UK nationals living in Spain need to make sure they are paying the right taxes in the right country – getting it wrong could prove costly.

Imagine this scenario: you are a British expatriate, living in Spain and enjoying the lifestyle you have dreamed about. Then you receive a letter from your local tax office claiming you owe them thousands of euros in unpaid taxes, interest and penalties.

Your reaction is that you have been paying taxes all along – in the UK. The problem is, if you are no longer resident in the UK, your income will be taxable in your new country. 

While cross-border taxation is complex, you need to understand how to meet the basic rules to ensure you pay the right tax in the right place. Ignorance or arguing that you pay your taxes in the UK is no defence.  

Where are you liable for taxation?

There are various reasons why many expatriates continue to pay taxes in the UK. They may think they have a choice about where they pay tax, or not realise they have become resident in another country. Or they might simply think that as long as they pay tax somewhere they will be safe.  

However, you cannot choose where you pay taxes. If you live in Spain, then you are likely to be deemed resident here and will be liable for Spanish taxes. In this case, some income – like UK rental income – may still be taxable in the UK while also being liable in Spain. To prevent tax being paid twice on the same asset, the UK-Spain double tax treaty determines which country has the taxing rights, and you can usually receive a tax credit for any tax paid in the other country to avoid a double taxation situation.  

Things get more complicated if you split your time between the UK and Spain, or you let a property in one country while living in another. 

See more about tax planning

Understanding your tax residency

Each country has different rules used to work out who is resident there for tax purposes. In Spain, you are tax resident if you spend more than 183 days here within a calendar year. Even if you spend less time here, you may be deemed resident for tax purposes if your main professional activity or most of your assets are based in Spain, or if your spouse and/or dependent children live here. 

Tax residents are liable to Spanish tax on worldwide income, capital gains and wealth. This includes most income that is also taxable elsewhere. 

Conversely, many expatriates assume they are not resident in the UK when they still are. Spending just 16 days back home could unintentionally trigger UK tax residency, so if you are living in Spain but return to the UK for extended periods, take care to understand your liabilities.

If you meet the residency requirements in more than one country, the ‘tie-breaker’ rules within most double tax treaties are there to determine where you should be resident. But this can be complex in certain cases. Without expert guidance, your interpretation of your situation may be different to the tax authorities’ view, and your circumstances can change which may unexpectedly change your position. 

Note also that your domicile status – which can affect your liability for UK inheritance tax – is different from residence. Shaking off your UK domicile is extremely difficult. Take specialist advice on how to best avoid leaving a significant inheritance tax liability for your heirs. 

The cost of getting it wrong

If you fail to pay the taxes you owe or report relevant income to the tax authorities in one or both countries, you could find yourself with a large bill for unpaid taxes, interest and penalties. You could even find yourself at the centre of a tax investigation, possibly in a foreign language, and having to pay for advice as well as the tax bill. 

It is more important than ever to ensure you are paying tax in the right place, as new rules leave no room for tax evaders – intentional or otherwise – to hide. With the new automatic exchange of information regime, over 50 countries – including Spain and the UK – are now sharing data on residents’ overseas income and assets. This means your local tax office will receive financial information about you without having to even ask for it. Next year, another 50 countries will join them. 

Note that Spanish tax authorities will compare information received with what you have submitted on your annual Modelo 720 report (where all Spanish residents have to declare their non-Spanish assets over a certain value). There are severe penalties for discrepancies or failure to comply. Remember, in some countries, tax evasion is a criminal offence that can result in prosecution.

You should take professional, personalised advice from an adviser with in-depth knowledge of the taxation regime of both countries and the interaction between them. Once you are certain you have your tax obligations right, you can focus on securing tax-efficient ways to make the most of your finances and get back to enjoying your time in Spain.  

Download our free Guide to Taxes in Spain

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.