Should you fear being tax resident in Spain?
Spain continues to be a favourite destination for expatriates, including those making the most of their retirement years. And with the residence rules for UK nationals potentially changing from January 2021, many people are moving their plans forward to make sure they are lawfully resident in Spain before Brexit takes full effect.
While you may be focused on all the benefits of living in Spain, you also need to understand how being Spanish resident will affect your tax position. Once you meet any of the criteria that make you tax resident here (you spend 183+ days in Spain, or your centre of economic or vital interests is here), you are liable for Spanish tax on your worldwide income, gains and wealth, and subject to the Spanish succession and gift tax regime.
Besides the expected income and capital gains taxes, Spain additionally imposes an annual wealth tax which generally affects those with net worldwide assets over €1,000,000. Combined together, this can result in a discouraging annual tax bill.
Spanish taxation therefore can present a dilemma for the wealthier individualsand families who wish to live in Spain. Do they become resident and face high taxes? Or do they just visit often but not enough to become tax resident?
But you do not necessarily need to fear taxation in Spain – in fact you may find you improve your tax situation by becoming resident. While tax rates can look high, the Spanish tax regime does present tax mitigation opportunities – the way you hold your assets can make a significant difference to how much tax you pay.
Here are two examples which illustrate just what a big difference restructuring assets can make for higher net worth people.
Mr Smith (not his real name) is resident in Andalucía, with a net worth of €9,000,000. His Spanish property (main home) is valued at €2,000,000. His various capital
investments amount to €5,000,000, plus another €1,000,000 in cash deposits. He has a UK pension fund worth €1,000,000.
His investment portfolio and savings
generate an annual income of €315,000 (income and/or realised gains). He receives pension income of €40,000 per annum (€30,000 from his private pension and €10,000 of state pension).
His annual Spanish tax liability in Andalucía, without any tax planning in place, is approximately:
Income tax: €79,930
Wealth tax: €128,364
Total tax: €208,294
However, if he takes specialist advice and restructures his assets to take advantage of the tax planning opportunities available in Spain, he could reduce his combined tax bill by over 80%. This involves using Spanish compliant investment arrangements, transferring his private pension fund and adjusting the way he takes income.
Tax liability after restructuring:
Income tax: €7,765
Wealth tax: €25,876
Total tax: €33,641
This represents a total tax saving of €174,653: €72,165 in income tax and €102,488 in wealth tax.
Mr. & Mrs. Jones
It is a similar situation for married couples. Mr and Mrs Jones (not their real names) are also wealthy Andalusian residents.
They own a €2,000,000 Spanish property equally in joint names (main home). They each have €2,500,000 in capital investments which generate an annual income of €150,000 for each of them. They also both have €500,000 in the bank (€7,500 income each). Mr Jones has a private pension fund worth €1,000,000 from which he receives an annual income of €30,000. They both receive a state pension of €5,000 per annum.
Their combined Spanish tax liability, without any tax planning, is approximately:
Income tax: €76,382
Wealth tax: €76,070
Total tax: €152,452
But like Mr Smith, they can restructure their assets to significantly reduce their Spanish tax liability.
Tax liability after restructuring:
Income tax: €5,842
Wealth tax: €23,666
Total tax: €29,508
They can reduce their Spanish income tax bill by €70,540 and their wealth tax bill by €52,404, making a total tax saving of €122,944.
Of course, everyone’s circumstances are different and you may not be in a position to achieve the same level of results. But these examples clearly show that the way you hold your assets and take income from them can make a considerable difference to how much tax you pay in Spain.
It is certainly worth asking a specialist adviser, like Blevins Franks, to review your investment portfolio, pensions and other assets. They can also evaluate your current tax liabilities, consider your personal situation and objectives, and look at what Spanish compliant arrangements would work for you and how much tax you could save. You may be very pleasantly surprised by your new tax bill in Spain!
These are simplified, estimate tax calculations for illustrative purposes and based on 2019 tax rates (pending the 2020 state budget).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 is advised to seek personalised advice.