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Interest rates have been at historical lows for most of the last 15 years or so, and now they have started to rise again. This is bad news for borrowers, but good news for savers! Savers have had very little to talk about for most of this time and a problem that they have not had to worry a lot about is having to pay much tax on the interest their savings were receiving, because the rate earned simply wasn’t very much, if anything at all.
Now that rates have crept up and people are starting to see a return on their money, they need to consider if a tax liability will arise. What very few realise, is that by holding your savings/investments in a certain way, you can defer this tax liability and get your returns to compound over time.
Compound interest is very effective and often understated. By way of an example, if a Spanish resident received 5% interest on a 100,000 EUR investment, they would earn 5000 EUR in year 1, but the starting rate of tax on savings is 19% meaning this is reduced to 4,050 EUR. Over a 10 year period, the 100,000 EUR would be worth 148,737.63 EUR.
In comparison, held efficiently with tax-deferral allowing for increased compound growth, the same 100,000 EUR generating the same 5% return, would be worth 162,889.46 EUR.
In year 2 your 5% return on 105,000 EUR would earn you 5,250 EUR. By year 3, your return would be 5,512.50 EUR. By year 10, your 100,000 EUR investment would now be worth 162,889.46 EUR.
Should an individual wish to receive income from their investments to live off, having the right structure can hugely reduce the amount of revenue lost to tax each month.
Contact us to find out more and to make sure your money is working hard for you, rather than you having to work hard for your money.
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