When moving to and living in Spain you need to review your tax and financial planning. Seek advice to make the most of tax planning opportunities.
If you are planning on moving to Spain, or have recently done so, you have made an excellent choice. There are so many benefits to living in Spain, and it can offer tax-efficient opportunities too.
Make the most of these opportunities and avoid costly mistakes by considering these seven questions.
1. Where will you need to pay tax?
You need to establish when you will become resident in Spain and liable to Spanish taxation on your worldwide income, gains and wealth, and subject to the Spanish succession and gift tax rules.
You will be tax resident in Spain if you are in the country for more than 183 days in a calendar year, but possibly also if your spouse and/or minor dependent children live here or your centre of economic interests is here.
Also be wary of UK tax residence rules – in some cases, just 16 days back home could unintentionally trigger UK tax residency and bring you in line for British taxes.
2. How much tax will you pay?
Income tax rates for general income (i.e. pension, employment, rental income, etc.) range from 19.5% to 48% in Andalucía and Comunidad Valenciana; 21.5% to 48% in Cataluña; 19.5% to 46% in Murcia; 19% to 47.5% in the Balearic Islands; 19% to 46.5% in the Canary Islands and 19% to 43.5% in Madrid. Savings income (interest, dividends, capital gains etc.) is taxed progressively at 19%, 21% and 23%.
Spain also currently imposes an annual wealth tax, which generally hits those with worldwide assets worth over €1 million. For Spanish residents, generally there is a personal allowance of €700,000 plus an extra allowance of up to €300,000 for your main home. So a married couple could have up to €2 million combined allowance.
However the good news is that tax-efficient investment wrappers offered through a Spanish-compliant bond could legitimately reduce tax on savings income and potentially on wealth tax. While some structures can seem similar, their tax benefits can vary significantly so take specialist advice.
Download our free Guide to Taxes in Spain
3. How should you hold savings and investments?
A potentially costly mistake is assuming what was tax-efficient in the UK is the same in Spain. ISAs, for example, lose their tax-free status once you are no longer UK resident and the interest, dividends and gains may attract Spanish tax. Your situation and goals will change when you relocate too. It is crucial to take a fresh look at your financial planning an investment management to make sure you are suitably diversified and everything is set up in the best way for your new circumstances.
4. What is the right currency mix for you?
Once you are living in Spain and spending euros daily, keeping savings and investments in sterling makes your income vulnerable to exchange rate fluctuations. Look for structures that let you diversify by holding investments in multiple currencies, with flexibility to choose the currency of your withdrawals and convert when rates are favourable.
Need personalised advice? Contact one of our Spain advisers.
5. What are your property options?
Another important issue to consider early is the tax implications of buying and selling property. When is the best time to sell your UK property or buy a Spanish home to limit capital gains tax and stamp duty in both countries? How could owning a high value property affect your wealth tax bill and succession tax liabilities in Spain? Understanding the answers could save thousands, so take care to establish your best approach.
6. What should you do with your UK pensions?
If you are planning to retire in Spain, make sure you fully understand your pension options and the tax implications before making any decisions.
There are now many options for how you take your pension, including taking the whole fund as cash, but you need to weigh them up, looking at how they work for you and the tax consequences or benefits. Taking regulated, personalised pensions advice is crucial.
7. Is your estate planning suitable?
It is important to revise your estate planning for Spain. Spanish succession law works very differently from UK law. Unless you take action, ‘forced heirship’ rules could automatically pass two thirds of your worldwide estate to your direct family, whatever your intentions. Take care to understand your options and any tax implications.
Spanish succession and gift tax also works very differently from UK inheritance tax. The applicable rules vary according to who the beneficiary is, where the deceased and beneficiary are resident, and where the assets are located. Rates and allowances vary across regions.
UK domiciles also remain liable for UK inheritance tax, so seek advice on how to reduce these taxes for your heirs.
Getting the answers to these key questions early can provide peace of mind that your financial affairs are in order so you can relax and fully enjoy your new life in Spain. Cross-border taxation is complicated, so take personalised, professional guidance to get the best results.
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.