Many British expatriates arrive in Spain to live without fully understanding the local tax situation or any obligations that may remain to the UK taxman. There are quite a few myths around and un
Many British expatriates arrive in Spain to live without fully understanding the local tax situation or any obligations that may remain to the UK taxman. There are quite a few myths around and unless you are properly informed you may get your tax planning wrong. This article looks at some of the common misconceptions and separates fact from fiction.
I am resident in Spain but complete a full tax return in the UK
?You become resident for tax purposes in Spain if: you spend more than 183 days here (not necessarily consecutive) in one calendar year; or your centre of economic or vital interests is in Spain, or your spouse is resident in Spain, unless you can prove you are resident elsewhere.
?As a resident of Spain you are liable for income and capital gains taxes on your worldwide income and must complete a Spanish tax return each year.
?If you receive a gift or inheritance as a Spanish resident you may be liable to Spanish succession tax.
?A UK tax return only needs to be completed in respect of certain non-exempt income, such as rental income from UK property.
I am taxed at source on my UK assets and therefore I am not liable to tax in Spain on these assets
?You are entitled to double tax relief if you have income subject to tax at source in the UK which is also taxed in Spain.
?You can usually make arrangements for tax not to be deducted at source in the UK on certain types of income. It would then be received gross and taxed solely in Spain.
I am taxed at source on my offshore bank accounts under the EU Savings Tax Directive and therefore am not liable to tax in Spain
?Paying withholding tax on offshore interest payments does not mean that you have no further tax liabilities on the same income in Spain.
?You still must declare such earnings on your Spanish tax return.
?If you pay the withholding tax and declare the income in Spain you are unlikely to receive any tax credit in Spain and could pay tax twice.
I can withdraw 5% of my UK/offshore insurance bond per year for 20 years without any liability to Spanish tax
?The 5% rule only applies to UK residents.
?As a Spanish tax resident, your offshore insurance bond will be taxed according to the Spanish rules.
There is no tax to pay if I have not taken withdrawals from my insurance bond
?The taxation of insurance bonds in Spain depends on whether the bond is ?qualifying? or ?non-qualifying?.
?Non-qualifying bonds are valued at 31st December each year and any increase in value from 1st January is taxed in full as savings income, even if there has been no withdrawal – the tax rate is 19% on the first ?6,000 and 21% on any balance. For example, if an investment bond increases in value by 10% from ?200,000 to ?220,000 in one year, the tax payable is ?4,080.
?Any fund located in a ?tax haven? (eg Isle of Man, Jersey, Guernsey) is non-qualifying and will receive this unfavourable tax treatment.
A withdrawal from a qualifying offshore bond will be taxed at 19% on the first ?6,000 and 21% on any balance
?There is no tax to pay until a withdrawal is made from qualifying bonds in Spain.
?The taxation is very favourable because only the growth in value element is taxed, not the whole withdrawal. Using the above example, if you withdraw ?20,000 you will only need to pay tax on roughly 10% of it. The taxable income is therefore ?2,000 and your tax liability (at 19%) is only ?380.
UK investment bonds are tax free in the UK for Spanish residents
?A UK investment bond is taxed at source in the UK.
?The tax deducted can be set against your tax liability in Spain, so you do not pay tax twice on the same income.
?If you have either a non-qualifying insurance bond or a UK investment bond it will be advantageous to transfer it to a qualifying, non-UK, bond.
I am a UK national and not liable to Spanish succession tax (SST)
?SST is payable if the inheritor or recipient of a gift is resident in Spain, or the asset being gifted or passed on death is situated in Spain.
?The tax rate can be as high as 34% for inheritances or gifts within the immediate family or higher for more distantly related recipients.
?Depending on which region you live in, there are usually deductions available according to the closeness in relationship between the recipient and the deceased, and other exemptions may be available.
?SST can often be avoided through use of an offshore trust.
Contact Blevins Franks for advice on tax mitigation strategies in Spain.
The tax treatment(s) detailed above is current at the time of writing and may change in the future.
By Bill Blevins, Managing Director, Blevins Franks
29th April 2010 / reviewed 10th September 2010