Spain and the UK: Are You Sure You Are Paying Tax In The Right Place?


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Many Britons who move to Spain understand that as a resident in Spain they are liable for tax in Spain. But some expatriates mistakenly continue to pay their tax in the UK believing that as long a

Many Britons who move to Spain understand that as a resident in Spain they are liable for tax in Spain. But some expatriates mistakenly continue to pay their tax in the UK believing that as long as they are paying tax somewhere it is OK. Be careful, paying tax to the wrong tax authority is a serious issue. If you don?t get it right, then your dream of an idyllic life in Spain could turn into a tax nightmare.

There are rules to establish tax residency in both Spain and the UK, and each country?s domestic rules differ. If you meet both countries criteria at the same time, then there are tie-breaker rules set out in the UK/Spain Tax Treaty to establish where you are tax resident. Even if you are clearly established as resident in one country, some taxes may be payable in both countries, although there will be double tax relief available, usually in the form of a tax credit in your country of residence for the tax paid in the other country. You may think you know the rules, but the tax authorities can have a different opinion. In these days when governments are keen to reap as much revenue as possible, both Spain and the UK are vigilantly identifying taxpayers who haven?t been paying the tax that they should.

Basically, you are tax resident in either country if you spend 183 days or more in that country in that country?s tax year, although other residence criteria do exist. The days are counted cumulatively and not consecutively, so you need to keep a close record if you travel a lot, especially if, like many British expatriates, you make frequent visits to the UK to keep in touch with family and friends, for shopping, traditional Christmases and to escape the oppressing heat and humidity of the Spanish summers.

The UK tax authority, HM Revenue & Customs, also has a 91 day residency rule, so that even if you spend less than 183 days in the UK in a tax year, but more than 91 days on average over four UK tax years, HMRC can treat you as tax resident in the UK. Even if you don?t spend 91 days in the UK, HMRC can look at the connections you keep with the UK and your lifestyle, such as if you maintain a family home, business links and a UK registered vehicle, and decide that you are a UK tax resident.

So, if you are living in Spain but spending a lot of time in the UK, you could find that your residence status is actually far from clear. All this will take time to sort out and could be costly to rectify if you have got it wrong. You could find yourself having to pay back tax, interest and penalties, something that could make a dent in your finances and affect your long-term financial security and retirement, as well as having less to leave to your children and grandchildren.

According to HMRC?s website: ?Residence is a complex subject. The terms residence and ordinary residence are not defined in the Taxes Acts. HMRC guidelines about their meanings are largely based on rulings of the courts.?

In Spain, if you spend less than 183 days here the Spanish tax authority will look to decide if your ?centre of economic interests? (i.e. employment or professional activities) is in Spain, or your ?centre of vital interests? is in Spain. Significant weight is attached to where your spouse and family live.

A number of Britons move to Spain and continue to operate their UK businesses by phone and the internet. Others may make arrangements with their UK company to work some weeks in the UK and spend the rest of their time in Spain. Does this make you a UK tax resident? Where are your taxes due in cases like this?

Under the UK/Spain Double Tax Treaty, if you earn income from employment in one country but are resident in the other country then the income is taxable only in the country of residence. However, if the employment is exercised in the other country, then that country also has taxing rights. So, if you live in Spain and physically work in the UK the income can be taxed in the UK as well as Spain, with appropriate double tax relief. However, things are never entirely straightforward and other factors have to be considered.

It is important to be aware of where your tax liability lies in your particular circumstances. You do not have a choice as to where you pay tax. It is largely dependent on your residence status but will also depend on the nature and type of income you receive, and which country it is received or earned in. So, just continuing to pay tax in the UK because it is easier for you to do so is simply not acceptable.

There is also domicile to consider which can affect your liability to UK inheritance tax (IHT). Shaking off your UK domicile is hard to do. You have to wipe the UK clean of all connections and acquire a domicile elsewhere to be regarded as non-UK domiciled. You can remain UK domiciled, even if you have been living outside the UK for many years, and if you are UK domiciled at the date of your death, UK IHT will be levied on your worldwide assets. IHT can slice a damaging amount from your wealth and it is your heirs who will feel the loss.

Fortunately there is help available to advise you on residence and domicile issues, and there are strategies available to lessen the impact of taxation. Taking specific advice before leaving the UK and moving to Spain is preferable as arrangements can be put in place before you go, although it is never too late to address the situation. Contact a reputable international financial and tax specialist like Blevins Franks for advice on your individual circumstances to make sure you are tax compliant and tax effective.

By David Franks, Chief Executive, Blevins Franks

25th September 2009

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; individuals should seek personalised advice.