Exposure to non resident tax in Spain can be a concern to anyone owning property there. Many people separate their time between their property in the Costas and their home country. And why not? Who wouldn’t want to ‘escape to the sun’ in the long, cold days of winter! Many also think that they are not liable to Spanish tax, as they are tax-resident elsewhere. Whilst this can be true in certain cases, there is no hard and fast rule, as much depends on an individual’s specific situation.
Spanish taxes for non-residents
If you own a property in Spain but don’t rent it out, an annual tax levy of Renta Imputada de Inmeubles Urbanos will be made. This is calculated in relation to the rateable value of your property.
Spain’s tax regime can be punitive and deciding whether to become a resident in Spain for tax purposes is undoubtedly a difficult question. The relevant benefits and drawbacks will depend on your individual circumstances.
There appear to be three categories of foreign resident in Spain:
- Those who are fully tax resident and declare their worldwide assets and income annually in Spain;
- Those who live mostly in their home country (e.g. UK), and have maintained tax residency there;
- A considerable number of ‘others’, whose status is not always certain as a result of spending roughly half of their time in Spain and half in their home country.
To be or not to be tax resident in Spain
Opinions can be divided when discussing these issues in the local Bodega; the law, however, is pretty clear. The Spanish tax authorities will deem you to be fully taxable if you spend more than 183 days a year in Spain. It is true that the Hacienda has been under-staffed and over-worked in recent years. This has had the effect of enabling a lot of people to remain under the radar. Things are changing though. More resources are now being focused on the collection of non-resident tax in Spain.
For the British in particular, Brexit has created uncertainty regarding the legal status of UK nationals. In the coming years, many British people will have to pay greater attention as to how they organise their affairs from a tax and residence perspective.
The question, therefore, is whether to remain non-resident in a post-Brexit world or become fully resident in Spain. The answer, as with many aspects of financial planning, will depend on individual circumstances and what is important to each person.
Non resident tax Spain – examples
- Whilst most understand that they are obliged to pay local property and services taxes in the same way as they would back home, not everyone is aware that they could also be liable to Capital Gains Tax (CGT) on the sale/disposal of property. This could be a major issue for those who bought many years ago; special care also needs to be taken on the death of a partner and any subsequent sale of property.
- Non residents may also be liable to Spanish tax on any cash or investments located in Spain. CGT and wealth tax could apply depending on your individual situation.
- Inheritance tax may be payable by non-resident beneficiaries. Each independent regional authority in Spain decides their own tax rates and who is liable. Whilst some, like Andalucia, are relatively generous in allowances, others can be penal. It is also important to note that dying ‘intestate’, could mean your estate is taxed at National level; this would usually be worse than that levied at a local level.
Pensions in Spain
Pensions and lump sum investments often form the bulk of an individual’s financial resources. There are thus a number of financial planning issues that non-residents need to consider when deciding whether to become fully tax resident in Spain.
The tax treatment of UK pensions in Spain is dependent on the type of scheme held. For Defined Benefit (DB) pensions already in payment, there is little room for taking advantage of beneficial Spanish tax treatment. By contrast, SIPPs and personal pensions, which are Defined Contribution (DC) plans are treated as ‘retirement savings plans’ by the Spanish system. As such, the DC pension fund is separated into capital and income, wherein only the ‘income’ element is taxed. This means that DC retirees can benefit from tax rates that are as low as 6% per annum.
Opportunities for holders of UK DB schemes
Pension benefits for non-resident DB scheme holders are taxed in the UK at between 20 and 45% per annum. Individuals who decide to become Spanish tax resident are allowed to transfer their DB schemes into a QROPS, which is treated the same way as other DC schemes. This will allow them to benefit from the favourable tax treatment highlighted above. It’s important to note, however, that valuable guarantees would be lost by transferring the pension. Whether to transfer or not must therefore be considered in the context of an individual’s total financial position.
Transferring may well be the best option if the DB scheme is a relatively small element of an individual’s retirement strategy. If, on the other hand, the DB scheme forms the whole of someone’s retirement income, it may well be better to stick with it and accept the tax consequences.
Non resident tax Spain: treatment of the tax free lump sum from UK DB schemes
Most DB schemes offer the option of taking a tax-free lump sum (in the UK) along with a reduced income. If the reduced income is sufficient to take care of monthly expenses, the lump sum could be invested in a Spanish Compliant Investment Bond (SCIB). This is a highly effective way of taking advantage of UK tax treatment of the lump sum, whilst still UK tax resident, and then doing the same after becoming Spanish tax resident.
Pensions and the UK Lifetime Allowance
An important decision for holders of UK SIPPs and personal pensions relates to whether or not they are, or could be in the future, subject to Lifetime Allowance (LTA) taxation. LTA tax of between 25 and 55% is charged on pension funds with a value in excess of £1,055,000. By choosing to become Spanish tax resident, SIPP/PP holders can elect to transfer into a QROPS. This means that future investment growth will be outside the LTA, which avoids being penalised for good performance.
There are ways to increase the LTA limit to £1.25m by applying to HMRC for one of the protection schemes. However, the availability of such protection is dependent on the UK Chancellor, who may opt to change course and seek to increase the ‘tax take’ post-Brexit!
The Overseas Transfer Charge
An additional threat to UK pension-holders is that of the Overseas Transfer Charge (OTC). This is a tax of 25% on pension funds that are transferred outside of the UK. At present, there are exemptions available, one of which is a transfer to an EEA country. If/when the UK leaves the EU (and therefore the EEA), this exemption will no longer apply and the option to transfer to a QROPS without the 25% OTC will be lost.
Lump sum investments in Spain
There is no tax on a SCIB if no withdrawals are made in any given tax year. Even when withdrawals are taken, the tax treatment is similar to that of the DC pension system. Withdrawals are separated into capital and income, and only the income is taxable. This means tax payable can be as low as 2-4% per annum.
Many people who retire to Spain have invested in Individual Savings Accounts (ISAs) in the UK and/or have funds held in bank deposits. The UK tax treatment of ISAs is highly beneficial, whereby no tax is due when withdrawals are taken. This is not the case in Spain, however, as Capital Gains Tax would apply to the annual increase in value as well as income tax on withdrawals. It therefore makes sense for those who are clearly non-resident in Spain to retain these investments, as they would not be taxable in Spain.
For those who are already tax resident, and anyone considering becoming tax resident in Spain, moving these funds into a SCIB would retain similar tax benefits as when they were UK tax resident.
Consult a Spanish lawyer
It is also worth consulting a solicitor with relevant knowledge and experience in both Spanish and international issues. You would be advised to draw up a Spanish will if you own property or other assets in Spain. It may also be wise to have another will in your home country, especially if you intend choosing that one as your country of preference for inheritance tax purposes. Laws can be complex and often require careful consideration. A solicitor can help you develop a logical and effective strategy to help with estate planning and keep you informed of any changes in legislation relating to non resident tax in Spain.
Use a qualified and experienced financial adviser
Finally, it is important to use the services of a qualified and experienced financial adviser. The adviser will help you arrange your investments and pensions in the most tax-effective way. CGT can be optional if investments are placed in the correct structure; annual savings income tax can be reduced considerably, or even eliminated completely.
A combination of the effects of Brexit and increased scrutiny by the Hacienda, has led to British people having to consider establishing permanent residence in Spain and/or clarifying their non-resident status. By using the services of tax advisers, solicitors and financial advisers, issues relating to non resident tax in Spain can be resolved.
There is often a tendency to bury our heads in the sand, for fear of exposing ourselves to bad news. In many cases, the news is not as bad as expected. Quite often, knowing the rules and regulations can actually turn out to be worthwhile!
For further information on non-resident tax in Spain, please complete the form below: