Spain, The UK And Double Taxation

When people leave the UK to live in Spain, they worry about leaving the system they know, moving to a place with a strange system in a strange language, or whether the Spanish system will be exact

When people leave the UK to live in Spain, they worry about leaving the system they know, moving to a place with a strange system in a strange language, or whether the Spanish system will be exactly the same as the UK one. Others worry that they will pay more taxes in Spain than the UK, or are concerned that they will have to pay tax twice. There is also a group that assume that they can live in Spain and continue paying taxes in the UK, and that this won?t be a problem. Unfortunately, Spanish residents are liable to Spanish taxes on their worldwide income. That said, some types of income remain taxable in the UK, even after you have left. So where does that leave you?

The UK and Spain have a treaty to eliminate double taxation which dictates where different types of income are taxable. Under the treaty, private pensions, annuities, state and most occupational pensions are only taxable in Spain. The main exception is government service pensions, such as civil service, local authority, armed force, police and fire pensions (not NHS pensions, however), which remain subject to UK tax only.

However, other types of income, like rental income from UK properties, are taxable in the UK (as it arises there) and also in Spain (as that is where you are resident). In this case, each country calculates the taxable income under its own domestic rules, so the taxable amounts in each country may be different. But you can offset any UK tax paid against the Spanish tax on the same income, so you are not taxed twice. The only downside is that if the UK tax is higher, no further tax is payable in Spain but you won?t receive a rebate of the difference. If the Spanish tax is higher, further tax will be payable in Spain.

UK tax on bank interest is 20% at source (with further tax being due if you are a higher rate taxpayer); however, in Spain, it is taxed at a flat rate of 19% on the first ?6,000 and 21% on the balance. UK ISA income is taxable in Spain, and the UK banks will share information about such investments with the Spanish authorities (under the European Savings Tax Directive), so keeping ISAs and not telling Spain about the income is not a solution. So, retaining a UK bank account is not necessarily tax-efficient, particularly if you have savings to protect from tax and inflation. There are tax-efficient investments available to Spanish residents that can reduce your tax liabilities.

Taking the time to understand the rules can allow you to ensure that you hold investments tax-efficiently, to minimise your tax liabilities and maximise your income, making your money work for you. Taking advice from someone who knows how both jurisdictions work could save you money in the long term, as well as giving you peace of mind, knowing that you are compliant in both Spain and the UK.

By Bill Blevins, Managing Director, Blevins Franks

12th April 2010