Do you own property in Spain and spend a lot of time here, but believe that you are not tax resident and so have not submitted tax returns in Spain? It can be surprisingly difficult to establish
Do you own property in Spain and spend a lot of time here, but believe that you are not tax resident and so have not submitted tax returns in Spain? It can be surprisingly difficult to establish one?s tax residence in certain circumstances. The onus is on the taxpayer to get it right in order to avoid potential penalties. It?s important to fully understand the tax residency rules of both Spain and your home country (this article covers expatriates out of the UK) to make sure you apply the rules correctly.
In any case, there can be tax benefits to being resident in Spain, so do you really want to take the risk?
There is no law which states you have to be resident somewhere. However many people who believe they are a fiscal nomad misunderstand the rules (albeit unwittingly). Unless you know intimately the tax residence rules of each country you spend time in you can be caught out. Many countries including Spain can deem you to be a tax resident there even if you spend under six months a year there. Most tax inspectors simply cannot accept that you are not a tax resident somewhere in the world.
The most well known rule on Spanish residency is the ?183-days-a-year? one. If you spend over 183 (not necessarily consecutive) days a year here in one calendar year you are liable to Spanish tax on your worldwide income. However it does not automatically follow that if you spend less than 183 days here you are not resident in Spain.
You are also deemed tax resident if your ?centre of economic interests? (the base for your economic or professional activities) is in Spain, and likewise if your ?centre of vital interests? is in Spain, i.e. if your spouse and/or dependant children live here. You may only spend two months a year here yourself, but if your spouse lives here and you cannot prove you are tax resident elsewhere, then you are tax resident in Spain.
Split year between UK and Spain
Many Britons split the year between the UK and Spain and choose which country to pay taxes in.
You cannot actually choose where to pay taxes. You either are, or are not, a tax resident of a country under its rules. Even if you think you are following the rules correctly you may get it wrong because if you meet the tax residency rules of both the UK and Spain ?tie breaker? rules come into effect to determine your status, and if those fail to determine which country you are resident in, it comes down to nationality.
Under the radar
There are also people who spend over 183 days a year here but choose not to declare themselves as resident believing that they can remain undetected. However with Spain stepping up its fight against tax evasion this is a very risky strategy.
To give just one example, the tax authorities have obtained an agreement from the Spanish electricity suppliers to divulge billing information for 2010. This is in line with an ongoing investigation into undeclared rental income and it will also catch people who are living here permanently but who haven?t registered as such.
Dangers of not being tax resident in Spain?
If you are tax resident in Spain under its rules but haven?t been submitting tax returns for one reason or another, even unwittingly, you may become subject to a tax investigation and have to pay back taxes, interest and possibly penalties. For peace of mind you may want to double check your position with a tax and wealth management adviser like Blevins Franks.
If you have been following the rules correctly and are indeed not tax resident here, have you considered your succession tax position if you own property here? Can your spouse afford for you to be a non-resident of Spain?
Spain has both State and Regional rules for succession tax and the difference between the two can be considerable. There is a gathering trend among Autonomous Communities towards relief or abolition of succession tax, especially in the direct line and between spouses. However, if you are not habitually resident in the region at the date of your death it is the State rules which will apply to your Spanish assets. To be habitually resident in an Autonomous Community (eg Andalucia, Murcia, Comunidad Valenciana, Islas Baleares and Islas Canarias) you have to have lived there for the last five years up to the date of the taxable event and been paying taxes locally.
There is no blanket exemption from succession tax between spouses under the State rules and anything over ?15,957 is liable to this tax. The rates start at 7.65% and rise to 34%. Depending on the relationship of the recipient and donor and the recipient?s net wealth, multipliers can push up the amount of tax to be paid. So, if your spouse or partner inherits your share of your Spanish property on your death, they could be liable to pay a significant sum in Spanish succession tax. As there is generally no UK inheritance tax between spouses, the Spanish tax represents a real cost on the first death.
There is a 95% allowance against the main home if the recipient is a spouse or descendant, but this is capped at ?122,606 per inheritor and he must retain the property for the next 10 years.
Your succession tax liability can often be significantly reduced with advance planning, but it is important to seek professional advice relating to your circumstances.
When it comes to income and capital gains tax on your savings and investments there are compliant arrangements available in Spain which can significantly lower your tax liability. It could be more beneficial for you to be tax resident in Spain rather than the UK, so you may want to re-consider your position.
Whether for tax mitigation purposes, or to determine the best place to be resident from a tax point of view, or for reassurance that you have got your tax residency right, it is best to seek professional advice from Blevins Franks because the application of the rules can be more complex than you realise.
By Bill Blevins, Managing Director, Blevins Franks
8th March 2011
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. Tax information has been summarised; an individual must take personalised advice.