The Spanish government has approved its budget for 2011 which sees tax rises for the wealthy and spending cuts of ?122 billion, or almost 8%. The tax rises are expected to boost revenue by ?170-?
The Spanish government has approved its budget for 2011 which sees tax rises for the wealthy and spending cuts of ?122 billion, or almost 8%. The tax rises are expected to boost revenue by ?170-?200 million. Readers who are high net worth taxpayers should review their tax planning to see what steps they can take to protect their wealth.
Finance minister Elena Salgado said: “It is the most austere budget for recent years.” Spain is trying to repair its economy having scraped out of recession earlier this year by just 0.1%. The government stood by its prediction that, even with the austere budget, the economy will continue to recover, with growth of 1.3% in 2011 and 2.5% in 2012.
Spain aims to slash its deficit to 6% of gross domestic product (GDP) in 2011, from an expected 9.3% in 2010 and 11.1% in 2009. For 2012, the shortfall is expected to be 4.4%, reaching 3% (the limit set by the EU) by 2013.
The finance ministry stated: “The government adopted a budget that advances fiscal consolidation and lays the groundwork for economic recovery.?
Ministerial expenditure will be axed by an ?extraordinarily large? 16%, ?the equivalent of what they had in 2006?, Salgado said.
Top Rate Of Tax Up 2%
The top rate of income tax levied by the state will jump 2% from 43%, with the introduction of two additional tax bands from 2011. Annual income from ?120,000 to ?175,000 will be taxed at 44% and income over ?175,000 will be taxed at 45%. Currently there are four tax bands and tax rates, with tax rates starting at 24%.
In certain autonomous regions the top rate of tax could be even higher. This is because Spain?s 17 autonomous communities control 50% of income tax while the state has control over 50%. In Catalonia, the community tax rate will increase to 23.5% for income between ?120,000 and ?175,000 and to 25.5% for income over ?175,000, taking the overall tax hike for a Catalonia resident with income over ?175,000 to 49%! Andalucia has raised its community tax rate to 22.5% for income between ?80,000 and ?100,000 and to 23.5% for income between ?100,000 and ?120,000.
In May, prime minister Jose Luis Rodriguez Zapatero, warned of a tax on ?those who actually have more?. It was dubbed a ?millionaire tax? and expected to impact those with a ?high economic capacity?. There was much speculation about what this would involve having already raised tax on savings in last year?s budget. Many thought that a wealth tax rate, currently effectively reduced to zero, would be increased but so far this has not happened. There is still room for the government to increase revenue further by reversing the 100% tax credit in the future.
Also in May, the Spanish government passed a ?15 billion austerity package which included an average public sector wage cut of 5% and a pension freeze.
One tax cut announced for the 2011 budget is a 10% rise in the reduction of net rental income before tax is due, to 60% from 50%. This will include any rental income from outside Spain except for short-term holiday lets.
An exemption relating to capital gains tax on investment funds was abolished.
Spain is not the only country to increase tax for higher earners next year. In France the top rate of tax is to increase by 1% from 40% to 41% and there will be an increase in capital gains tax by 1%. The sale of moveable assets will go up to 19% from 18% and tax on the sale of immoveable assets from 16% to 17%.
In the UK, those earning over ?150,000 suffered a tax increase of 10% from 40% to 50% starting from the 2010/11 tax year.
Indeed, the UK?s top rate of personal income tax at 50% was the highest seen globally and has propelled the UK to fourth position in a league table of EU personal tax rates, according to KPMG's individual income tax and social security rate survey 2010. Only Sweden, the Netherlands and Denmark outstrip the UK.
In Ireland, the top rate of tax increased by 1% in 2010. Iceland replaced its flat tax regime with a progressive approach raising the top personal income tax rate by approximately 9%. Greece raised its top rate by 5% and Portugal by 3% to 45% on income above ?150,000. Sweden taxes its highest earners at 56%.
KPMG?s findings show an upward trend across Europe and other advanced economies where governments are seeking increased revenues from their country?s highest earners. The survey also reveals that the majority of rate movement in 2010 is in Europe, with the highest personal income taxes worldwide paid by EU citizens, where average rates went up by 0.3% over the past year.
The Spanish budget, which was approved by the Council of Ministers on 24th September, still has to go through parliament but it is expected to be passed later in the year.
Tax rises are never good news and the more you earn the higher the rate of tax you have to pay. Following the global financial crisis, governments are focusing on higher earners to bear the brunt of tax rises to help fill treasury coffers.
Matters are not helped for British expatriates in Spain by low bank interest and disappointing currency exchange rates. Fortunately you can often positively address the situation with confidence with an effective tax planning and wealth management strategy, structured to legitimately limit the amount of tax you pay while at the same time aiming to protect your wealth. A financial manager specialising in these areas such as Blevins Franks can advise you on your specific requirements.
By Bill Blevins, Managing Director, Blevins Franks
18th October 2010