Spanish Equity Release

With recent increases in property prices in Spain, especially on the popular Costas, many expats now find themselves asset rich but with additional the cost of living rises, possibly poor in the pocket. In addition these property price increases can be a potential nightmare for your inheritors as in Spain inheritance tax has to be paid on the death of the first partner and the property cannot be sold until it is paid. With the maximum tax-free allowance being in the region a paltry 15,957 euros the surviving partner could find themselves with a very hefty bill to pay.

A Spanish equity release scheme could help to resolve both of these problems. Firstly you can release some cash to spend on whatever you wish and additionally invest a sum of money to help top up your current income. Secondly you can reduce the assessable value for your inheritance tax by the amount of the loan. For instance, a secured loan of 80% of the value of your Spanish property could reduce the inheritance tax by between 90% and 95%.

There are many well known banks offering Spanish equity release schemes, such as Barclays, Jyske Bank, ABN Amro, Rothschilds and Landsbanki amongst others. As you would expect they all have slightly different schemes with varying loan to value amounts,(i.e. the percentage of the value of the property they will lend you.) Varying amounts you can draw in cash and varying percentages that you can take as income per annum. But they are all have the same underlying system.

Basically they will lend you, for instance 75% of the value of your property, of this you may be able to take up to 25% in cash, some banks only allow you to take 10%, and the remainder is placed in a managed portfolio with the intention that it pays the interest on the loan and also makes a bit on top to provide you with an income. In theory if the interest rate on the loan is 4.5% and the investment bond makes 8% per annum then you should be left with an income of 3.5% from the amount invested.

Spanish Equity Release Example:-
Property Value 750.000 euros.

LTV of 75% 562.500 euros (amount borrowed)

Cash taken @ 20% 112.500 euros

Amount invested 450.000 euros

Annual interest at approx 8% 36.000 euros

Interest on loan @ 4.5% 25.310 euros (annual repayments)

Potential annual income 10.690 euros

Potential weekly income of 205.58 euros.

The setting up costs are around 3% and are generally taken out of the cash allowance. Of course this looks very good on paper but it can be risky for instance if the interest rate on the loan goes up and your investment portfolio performs badly then you may be left in the position were you cannot meet the repayments on the loan and your home could be in jeopardy.

However historically the spread between loan interest rates and investment returns are at worse just a few percent in favor of the investment and at best there can be quite a substantial difference.

Of course it goes without saying that a Spanish equity release scheme is not something to be undertaken lightly and good reliable advice from an established and regulated financial advisor is imperative. However it can be one way to not only reduce inheritance tax liability but also to unlock some of the equity tied up in your Spanish home and hopefully provide a reasonable top up to your weekly income which may help to combat the cost of living rises for those on a fixed income.

About the author:
Ruth Polak is the owner of www.costadelsol-vacationrentals.com, a web site specializing in holiday villas and apartments on the Costa del Sol and in Rural Andalucia. You will also find lots of information about Spain and Andalucia, in particular.