Many people who move to Spain rely to a certain extent on their savings to provide an income, or at least to have as back up if needed. It is therefore important to understand how va
Many people who move to Spain rely to a certain extent on their savings to provide an income, or at least to have as back up if needed. It is therefore important to understand how various savings and investments are taxed in Spain so that you can factor in how much you will lose in tax. Understanding how the system works can help you set up your financial planning in Spain to pay as little tax as possible.
Spanish tax residents are liable to tax on their worldwide income and gains, including those made in offshore centres.
In Spain income is split into two categories for tax purposes, general income and savings income.
The savings income category covers:
? Interest income
? Dividend income
? Capital gains on the sale or transfer of assets (both shares etc and property)
? Income derived from life assurance contracts
? Income from purchased annuities
Income from savings and investments are combined and taxed together each year at fixed rates of 19% for income under ?6,000 and 21% for anything in excess of this.
Pension income, as well as any income from rental property, are taxed as general income and so at the scale rates of tax which range from 24% to 45% (47% in Andalucia and 49% in Catalu?).
Investment losses in a particular year can be set off against other savings income (but not against general income and vice versa), but capital losses can only be offset against other capital gains and not against other savings income, with unrelieved losses carried forward for up to four years.
The general tax free allowance, the Minimo Personal y Familiar, is available to everyone. Set against general income first, any balance can be set against savings income if not fully utilised against general income.
The basic allowance is currently ?5,151 per person, or ?8,551 for joint returns, increasing to ?6,069 for those aged 65 and over and ?6,273 for those over 75. Higher allowances are available for people with an incapacity or who have dependants.
Unfortunately the allowance is not quite as generous as first appears, since it is not a deduction against taxable income but a credit given against the total tax payable. To cut a long story short, while on paper your basic allowance is ?5,151, only a maximum of ?1,236 can be offset against your tax liability for the year, but it can be as low as ?978 if solely set against investment income.
What about UK investments?
While ISA, PEP and Premium Bond income is completely free from tax in the UK, such income is not tax efficient in Spain ? all income received and gains made on share sales (including within ISAs and PEPs) are subject to savings income tax in Spain.
Note that while you can continue to hold your ISA after you have left the UK, as a non-UK resident you cannot contribute any more to it.
Premium bonds winnings are also fully taxable in Spain, although taxed as general income.
The gross dividend income from UK shares (i.e. the dividend received, plus the 10% tax credit treated as being attached to the dividend) is taxable in Spain, although, to avoid double taxation on this income, the 10% tax credit can be offset against the Spanish tax due on the dividend, leaving tax of 9% or 11% to pay in Spain.
British residents with investment bonds can take up to 5% of their original investment each year tax-free, but this does not extend to Spanish residents and the Spanish tax authorities can impose a penal tax charge on such investments held offshore, although Spanish compliant investment bonds can be very tax-efficient in Spain.
What about offshore accounts?
Since you are taxed on your worldwide income in Spain, interest earnings from offshore accounts like Jersey, Switzerland etc must be declared in Spain even if the Savings Tax Directive withholding tax is deducted.
If you bank in one of the jurisdictions which still offer the withholding tax option, the tax rate jumped from 20% to 35% – a 75% increase – on 1st July.
The Isle of Man and Guernsey used to offer the withholding tax option but stopped doing so on 1st July. They now automatically exchange information on all EU owned bank accounts.
Where Spanish residents do not opt for exchange of information (or have this automatically applied) and declare the income in Spain, they will be paying 16% or 14% more in tax on such income.
Tax efficient investments and pensions
There are very tax-efficient investment vehicles available to residents of Spain that can reduce taxable income, and thus income tax. They can also mitigate Spanish succession tax. This may also apply if you have any UK private pensions from which you have not yet drawn any benefits or they are in drawdown.
The tax information in this article has been summarised and it is very important that you seek professional advice for your personal situation from a tax and wealth management firm like Blevins Franks which keeps up to date with the ever changing Spanish taxation rules and rates.
The 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.
By Bill Blevins, Managing Director, Blevins Franks
1st July 2011