Spain continues to be a favourite destination for expatriates, including those making the most of their retirement years. There are many benefits to living here, but you do need to navigate a foreign tax regime and understand how it affects you. And one key difference between UK and Spanish taxation is Spain’s imposition of a ‘wealth tax’.
Wealth tax is effectively an annual tax on your capital assets, payable in addition to income and capital gains taxes. The value of your assets is added up on an annual basis as at 31 December, and if the total value exceeds the available allowances, the excess is subject to wealth tax. Spanish residents are liable on their worldwide assets, non-residents are only assessed on Spanish assets.
The tax-free allowances are high, so it’s wealthier people who are affected by this tax – but whether or not your pension fund is included in the calculations could make a significant difference. And for UK nationals, Brexit has unfortunately had an impact here.
Spanish wealth tax and pensions
Wealth tax is payable on the net value of most of your capital assets, such as real estate, savings and investments, shareholdings, jewellery, art, antiques, cars, boats, etc.
There are some exclusions however, and wealth tax is not payable on general household contents (other than items like art and vehicles), pension rights (other than purchased annuities), certain shareholdings in family companies and business assets (subject to conditions). There can also be some exemptions for antiques and works of art.
However, although pension plans are generally listed as one of the assets exempt from wealth tax, a ruling by Spain’s Directorate-General for Tax (DGT) concluded that non-EU pension plans do not qualify for the wealth tax exemption. Binding ruling V1049-19 of May 2019 states that: “the consolidated rights and economic rights of pension plans established in non-EU Members States may not benefit from the exemption”.
This means that Spanish wealth tax now applies to a UK pension fund, from the point at which a member can take benefits (currently age 55). Your UK personal pension funds will be added to your other worldwide assets to calculate your tax liability each year.
This is a new development, and you could try defending your pension plan with the Spanish tax authorities. Alternatively, consider transferring your funds into a Spanish or EU pension plan, such as an EU-based Qualifying Recognised Overseas Pension Scheme (QROPS).
Spanish wealth tax rates and allowances
Each individual benefits from a personal tax-free allowance of €700,000 (reduced to €500,000 in Comunidad Valenciana and Cataluña). Residents have an additional €300,000 allowance against the value of their main home (unless owned through corporate structures).
The state rates start at 0.2% for wealth up to €167,129 and rise progressively to 3.5% for wealth above €10,695,996. Some Autonomous Regions have approved their own rates:
In Andalucía, wealth tax rates range from 0.2% to 2.5%; in the Balearic Islands from 0.28% to 3.45%; in Cataluña from 0.21% to 2.75%; in Murcia from 0.24% to 3%, and in Valenciana from 0.25% to 3.5%. Madrid currently provides a 100% tax-free relief.
Tax planning to reduce wealth tax
If wealth tax or other Spanish taxes concern you, ask a specialist tax and wealth management adviser to review your tax planning and the way you own assets. Depending on your circumstances, there may be options to reduce your wealth tax liability. For example, there are compliant tax-efficient investment structures that can allow you to reduce both your income and wealth tax bill in Spain.
If you are worried that the value of your UK pensions may now push your worldwide assets into scope for wealth tax, contact Blevins Franks to explore your options. With UK pensions, for example, you could transfer funds into a Spanish arrangement or an EU-based QROPS that will qualify for the wealth tax exemption. Doing so could also unlock other benefits not usually available to UK pensions, such as currency and estate planning flexibility. The UK’s 25% Overseas Transfer Charge does not currently apply to EU transfers, so this is a good time to review your position.
With Blevins Franks’ expert, cross-border advice, you can take advantage of suitable tax-efficient opportunities to prevent a higher tax bill than necessary and make the most out of living in Spain.
Talk to one of our advisers