TRANSFERRING MONEY

Regular transfers

The use of two accounts, one in the home country and one in Spain, should be enough for the transfer (transferencia) of money, pensions and day to day living expenses. The transfer of money between two accounts is straightforward irrespective of the currency involved but charges can vary and conversion from sterling or dollars into euros is expensive.

Some people prefer to use three accounts: a UK sterling account, a UK euro account and a Spanish euro account. They transfer sterling to euros in the UK, then transfer these euros to Spain with instructions that all transfer charges are to be allocated to the UK account. The advantages of this may not be immediately apparent, but the benefits are avoidance of Spanish bank charges and the full identification of currency transfer costs which is not possible with only two accounts.

Offshore banking has some advantages for investments and tax free savings. Since Gibraltar, an offshore centre, is so close to the Costa del Sol, it is still possible to bank offshore and live in Spain. Many offshore current accounts offer a cash or credit withdrawal worldwide. However charges of 2.25 per cent from the exchange rate and 1.5 per cent per withdrawal make offshore banking expensive. The benefits of offshore banking are now doubtful as the EU has closed tax avoidance loopholes by having an offshore bank declare any interest earned to the tax authorities of the account holder’s country of residence.

Any time money is transferred from a UK bank to an account in Spain a charge occurs. There are some exceptions but try to avoid paying a sterling or dollar cheque into a Spanish bank account. The charges are high – around 0.55 per cent and there is a 14 to 21 day delay while a cheque clears. A cheque from another country in the euro zone suffers an even worse fate, taking six weeks to clear as there is no centralised clearing bank system. A normal cheque within Spain attracts a small charge but no delay.

To reduce bank charges always transfer money from outside Spain by electronic transfer. Always transfer euros, not sterling or dollars. Always use a rapid bank transfer system such as SWIFT which assures the money is sent quickly. The charge will be a fixed fee of around £20 and 0.25 per cent deducted from the official exchange rate from the UK bank and a further 0.25 per cent from the Spanish bank. This deduction, in total 0.5 per cent, can be paid by the sender or by the receiver, or split evenly which is the normal approach. European banks have introduced unique account numbers for all bank accounts, incorporating a code for the identity of the bank and branch involved as well as the account number of the individual customer. These are known as IBAN numbers. This, not name, address, sort code and account number, should be quoted on all international currency transfers.

Specialist companies

Specialist companies, competing with UK banks, exist for the regular transfer of money abroad. A fixed monthly euro requirement will vary as the exchange rate varies, so it is not possible to be exactly sure how much sterling will be required to cover an overseas payment. Overseas payment plans allow the fixing of an exchange rate between sterling and euros for one year at a time. The monthly payments are collected from a UK bank by direct debit and transferred abroad on a set date each month. The costs of this service are an annual £50 fee and £7.50 per month, less than normal banking charges.

Large transfers

Transferring large amounts of money over a lengthy period of time from outside the euro zone requires careful consideration. The variable exchange rate has to be taken into account. At its launch the euro instantly revalued to 1.64€ against the pound but in the aftermath of 9/11 moved to 1.39€. Which currency is weak or strong is a matter of conjecture. Either way, this swing of 18 per cent is a major influence when large sums of money are transferred. It can take many months to purchase a property abroad, particularly in the case of a new development. It is therefore important to ensure protection from the volatility of exchange rates. This means that a property price quoted today is probably not the price eventually paid, especially in the event of staged payments when purchasing ‘off plan’.

For example let us assume that you are UK resident buying a new villa in Spain. The developer will require a deposit in euros immediately, then further stage payments during construction over the next 18 months and a large payment upon completion. The price of the property is in euros and this will not increase unless the specification is upgraded.

The actual cost in sterling will be determined by the timing of the currency purchase. If the pound strengthens during construction the cost will decline, but if the euro strengthens costs will increase. To illustrate the potential volatility a property priced at 200,000€ would have cost £129,870 in January 2003 but increased by £12,980 to £142,850 by May (a ten per cent increase in just five months).

Strategies for currency fluctuation

One transfer strategy would be to buy all the euros now, thus fixing the cost at the outset. This is called buying currency for ‘spot’. Deposit the bought currency to earn some interest and make payments to the developer as requested. Another transfer strategy would be to buy the euros each time they are required to be sent to the developer. This means the purchaser has no idea what the final cost of the property may be.

A more complex transfer strategy, but one that is gaining in popularity, is to buy a ‘forward contract’. In essence, a forward contract means buying the currency now, and paying for it when there is a need to make the individual stage payments. The requirement is to pay ten per cent now and a 90 per cent balance upon the maturity of the contract. For example £50,000 worth of euros bought now but not sent for three months means agreeing the rate now, placing £5,000 on deposit, and paying the remaining £45,000 balance in three months. If the exchange rate moves in the three-month period this will not affect the situation as the currency was bought at the originally agreed rate. It is possible to fix a rate on all forward requirements up to 18 months.

A forward contract can therefore remove the risk of exposure to currency fluctuations, which can occur between the time of agreeing a purchase and the completion of a purchase of an overseas property. However if sterling strengthens, it is possible to end up with an inferior exchange rate, lower than that on the open market at any point in time, but that is a risk each individual must assess for themselves and offset against the stability of a forward contract.