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.
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
Mr Smith (not his real name) is resident in Mallorca:
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).
Spanish tax liability | Without tax planning | After restructuring | Difference |
Income tax | €80,237 | €4,252 | -€75,985 |
Wealth tax | €131,564 | €29,437 | -€102,127 |
Total | €211,801 | €33,689 |
-€178,112 |
It is a similar situation for married couples. Mr and Mrs Jones (not their real names) are also wealthy Balearic residents:
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.
Spanish tax liability | Without tax planning | After restructuring | Difference |
Income tax | €76,897 | €5,697 | -€71,200 |
Wealth tax | €85,894 | €18,109 | -€67,785 |
Total | €162,791 | €23,806 | -€138,985 |
Mr Clarke (not his real name) is resident in Andalucía:
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).
Spanish tax liability | Without tax planning | After restructuring | Difference |
Income tax | €79,930 | €7,765 | -€72,165 |
Wealth tax | €128,364 | €25,876 | -€102,488 |
Total | €208,294 | €33,641 |
-€174,653 |
It is a similar situation for married couples. Mr and Mrs Johnson (not their real names) are also wealthy Andalusian residents:
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.
Spanish tax liability | Without tax planning | After restructuring | Difference |
Income tax | €76,382 | €5,842 | -€70,540 |
Wealth tax | €76,070 | €23,666 | -€52,404 |
Total | €152,452 | €29,508 | -€122,944 |
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.