Expatriates living in Spain have been hammered by the weakening Sterling to Euro exchange rate, negligible interest rates, pension restrictions and the fall out of the credit crunch. Now they als
Expatriates living in Spain have been hammered by the weakening Sterling to Euro exchange rate, negligible interest rates, pension restrictions and the fall out of the credit crunch. Now they also have to face the further blow of higher taxes, as we begin to see the predicted tax rises sweeping Europe.
The UK led the way by announcing a 50% income tax rate for high earners, and Spain indicated over the summer that it would have to increase tax on the wealthy in order to tackle its ballooning budget deficit.
The Spanish 2010 Budget, which was delivered on 29th September, then went ahead and included various tax hikes, in spite of criticism from the opposition which warned that raising taxes at this critical time will only delay Spain?s exit from recession.
One measure that will affect everyone living in Spain is the increase in the standard rate of VAT from 16% to 18%. The reduced rate currently applied to services and food production will increase from 7% to 8%. The super-reduced rate remains at 4%.
With income already reduced by poor interest and exchange rates, this increase will be noticeable for many expatriates. While there is nothing you can do to directly protect yourself from higher VAT, this is a good time to review your savings, investment and pension structures with a financial adviser like Blevins Franks to establish if there is anything you can do to increase your income.
Those with savings and investments will be impacted by the proposed increase in the savings tax rate, which includes capital gains and dividend income as well as bank interest.
This rate will increase from 18% to 19% for the first ?6,000 of income, then to 21% on the excess.
This will have a negative impact on wealth preservation and investment income, at the same time as the VAT increase will reduce the purchasing power of your wealth and income. Coming at a time of such low interest rates, these changes will do nothing to help expatriates living in Spain, especially those with large holdings in bank deposits.
The budget also includes plans to abolish the annual income tax allowance of ?400 for employees.
Provided the proposals are approved by parliament, the savings tax increase will come into effect from 1st January next year, while the VAT increase will apply from 1st July. Overall, the ?austerity budget? contains almost ?11 billion in proposed tax increases.
The budget thankfully does not mention anything about wealth tax, but not many people realise that it was never actually abolished. It therefore still lurks in the background and it would be a simple matter for the government to bring it back should it be forced to take further steps to increase tax revenue.
Although Prime Minister Jose Louis Rodriguez Zapatero had promised to reduce taxes in his 2004 election campaign, the country has since been battered by recession, and measures to revive the economy have hit public finances hard.
The Spanish budget deficit is forecast to reach 8.1% of Gross Domestic Product (GDP) next year. The government is hoping its proposed tax increases will significantly reduce this deficit and demonstrate its commitment to bring it back within the target 3% of GDP by 2012. Under EU rules, Member States are required to keep their budget shortfalls below 3%, although they have some leeway in economic downturns. Zapatero had insisted in August that ?the government will fulfil the stability pact?, but independent economists queried whether this would be possible considering the dire state of the nation?s finances.
Spain also has the highest unemployment rate in the European Union at 17.9%. This is expected to increase to 18.9% next year.
Deputy Prime Minister Maria Teresa Fernandez de la Vega said that the ?austere? budget will help the recovery of employment.
Spain is not alone in facing higher taxes. The French Finance Bill for 2010 proposes removing a limit on social charges (a form of income tax) on investment income. Ireland raised taxes in an emergency budget in April and Finland plans to increase VAT next year. Other countries are likely to see tax rises in one form or another in the not too distant future.
While the economic downturn is the major catalyst to increase taxation right now, governments also have the ongoing issue of aging populations to deal with ? something that is not going to improve once the financial crisis is over.
Although the UK has already announced some tax increases, the middle classes are bracing themselves for the next tax attack. The National Institute of Economic and Social Research (NIESR) recently suggested that there should be a 7% rise in the rate of personal income tax in order for the country?s debt burden to be brought down to acceptable levels over the medium term.
Tax planning, however, remains alive and well, whether you are resident in the UK or Spain or in many other countries. Those living in, or thinking of moving to, Spain can still make legitimate use of a number of tax approved structures to keep their taxes to a more acceptable level, thus helping increase income and preserve wealth.
Speak to Blevins Franks to see what opportunities may be available to lower your tax bill in Spain or the UK. At Blevins Franks our goal is to protect your wealth in real terms and in the most tax efficient way.
2nd November 2009