Will you need to restructure your UK assets when faced with higher than expected Spanish tax liabilities?
Living in Spain has many attractions, not least the quality of life in a warmer climate. But, as with any country, it is not without some drawbacks, particularly unfamiliar local bureaucracy and a foreign tax system that can be confusing and concerning.
Once you are tax resident in Spain, your worldwide income and gains become liable to Spanish income, savings and capital gains taxes. In addition, Spain imposes an annual wealth tax which generally affects those with net worldwide assets over €1,000,000.
Spanish taxation can therefore present a dilemma for the 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? And some people who already live here find their tax liabilities are higher than expected and wonder if they are paying more tax than necessary.
Download our Guide to Taxes in Spain
But while the headline rates of tax can look high, and wealth tax is certainly unwelcome, the Spanish tax regime does present attractive tax mitigation opportunities. The way you hold your assets can make a significant difference to how much tax you pay. In fact, with specialist advice and strategic tax planning, you may even improve your tax position by becoming resident.
Here is an illustration which shows what a big difference restructuring assets can make for higher net worth people:
Spanish tax liabilities – without tax planning
Mr and Mrs Smith (not real names) are a British couple who want to live in Southern Spain when they retire shortly. They have started looking seriously at all the implications of living in Spain. They contact Blevins Franks to find out exactly what the annual tax implications are on their income and wealth.
They are a wealthy couple, who have built up substantial savings for their retirement. They each have €2,000,000 in capital investments which generate an annual income of €52,500, and €1,000,000 cash deposits providing additional income of €10,500 income each. Mr Smith has a private pension fund worth €1,630,000, but he is not taking income from it.
Their investments have worked well for them in the past, so they were expecting to keep their current portfolio and arrangement, as well as leave Mr Smith’s pension fund with the UK provider.
Based on this, once they become tax resident in Andalucía, their combined annual Spanish tax liability, without any tax planning, would be approximately €43,697, as follows:
Income tax: €13,374
Wealth tax: €30,323
Total tax: €43,697
Spanish tax liabilities – with strategic tax planning
At Blevins Franks, we spend time talking to our clients and getting to know their situation, objectives and what is important to them, before outlining our recommendations to achieve their aims and improve their tax position in Spain.
We look at restructuring their assets, to make them suitable for a Spanish tax resident and to take advantage of the compliant tax planning opportunities available in Spain. In this illustration, we are able to reduce their annual combined tax bill by 65%, as follows:
Income tax: €0
Wealth tax: €15,605
Total tax: €15,605
Achieving these tax savings involves moving their investment capital from the UK into Spanish compliant investment arrangements and adjusting the way they take income. Mr Smith will also transfer his UK private pension into an EU-based Qualifying Recognised Overseas Pension Scheme (QROPS).
The wealth tax calculations in both scenarios include their property. Since it is owned through a company it does not benefit from the main home exemption.
A further benefit of moving his pension into a QROPS is that it will then no longer be subject to the UK’s lifetime allowance charge when he reaches age 75. While he will pay around £29,000 on the transfer, this is around £455,000 less than he would have paid otherwise.
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.
So even if you are happy with your UK investments and pensions, it is worth exploring how you will benefit from moving your capital outside the UK. In any case, you should always review your wealth management after a big change in your circumstances, like retirement or moving abroad, and ensure your arrangements remain suitable for your life today and what you expect the future to hold.
If you have not yet moved to Spain, take advice before you do to establish the best time to dispose of your UK assets. Timing your move could make a considerable difference, particularly with the UK and Spain having different tax years. Weighing up whether you are better off paying capital gains taxes in the UK or Spain and planning your move accordingly could save you tax.
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 your local Blevins Franks adviser for personalised tax and wealth management advice
These are simplified, estimate tax calculations for illustrative purposes only. They are calculated using the Andalucía 2021 income and wealth tax rates, so the figures will vary a little in other regions (more so in Madrid which effectively does not impose wealth tax).