We run through some of the tax and financial essentials you need to be aware of and plan for if you are to get the best out of living in Spain.
Spain usually receives an influx of visitors from the UK, and elsewhere, at this time of year. It is not difficult to appreciate why so many people fall in love with the local lifestyle and consider making Spain their home. This is therefore a good month to run through some of the tax and financial essentials you need to be aware of and plan for if you are to get the best out of living in Spain.
It is also useful advice for those who have recently moved over, or even those who have been living in Spain a while, to consider if they have all the essentials in place.
The starting point is to understand how you become resident for tax purposes. Tax residency in Spain is not just about day counting. You could be resident even if you do not live in Spain but your spouse does, or if your centre of economic interests is here. You also need to know how the UK residence tax could continue to apply to you.
Under Spanish domestic law, you are either resident or non-resident for the whole tax year. If you arrive with the intention of staying here indefinitely during the first six months of the calendar year, you are likely to be regarded as resident in Spain for the full calendar year.
However, if you moved to Spain directly from the UK, then under the UK/Spain tax treaty rules you will probably be regarded as UK resident up to the date you leave.
Spanish taxpayers have had a particularly high tax burden over recent years. Income tax rates range up to 52% – 56% in Andalucía and Cataluña. Savings income is taxed separately, with rates from 21% to 27%. This should improve over the next two years, if the proposed tax reforms go ahead.
Spain also currently imposes an annual wealth tax. It had been abolished but then reinstated, and the proposed tax reforms do not mention it. It hits those with worldwide assets worth over €1 million (€700,000 if you do not own your own home), or €2 million for married couples.
You need a thorough understanding of the Spanish tax system and how it applies to you. Only then can you establish what steps you can take to lower your tax liabilities. Because there is the good news – there are often ways to lower taxes on your investment income, assets, pensions and estate. This is not an area for DIY financial planning, you do need specialist guidance. Getting it wrong could be costly.
Succession tax in Spain works quite differently from UK inheritance tax. The rates and allowances depend on who the beneficiary is, and the tax due can be increased depending on net worth.
Rates, allowances and exemptions vary across regions. Some regional rules are very beneficial for spouses and children, but only if you are “habitually resident” in the region, i.e. have been living there for five years up to your death. In Valenciana, for one of the key benefits to apply, your beneficiary also needs to be habitually resident. Otherwise, the more damaging state rules apply.
This leads me on to succession law – an unfamiliar concept for British people. Spanish law requires a parent to leave two-thirds of their estate to their children, even by-passing the surviving spouse. However in practice British nationals can make a Spanish Will leaving their Spanish property to whomever they choose. Moreover, from next August, a new EU law will allow you to elect, via your will, for the law of your country of nationality to apply. This only applies to succession law, not tax.
Another important tax issue to consider early are the tax implications of buying and selling property. When is the best time to sell your UK property? When is the best time to buy in Spain? You could easily end up paying tax that could have been avoided, so look into this carefully.
Pensions are another key issue. The UK pension reform provides you with more options, but you need to consider all the tax implications in Spain. You need to weigh up all the options, and there a few, and how they work for you. If you have not yet started drawing your pension, seek advice before you do, otherwise it may be too late for some opportunities.
Last here but certainly not least, you need to review your savings and investments. You need to make sure that they are structured in the most suitable way for your new circumstances and objectives, always taking your appetite for risk into account. At the same time, you want them to be structured in the most tax efficient way for Spain. So overall, it may be time for some significant restructuring to ensure you do not pay any more tax than you need to.
The sooner you carry out your tax and wealth management planning, the sooner you can get on with enjoying your new life in Spain.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.