The Spanish tax system is much like other European countries in generic terms. Taxation in Spain comes in the form of income, capital, property and inheritance taxes; local taxes are levied at varying rates depending on your individual circumstances. There are certain distinctions made between resident and non-resident taxpayers. One important difference is that each of the 17 autonomous regions in Spain set their own rates which are payable in addition to national rates.
Spanish tax residents are taxed on a worldwide basis. As a result, all income, capital and other assets should be declared every year. There are exemptions available for temporary workers and expats which should be explored before moving. Again this is dependent on everyone’s personal situation. For those who qualify for an exemption, the tax will only be levied on Spanish sourced income. Individuals who spend 183 days or more in Spain are obliged to declare their worldwide income there.
Personal income tax rates
There are two forms of taxable income in Spain to consider: general taxable income and savings taxable income.
Savings taxable income
Residents are taxed on their worldwide savings income and non-residents on their Spanish savings income at a fixed rate. The rates for 2016 are as follows:
- €0 – €6,000: 19%
- €6,000 – €50,000: 21%
- Over €50,000: 23%
Savings taxable income includes interest income, dividends, income from life assurance contracts, purchased annuity income along with income from capital gains arising from the sale/transfer of assets.
General taxable income
Spanish residents are taxed on their worldwide income on a progressive scale. General taxable income includes all income that is not categorised as ‘savings income’. is included here, including all earned income (that is, salary, self-employment and pension income), rental income, income from royalties, any capital gains not generated from the sale/transfer of assets such as lottery prizes.
*Note: Tax rates may differ depending on the region (Comunidad Autónoma) where the taxpayer is resident.
Treatment of UK Pensions
Spanish residents with UK state pensions and/or occupational pension income are taxable in Spain and not in the UK, under the terms of the UK-Spain Double Taxation Treaty. However, it should be noted that UK Government service pensions (e.g. civil service, local authority, fire service, police and most teachers) remain liable only to UK tax and are therefore not taxable in Spain.
A distinction is made between pensions which are Defined Benefit (DB) and those which are annuity based. Annuity based pensions attract considerable tax advantages for those who qualify. Care has to be taken when assessing qualification as personal pensions which have been built up from employer contributions may not benefit in their entirety from the annuity allowance.
In the UK, individuals can take a lump sum of 25% free of tax from their pension on retirement. For expats in Spain however, any lump sum withdrawn from a foreign scheme is taxable in Spain, irrespective of UK legislation. In the first instance, actual pension contributions would be deducted from the lump sum (in proportion to the whole fund). Thereafter tax on the lump sum is calculated in tranches as follows:
- The first €6,000 is taxed at 20%
- 22% on the remainder up to €50,000
- 24% on amounts over €50,000
Example: an individual takes the full 25% from a €100,000 pot which has been built up with contributions of €60,000. The tax calculation on the lump sum would be:
€25,000 – €15,000 (25% of €60,000 contributions) = €10,000
The total tax due would therefore be:
€1,200 (20% of €6,000) + €880 (€22% of €4,000) = €2,080.
There are a number of tax planning opportunities for expats in Spain or those intending to move there. For those already in the Spanish tax system, it might be better to forgo the lump sum and take a higher annuity income as long as that annuity qualifies for the favourable tax treatment mentioned above. A UK tax resident planning to move permanently to Spain might be advised to take the lump sum whilst it is still tax-free in the UK.
British expats and other UK pension holders often choose to transfer their funds into a QROPS in order to fully benefit from the annuity exemption. QROPS offer inheritance and succession tax advantages as the pension is held in trust. The trust is structured in such a way that the individual is deemed not to hold the assets personally, therein creating a distance from ownership upon death. This means that any inheritance from the QROPS can be received free of Spanish succession tax.
Wealth Tax in Spain
Wealth tax is payable on total worldwide assets for Spanish tax residents. Allowances are generous; everyone has a personal allowance of €700,000 in addition to €300,000 for their main residence. The value of assets exceeding the allowance is taxed by the State (ranging from 0.2% to 2.5%) and also at a regional level depending on where you live. In Andalucia for example, rates start at 0.24% and rise on a sliding scale to 3.3%. Although Spanish tax residents are assessed on a worldwide basis, there are exceptions which need to be deducted before calculating the liability. These include pension rights, intellectual property rights, household contents, shares in small businesses, family businesses and property companies.
Capital Gains Tax
Capital Gains Tax (CGT) is payable on the sale or transfer of qualifying assets. Rates are in line with savings income tax rules. Liability depends on which asset sales qualify and which don’t. Exemptions are available according to each individual’s personal circumstances.
Property taxes are also an important issue for expats in Spain. Spanish VAT (IVA), document fees and sales transfer taxes (similar to UK stamp duty) are payable. Rates vary according to what type of property is purchased, the value, and the region the property is located in. Additionally, everyone pays a local property tax similar to the UK’s council tax.
Spanish inheritance tax
Spanish inheritance tax was reformed in April 2019. A number of regions in Spain have introduced a discount of 99% on inheritance and gift tax liabilities. There is a €1m tax-free exemption which means that anyone inheriting less than €1m will pay zero Spanish inheritance tax. Inheritances over €1m will only be taxed at a nominal 1% rate. Similarly, no tax will be payable on gifts, which compares highly favourably with the previous complex and penal system.
As with most country’s tax systems, assessing liabilities and claiming allowances can be a complex procedure. In addition to using a financial adviser in Spain, we recommend consulting a qualified accountant.