One potential effect of Brexit for Spanish residents is that some UK pensions may now fall into the Spanish wealth tax net for the first time.
Generally, Brexit has not affected the tax treatment for UK nationals settled in Spain, as the UK-Spain double tax treaty determines how Spanish residents are taxed on UK assets. However, there may be a change in the way UK pensions are treated when it comes to Spanish wealth tax.
Pensions and wealth tax in Spain
UK pension plans (other than purchased annuities), have generally been exempt from Spanish wealth tax. But now that UK pensions have become ‘third country’ (non-EU/EEA) assets, they may no longer qualify for the exclusion.
This means that UK personal pensions and SIPPs (Self-Invested Personal Pensions) may now fall into the Spanish wealth tax calculation.
Although pension plans are not usually captured by Spanish wealth tax, as with many tax matters in Spain, this is not clear-cut. The current law on wealth tax exemptions does not differentiate between Spanish and foreign/EU and non-EU pension plans, so both should be treated the same. However, a binding ruling from the Directorate-General for Tax (DGT) in Spain in 2019 states that “pension plans established in non-EU member states may not benefit from the [wealth tax] exemption”.
Because there is no distinction between Spanish/non-Spanish pension plans in the actual wording of the law, lawyers could argue that UK pensions remain exempt. But this is not a given – as Brexit is such a new state of play, this is an untested position so it is unclear what the outcome would be.
So if you are Spanish resident with a UK pension plan, you may have to potentially defend your position with the tax authorities to prevent a new wealth tax liability.
Spanish wealth tax rules
While Spanish wealth tax was effectively abolished in 2008 and reinstated on a “temporary” basis during the financial crisis in 2011, it has been extended in successive budgets. Spain’s 2021 budget confirmed it is now considered a permanent tax.
Spanish residents face wealth tax on worldwide assets; for non-residents it affects Spanish assets only.
It is payable each December on the total net value of most capital assets, including real estate, savings and investments, shareholdings, jewellery, art, antiques, cars and boats.
General household contents, certain shareholdings in family companies, business assets – and usually pension rights – are not subject to wealth tax.
Spanish wealth tax rates and allowances in 2021
There is a personal tax-free allowance of €700,000 per person, although this can vary regionally.
Spanish residents can get an additional allowance of up to €300,000 against the value of their main home (excluding properties owned through corporate structures). This means a married couple resident in certain regions of Spain and owning property in joint names could potentially have a total tax-free allowance of €2 million for wealth tax purposes.
State wealth tax rates
The 2021 state rates start at 0.2% on assets up to €167,129 and rise up to 3.5% on assets over €10,695,996. The Autonomous Regions can vary both rates and allowances, so you need to establish what the rates are in your area.
Andalucía wealth tax rules
Andalusian wealth tax rates range from 0.2% to 2.5% (this is a decrease on the 2020 rates which ranged from 0.24% to 3.03%). The state allowance of €700,000 applies.
Cataluña wealth tax rules
In Cataluña, the individual wealth tax allowance is lower than the state level, reduced from €700,000 to €500,000. Rates range from 0.21% to 2.75%.
Comunidad Valenciana wealth tax rules
In Comunidad Valenciana the individual wealth tax allowance is lower than the state level, reduced from €700,000 to €500,000. Rates range from 0.25% to 3.5%.
Balearic Islands wealth tax rules
In the Balearics, the state €700,000 wealth tax allowance applies, but the wealth rates and thresholds are slightly higher. Rates range from 0.28% on assets up to €170,472 to 3.45% on assets over €10,909,915.
Canary Islands wealth tax rules
The Canary Isles applies the same wealth tax allowance and rates as the state rules. This means an allowance of €700,000 and rates ranging from 0.2% to 3.5%.
Murcia wealth tax rules
In Murcia, wealth tax rates range from 0.24% to 3%. The state allowance of €700,000 applies.
Madrid wealth tax rules
Madrid currently provides a 100% tax-free relief, so residents there do not have to pay any wealth tax, regardless of their total net worth (although they may still need to submit a wealth tax return for information purposes). It is the only region to do this.
Reducing exposure to Spanish wealth tax
Depending on your circumstances, there may be options to reduce your wealth tax liability. For example, there are some tax-efficient investment structures that can allow you to reduce both your income and wealth tax bill in Spain.
If you are worried about the impact of wealth tax – or that the value of your UK pensions may now push your worldwide assets into scope for wealth tax – make sure you review your arrangements. Your local Blevins Franks adviser can assess your situation to establish any wealth tax implications and recommend suitable Spanish-compliant options.
For Spanish residents with a UK personal pension or SIPP, now may be a good time to consider transferring to a Spain-compliant alternative, such as an EU-based QROPS (Qualifying Recognised Overseas Pensions Scheme) that will qualify for the wealth tax exemption. Doing so could also unlock other benefits not usually available to UK pensions, such as currency and estate planning flexibility.
See the pros and cons of transferring to a QROPS
Remember: when exploring your pension options, you should take extreme care to do what is right for you with personalised, regulated advice.
With Blevins Franks’ expert, cross-border advice, you can take advantage of suitable tax-efficient opportunities to prevent a higher tax bill than necessary and make the most out of living in Spain.
Contact your local Blevins Franks adviser