Wealth tax in Spain is regarded as being a 'blunt tool' used by the government to raise revenue. It seems particularly unfair as an individual's wealth has been accumulated from assets and income which has already been taxed.
The good news is there are ways to significantly reduce liability for wealth tax in Spain by restructuring your investments tax efficiently.
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Who is liable for wealth tax in Spain?
Residents and non-residents are both potentially subject to wealth tax in Spain. The important difference is that non-residents only pay based on assets located in Spain, whereas residents are liable on a worldwide basis.
Autonomous Communities (ACs) impose regional variations. However, non-residents are taxed at the national rate only. Tax-free allowances exist and are made up of a National exemption of €700,000 per person and an additional main residence uplift that depends on the individual's AC. Andalucia, for example, exempts a further €300,000, or €600,000 for a married couple. This equates to allowances of around €2m for a couple.
Other aspects of the Spanish tax system
The Spanish tax system is based on 'worldwide income', which means fully resident taxpayers must declare all assets owned wherever they are situated. Assets with a value above €50,000 must be declared on Modelo 720 each year. This should be done by asset class. For example, all bank deposits should be aggregated, so there is no benefit in holding a series of accounts with €49,000 each. The same applies to investment funds, shares, and property.
Salary and/or pension taxation rates are slightly different from Investment Income rates, although both are based on a banded system. The higher your income, the higher the rate. A nil rate band applies to salary/pension income but not investment income.
Savings Income Tax applies to all investment growth, dividends, and interest received in a tax year, whether withdrawn as income or not. Tax is therefore payable on an ‘arising basis’, which as a concept, is unfamiliar to many foreign retirees.
Rates of wealth tax in Spain are calculated on a banded basis and rise according to the size of overall net wealth. The lowest rate in Andalucia is 0.20% on the first band above the allowance, rising to a maximum of 3.5% for estates valued above €10m.
An example of the calculation of wealth tax in Spain:
Mr and Mrs Brown have retired to Andalucia. Their property is worth €600,000, and they hold a variety of investments valued at €4,400,000, which are owned jointly. They both have taxable pensions of approximately €25,000 gross.
Each, therefore, has a wealth tax-free allowance of €1m (€700k National plus €300k in Andalusia). This leaves €3m potentially liable to Wealth Tax, or €1.5m each.
If we assume a wealth tax rate of 2% and investment growth of 5%, each will have a total tax liability of:
Estimated Income Tax on pension €8,340 Investment Income Tax: 21.50% of €75,000 (5% investment growth on €1.5m) = €16,130 Total General Income tax: €24,470 Wealth tax: €30,000 (2% of €1.5m) Total tax = €54,470
Application of the 60% rule
In brief, the 60% rule states that Spanish wealth tax and personal income tax liability cannot exceed 60% of a person’s taxable income base. In this case, the total taxable base is €100,000 (pension income of €25,000 plus Investment Income of €75,000).
60% of €100,000 is €60,000. As this is higher than the total liability of €54,470, no further reduction applies, and the total payable will be as above.
Restructure your tax position using a Spanish Compliant Investment Bond
Your tax position can be optimised by correctly structuring your investments. A Spanish Compliant Investment Bond (SCIB) is exempt from investment growth being taxed on an arising basis. This means we can discard all of the investment income above when calculating liability to wealth tax in Spain. The figures then change dramatically:
Income Tax on pension: €8,340 Investment Income Tax: €0 Wealth tax: €30,000 before applying the 60% rule Taxable base: €25,000 pension
If we then apply the 60% rule, the tax would be €15,000 as this would be the maximum payable, based on 60% of gross pension, and represents a 50% reduction in liability for wealth tax in Spain.
The total tax payable would be €23,340 (€8,340+€15,000): a saving of €31,130 for each partner.
Can we reduce wealth tax any further?
For those retiring on investment income only, the wealth tax position is even more beneficial.
If we assume Mr and Mrs Brown own the same house but don’t have taxable pensions and have recently sold their business for €4.4m, their position would be as follows:
€2m wealth tax-free allowance €3m potentially liable: €60,000 (2%) Establish a SCIB for €1.5m each, meaning the taxable income base is: €0
Wealth tax should therefore be zero. However, Spanish law states that a minimum of 20% of the wealth tax liability must be paid.
So, in this case, €6,000 (20% of €30,000) would be payable by each partner.
Planning matters. When moving to a different country, it's vital to restructure your financial affairs accordingly. While it may not be possible to eliminate wealth tax in Spain, allowances exist, making their impact much less painful.
Stop press! Negotiations are underway in Andalucia to remove wealth tax. A lot depends on upcoming elections and whether it will be done before or afterward. It sounds like a vote-winner to me!
If you would like more information on wealth tax in Spain, please complete the form below:
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