Wealthy individuals living in Spain need to brace themselves for an unexpected tax shock. Spanish prime minister, Jos?Luis Rodr?uez Zapatero, has announced an imminent tax increase for ?those w
Wealthy individuals living in Spain need to brace themselves for an unexpected tax shock. Spanish prime minister, Jos?Luis Rodr?uez Zapatero, has announced an imminent tax increase for ?those who actually have more?. Whether this is the last of the tax rises or there are more to follow remains to be seen. It raises the importance of tax planning to minimise your tax liabilities and protect your wealth.
In giving warning of the impending tax rise on the wealthy, dubbed a ?millionaire tax?, on 26th May Zapatero told parliament that it would affect only those with a ?high economic capacity?. At the time of writing details have not been released on how the tax would apply or how long for.
It marks a clear u-turn by the government, which had only very recently rejected the idea of imposing a millionaire tax, with Zapatero explaining that the time was not right for such plans. While he now says that only the most wealthy will be affected, the middle classes will be concerned that he will also backtrack on his promise not to target them if the need arises.
Determined to save around ?15 billion by 2011, the Spanish government earlier presented an austerity package, which includes a 5% pay cut for public sector employees and a freeze on pensions. Along with an already planned increase in VAT these deficit reduction measures will affect a broad section of Spanish taxpayers, but Zapatero feels that the better off should make a special effort. “In my opinion, any citizen feels that the effort should be greater from those who have more,” he told an EU news conference. It places a heavy burden on affluent taxpayers whom the authorities and public alike feel should pay for the bulk of the deficit bailout. Spain aims to reduce its budget deficit from 11.2% last year to 9.3% this year, 6% in 2011 and below the 3% EU threshold by 2013.
There has been some speculation about which taxes would rise, with an article in El Mundo on 19th May listing potential areas where the government could increase taxation.
Tax increase on income
The highest rate of income tax is currently 43%, applying to those earning over ?53,407 in the current tax year. This tax rate could be increased for higher earners and tax bands potentially narrowed. Some reports had suggested a tax rate of 48% for those earning over ?150,000.
The El Mundo article said that Ministry of Finance specialists, Gestha (Sindicato de tecnicos del ministerio de hacienda), had suggested targeting income over ?600,000. 3.7% of taxpayers declare incomes above ?60,000 a year which would not bring in an effective amount of revenue ? so how large would the tax rise have to be on this group of high earners?
Wealth tax
Wealth tax could be another option for the government. The tax rate was effectively reduced to zero on 1st January 2008 by applying a 100% tax credit, leaving scope for this to be reversed. It is thought that the tax rate could be reintroduced for those having a net wealth in excess of ?1.5 million, which could raise an additional ?1,240 million annually.
SICAVs
An SICAV is a type of open-ended collective investment scheme and has been a controversial structure in Spain as this type of investment attracts a very low tax – as little as 1% – much lower tax than other investment funds. There are 440,000 investors in SICAVs in Spain, and although the government has rejected increasing the tax rate on these so far for fear that investors would leave the country for more tax advantageous jurisdictions, there is plenty of scope to raise the tax rate to collect more revenue.
In the 2010 Spanish Budget tax on savings income was raised to 19% from 18% on the first ?6,000 and 21% on the excess.
Succession tax
The Institute of Fiscal Studies (IEF), an organisation linked to the Ministry for Economic Affairs, has carried out studies looking at a new tax on succession which would establish a common minimum tax across all of the autonomous regions. In recent years there has been a drop in the succession tax collected and this would go some way to shore up an historic deficit position in the autonomous communities.
Bank tax
The ?bank tax? being discussed by the EU, otherwise known as the Tobin tax, would affect 295 Spanish financial institutions. Gestha estimates a tax here of five points could raise ?1,285 million.
Excise and VAT
Even though tax on tobacco and fuel was raised last June, it could be hiked further, as well as an increase on alcohol.
The VAT rate is already due to increase from 16% to 18% from 1st July 2010. The reduced rate currently applied to services and food production will increase from 7% to 8%.
To limit the impact of the potential Spanish tax increases, wealthy taxpayers can often use effective tax planning measures to reduce their tax liabilities. This will protect your wealth giving you more to spend on the lifestyle to which you are accustomed and protect the inheritance you intend to leave to your family. A tax and wealth management specialist like Blevins Franks can advise you on the appropriate tax planning to suit your specific needs.
By Bill Blevins, Managing Director, Blevins Franks
31st May 2010
