If you are a Spanish resident, you are liable to pay tax in Spain on your worldwide income and gains, including those from offshore financial centres like the Isle of Man and Switzerland.
If you are a Spanish resident, you are liable to pay tax in Spain on your worldwide income and gains, including those from offshore financial centres like the Isle of Man and Switzerland.
Income and capital gains tax
Since 2007 income (including capital gains) has been split into general income (renta general) and savings income (renta del ahorro).
Savings income includes interest earnings; capital gains on the sale or transfer of assets (whether real estate or shares and funds); dividends; income from life assurance contracts and purchased annuity income. You add it all together and it is taxed at a fixed rate of 19% for the first ?6,000 and 21% on any excess.
There may be some tax relief available for your Spanish property. For example, if you are over 65 and the property qualifies as your habitual main residence any gain is tax free.
All other income, including salaries, pension and rental income, is classed as general income and taxed at progressive scale rates. The State rates for 2011 range from 24% to 45%. Andalucia has two higher rates of 46% and 47% and in Catalu? the top rate is 49%.
The basic personal allowance for 2011 is ?5,151 per person. For joint returns the allowance for the second spouse is ?3,400. These are unchanged from previous years. This is less generous than it first appears as it is not given as a deduction from income but as a tax credit at the lowest rate of tax and then deducted from your tax bill. An individual?s tax credit is therefore worth ?1,236 (?5,151 x 24%) or, if your only income is investment income, ?978.69 (?5,151 x 19%).
Offshore interest
Interest earned from offshore bank accounts should be declared and taxed in Spain as savings income. There are people however who continue pay the withholding tax deducted under the Savings Tax Directive and this rate will increase from 20% to 35% from 1st July this year. No reimbursement is due in Spain if you pay the higher rate offshore. Paying the withholding tax does not exempt you from declaring the income on your annual Spanish tax return.
The Isle of Man and Guernsey will start to automatically exchange information with your tax authority on your bank account and will no longer offer the withholding tax option.
Pension income
UK occupational and state pension income is only taxed in Spain under the terms of the UK/Spain double tax treaty. The progressive rates of income tax apply. An abatement of between ?2,652 and ?4,080 is available when calculating the taxable income. UK government service pensions remain liable only to tax in the UK. They are not taxable in Spain and should not be taken into account when determining the tax rate on your other income.
The taxation of UK private pensions can give rise to some interesting anomalies because of the confusion over the meaning of ?purchased annuity? in Spain. However many people find that a purchased annuity is taxed very favourably here. For example, if it commences between the ages of 60 and 65, 76% of it is tax free.
If you can transfer your pensions into a Qualifying Recognised Overseas Pension Scheme (QROPS) you will benefit the favourable annuity treatment in Spain (up to 92% can be tax free). If you have lived in Spain for five consecutive and full UK tax years at the date of your death, the balance of your fund would also escape all UK death charges; charges which apply even if you are non-UK resident.
Notional rental income
If you own an investment property in Spain which is not used as your main home a purely notional rental income is deemed to arise for periods where the property is not actually let. This is normally based on 2% of the valor catastral (official value) of the property.
Wealth tax
This was effectively discontinued from 2008. Taxpayers are given a 100% credit on their potential wealth tax liability, with no need to make a return of wealth. In effect, it remains a threat since it was not completely abolished.
Succession tax
This tax on inheritances and gifts is paid if the beneficiary is a resident of Spain or the asset concerned is located in Spain. It is paid by each beneficiary rather than the estate. Tax rates generally range between 7.65% and 34% for the immediate family, but can be increased depending on the beneficiary?s relationship with the donor and their net wealth. There is no blanket exemption between spouses under the State rules and anything over ?15,957 is liable to this tax. There are allowances available, particularly against the main home, although the State rules only give this exemption if the property is owned by the inheritor for at least 10 years (it does not have to be their main home).
The regional rules are much more lenient than the State ones, particularly for spouses and children, but you must have been ?habitually resident? (usually requiring residence in that region for at least five years) in that Autonomous Community for the regional rules to apply to your estate.
Since this application of this tax can vary so much you need to seek advice relating to your personal situation.
That said, Spain has now been referred to the European Commission for discriminatory treatment of residents and non-residents living in the EU, as if you live in the UK you may well pay more tax than someone living in Spain on that inheritance/gift. The Commission has asked Spain to end this discrimination. Watch this space to see what Spain is going to do about this.
UK inheritance tax
If you remain UK domiciled while Spanish resident, as many British expatriates do, you remain liable for UK inheritance tax on your worldwide assets, including those in Spain, as well as Spanish succession tax. Any tax paid in Spain can be deducted from the UK tax due on the same asset.
Tax mitigation in Spain
Fortunately there are legitimate strategies available to lessen the impact of taxation. With careful planning and professional advice from Blevins Franks you can often significantly reduce your Spanish tax liabilities, including income, capital gains and succession tax, and possibly also UK inheritance tax.
By Bill Blevins, Managing Director, Blevins Franks
11th March 2011
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.
