest rate levels but these may change, thereby rendering the return on your bond relatively less attractive than cash deposits. So bonds are traded in the market to reflect this. For example, a bond may be issued at a time when 6 per cent is an attractive interest rate return and as a result your £100 bond may pay a coupon rate of 6 per cent. So you have paid £100 to get £6 per year plus your original investment back at the end of the bond’s term.

But if interest rates jump to 9 per cent your coupon rate starts to look a bit weak. You therefore sell your bond in the market, but no-one will pay £100 to get only £6 a year so you have to sell at a lower figure that builds in the difference in rates.
Of course you can take comfort from the knowledge that you will get your capital back at the redemption date, in this case from the UK Treasury.
Corporate bonds work in a way that is broadly similar to government bonds – they are issued by companies as a way of raising money from investors. Again, they pay a coupon rate coupled to a pledge to repay the capital at the maturity date. Like gilts, they can be traded on the market if investors want their capital back before the maturity date.

“Pooled” Investment
Unit Trusts, Investment Trusts and Open Ended Investment Company (OEIC).
All three will take the pooled monies of a large number of investors and put them in the hands of a professional fund manager. He or she will choose a broad spread of instruments in which to invest, depending on their investment remit. The main asset classes available to invest in are shares, bonds, gilts, property and other specialist areas such as hedge funds.
There are key differences between the three types of scheme structure.

Unit Trusts
An investor in a unit trust ‘buys’ a number of units, while an investor in an investment trust or OEIC ‘buys’ shares. Unit trusts are open-ended, which means that units can be issued as demand requires. The price of these units is dependent on the value of the underlying assets, and they can be sold back to the fund managers by the investor.

Investment Trusts
Investment trusts are structured as companies so their shares are traded in the same way as any other limited company’s shares.
Investment trusts offer a wide range of investments.

Open Ended Investment Companies (OEICs)
The OEIC is structured along similar lines to the unit trust, but it differs as it has no bid/offer spread. This means buyers and sellers get the same single price. Additionally, the OEIC has an “umbrella” structure allowing numerous “sub-funds” investing in different types of assets, so the investor can switch easily between different investment funds.
Given the range of options of unit trusts, investment trusts or OEICs, the choice can be confusing – consulting an Independent Financial Adviser could help simplify your investment choice.

Offshore investment
In most cases, offshore investment offers huge advantages over conventional asset management. From the UK perspective, offshore funds have traditionally been used mainly by expatriates. Because UK expatriates do not generally pay UK income tax, it makes sense for them to invest in funds based in a low-tax centre such as Luxembourg, Dublin or the Isle of Man.
As well as offering tax advantages, lighter regulation in offshore centres means funds can invest in a much wider range of markets than most onshore vehicles – a big attraction for the more adventurous investor. Here the services of an IFA with specialist knowledge of the offshore market can prove invaluable.

What are offshore investments?
Offshore investing is when you invest in investment vehicles situated in low tax areas outside of the United Kingdom or other “modern” countries.
For many there are advantages to investing offshore particularly the tax deferral benefits. In financial planning terms holding cash offshore in a fund or deposit account can be useful for example to determine when the money is brought back to the UK to add to the investor’s retirement fund or to gift to children or grandchildren.

Who can invest offshore?
Any adult can invest offshore.
In order to work out what your tax position will be it is important for offshore investors to know two things. What your domicile is and whether you are a UK or other national tax resident. An individual acquires a domicile of origin, which is usually the same as that of his or her father. If you were born in the UK and it is your permanent and natural home it is generally the case that your domicile is the UK.
If you live outside the UK for more than 6 months of each tax year you will generally be treated for tax purposes as a non-UK resident.
An Independent Financial Adviser can help you work out the answers to these questions.
What are the benefits of offshore investments other than tax?
By going offshore, you can choose from thousands of funds that can improve the diversification of your portfolio. You can also get access to expert fund managers that are not available in the UK.

What is the position for expatriates?
Those who live or work overseas to enjoy a different lifestyle often want to pay as little tax as is legally possible.
Regarding savings and taxation, what applies to you in your specific circumstances is generally determined by the UK tax regulations and whatever tax treaties exist between the UK and your host country. The UK has negotiated treaties with most countries so that UK expats in those countries are not taxed twice. It makes sense to have an Independent Financial Adviser at home and abroad who understands the rules and regulations. Basically if a non-domiciled UK resident is employed by a non-UK resident employer and performs all of their duties outside of the UK, the income arising is only subject to UK tax if it is received or remitted to the UK.

Are offshore centres regulated?
There are more than 30 offshore centres, ranging from the Channel Islands through the British Virgin Islands to the Cook Islands. Their level of regulation, supervision and compensation schemes vary so it is important to get advice before investing in an offshore jurisdiction.
Offshore financial centres have tightened their regulations in recent years. Indeed, in the Isle of Man and Channel Islands, providers of trusts and companies are now being regulated, which has yet to happen in the UK. Hedge funds and experienced investor funds face relatively light regulation.
The most popular locations for investing offshore to date by UK national investors have been the Isle of Man, Jersey, Guernsey, Luxembourg and Dublin.