Legitimately reducing your Spanish tax bill

Should you fear being tax resident in Spain? While tax rates can seem high, the way you hold assets and take income can make a significant difference to your Spanish tax bill.

Spain continues to be a favourite destination for expatriates, including those making the most of their retirement years. And with the residence rules for UK nationals potentially changing from January 2021, many people are moving their plans forward to make sure they are lawfully resident in Spain before Brexit takes full effect. 

While you may be focused on all the benefits of living in Spain, you also need to understand how being Spanish resident will affect your tax position. 

Tax residence in Spain

Once you meet any of the criteria that make you tax resident – spending 183+ days or your centre of economic or vital interests is in Spain – you are liable for Spanish tax on your worldwide income, gains and wealth. You would also be subject to the Spanish succession and gift tax regime.  

Besides the expected income and capital gains taxes, Spain imposes an annual wealth tax, which generally affects those with net worldwide assets over €1,000,000. Combined together, this can result in a discouraging annual tax bill. 

Spanish taxation therefore can present a dilemma for wealthier individuals and families who wish to live in Spain. Do they become resident and face high taxes? Or do they just visit often but not enough to become tax resident?   

But you do not necessarily need to fear taxation in Spain – in fact you may find you improve your tax situation by becoming resident. While tax rates can look high, the Spanish tax regime does present tax mitigation opportunities – the way you hold your assets can make a significant difference to how much tax you pay.

Here are two examples which illustrate just what a big difference restructuring assets can make for higher net worth people living in Spain.

See Andalucía tax planning examples

Balearics tax planning examples  

Tax for an individual living in Mallorca

Mr Smith (not his real name) is resident in Mallorca:

• His Spanish property (main home) is valued at €2,000,000.
• His various capital investments amount to €5,000,000, plus another €1,000,000 in cash deposits.
• He has a UK pension fund worth €1,000,000.
• His investment portfolio and savings generate an annual income of €315,000 (income and/or realised gains).
• He receives pension income of €40,000 per annum (€30,000 from his private pension and €10,000 of state pension). 

Without any tax planning in place, his annual Spanish tax liability in the Balearics is approximately €208,294 (€80,237 income tax + €131,564 wealth tax). 

However, if he takes specialist advice and restructures his assets to take advantage of the tax planning opportunities available in Spain, he could reduce his combined tax bill by over 80%.

By using Spanish compliant investment arrangements, transferring his private pension fund and adjusting the way he takes income, Mr Smith could realise a total tax saving of €178,112 (€75,985 less income tax and €102,127 less wealth tax).

Tax for a couple living in Mallorca

It is a similar situation for married couples. Mr and Mrs Jones (not their real names) are also wealthy Balearic residents:   

• They own a €2,000,000 Spanish property equally in joint names (main home).
• They each have €2,500,000 in capital investments, which generate an annual income of €150,000 for each of them.
• They both have €500,000 in the bank (€7,500 income each).
• Mr Jones has a private pension fund worth €1,000,000 from which he receives an annual income of €30,000.
• They both receive a state pension of €5,000 per annum. 

Without any tax planning, their combined Spanish tax liability is approximately €162,791. But like Mr Smith, they can restructure their assets to significantly reduce their Spanish tax liability, reducing their Spanish income tax bill by €71,200 and their wealth tax bill by €67,785 to realise a total tax saving of €138,985.

Andalucía tax planning example  

Tax for an individual living in Andalucía

Mr Clarke (not his real name) is resident in Andalucía:

• His Spanish property (main home) is valued at €2,000,000.
• His various capital investments amount to €5,000,000, plus another €1,000,000 in cash deposits.
• He has a UK pension fund worth €1,000,000.
• His investment portfolio and savings generate an annual income of €315,000 (income and/or realised gains).
• He receives pension income of €40,000 per annum (€30,000 from his private pension and €10,000 of state pension). 

Without any tax planning in place, his annual Spanish tax liability in Andalucía is approximately €208,294 (€79,930 income tax + €128,364 wealth tax). 

However, if he takes specialist advice and restructures his assets to take advantage of the tax planning opportunities available in Spain, he could reduce his combined tax bill by over 80%.

By using Spanish compliant investment arrangements, transferring his private pension fund and adjusting the way he takes income, Mr Clarke could realise a total tax saving of €174,653 (€72,165 less income tax and €102,488 less wealth tax).

Tax for a couple living in Andalucía

It is a similar situation for married couples. Mr and Mrs Johnson (not their real names) are also wealthy Andalusian residents:   

• They own a €2,000,000 Spanish property equally in joint names (main home).
• They each have €2,500,000 in capital investments, which generate an annual income of €150,000 for each of them.
• They both have €500,000 in the bank (€7,500 income each).
• Mr Jones has a private pension fund worth €1,000,000 from which he receives an annual income of €30,000.
• They both receive a state pension of €5,000 per annum. 

Without any tax planning, their combined Spanish tax liability is approximately €152,452. But like Mr Clarke, they can restructure their assets to significantly reduce their Spanish tax liability, reducing their Spanish income tax bill by €70,540 and their wealth tax bill by €52,404 to realise a total tax saving of €122,944.

Reducing your Spanish tax liabilities

Of course, everyone’s circumstances are different and you may not be in a position to achieve the same level of results. But these examples clearly show that the way you hold your assets and take income from them can make a considerable difference to how much tax you pay in Spain. 

It is certainly worth asking a specialist adviser like Blevins Franks to review your investment portfolio, pensions and other assets. We can also evaluate your current tax liabilities, consider your personal situation and objectives, and look at what Spanish compliant arrangements would work for you and how much tax you could save. You may be very pleasantly surprised by your new tax bill in Spain!  

Contact a local adviser in Spain 

The tax information has been simplified in this article for the purpose of the illustrative tax calculations shown here. All these estimate tax calculations are based on the 2019 tax rates and allowances. These 2019 rates may slightly change in the future when the next Spanish budget is finally approved.

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 is advised to seek personalised advice.