Living in Spain – Tax Issues British Expatriates Need To Know

It is not difficult to appreciate why so many people fall in love with Spain and consider making it their home. There are, however, some tax and financial essentials you need to plan for if you are to get the best out of living in Spain.

Many people fall in love with Spain and consider making it their home. There are, however, some 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 here a while.

The starting point when living in Spain 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 and/or minor dependent children do, or if your centre of economic interests is here. You also need to know how the UK’s statutory residence test could continue to apply to you. If you are a UK national already living here but have not yet sorted out your residence, it may be a good idea to do so now, before Brexit.

Under Spanish domestic law, you are either resident or non-resident for the whole tax year; there is no split year treatment. 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.

Spanish taxpayers have had a high tax burden over recent years, though income tax rates have improved a little now. They currently range up to 48% in Andalucía and Cataluña; 47.5% in Islas Baleares; 46.5% in Islas Canarias; 46% in Murcia and 45.98% in Comunidad Valenciana.

Spain also currently imposes an annual wealth tax, which generally hits those with worldwide assets worth over €1 million. There is a personal allowance of €700,000 plus an extra allowance up to €300,000 for your main home.

Expatriates living in Spain need a thorough understanding of the Spanish tax system and how it applies to you. Only then can you establish what tax planning steps you can take. 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 ‘do it yourself’ 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, where the deceased and the beneficiary are resident, and where the assets are located. Rates, allowances and exemptions vary across regions.

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, under the EU succession regulation ‘Brussels IV, foreign nationals can elect, via their will, for the law of their country of nationality to apply to avoid Spanish forced heirship rules. This only applies to succession law, not tax.

Another important tax issue to consider early when moving to Spain 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 when retiring to Spain. There are many more options now under the 2015 UK pension freedom, but you need to weigh them up, looking at how they work for you and all the local tax implications if you are living in Spain. If you have not yet started drawing your pension, seek advice before you do.

Last 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, as well as to meet your estate planning wishes. So overall, it may be time for some 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.

Any questions? Ask our financial advisers for help.

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.