Spanish wealth tax is a highly effective way for the government to raise funds when times are tough and the coffers are running dry. The Spanish reintroduced this tax in 2011 after the financial crisis of 2008. The intention was always to reverse the decision when the economy became healthier, but it never happened. Like many other countries, Spain has lurched from one crisis to the next over the last decade. Just as it looked as if the government could make good on its promise to abolish wealth tax in Spain, Covid came along and spoiled the party.
Who is liable for wealth tax?
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. As a general rule, most ACs grant an allowance of €700,000 per person along with an additional €300,000 based on net property value. This equates to allowances of around €2m for a couple.
Spanish wealth tax rates
Rates 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% for estates valued above €11.3m.
Limit your liability to Spanish wealth tax
It appears that there is no end in sight to the continuation of wealth tax in Spain. One way to limit your liability would be to irrevocably give away some of your wealth to a named individual. This could be a valuable estate planning strategy and help pass wealth down through the generations. The obvious downside, however, is that the donor no longer has any claim on the assets. There is no going back.
Another option is to place the funds in a Spanish qualifying life assurance bond and waive your rights to the redemption value for at least three years. This is more of a ‘sticking plaster’ than a permanent solution. Although wealth tax would be avoided for the restricted period, the money would again be liable afterwards. As with the previous restriction, these funds would not be available to the donor for the selected period.
Both of the above options have been extensively debated in the Spanish parliament recently. It seems certain that they will be abolished as soon as the Covid payback plan has been agreed.
Essentially, the Spanish government is already looking at ways to reduce national debt due to the pandemic cost. As a result, corporation tax, income tax, and wealth tax are in the spotlight. Any increase to income tax is likely only to apply to high earners (above €200,000 p.a.). Increases in Spanish wealth tax could affect those who own high-value property despite having a relatively modest income.
This means we are back to square one. However, there is one more way to reduce Spanish wealth tax: the 60% rule.
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.
It, therefore, makes sense to maintain as low a level of income base as possible. For those with guaranteed income from pension schemes, not much can be done to reduce income if it’s already in payment. If, however, you are considering your options available from a Defined Benefit pension, you may be best advised to take a lump sum and reduced income, rather than a full pension. The same principle can also be applied to annuities. The more extra benefits you add to an annuity (full widows pension, dependents pension, guaranteed periods), the lower your income will be.
The next step is to consider your investments. Residents in Spain are taxable on investment income on an arising basis. As such, investment growth is subject to savings income tax every year. If you hold a portfolio of investments worth €150,000 at the beginning of the year and it increases in value by €10,000, that amount is added to your taxable base.
Advantages of using a Spanish Compliant Investment Bond
Your tax position can be optimised by correctly structuring your investments. A Spanish Compliant Investment Bond offers two significant benefits:
- Annual savings income tax doesn’t apply if no withdrawals are made.
- Even if income is withdrawn, it is reduced to a fraction of the amount taken when calculating your taxable income base.
Using the example above, and assuming the growth is taken out to supplement income, the taxable income base would be reduced to only €625, despite a withdrawal of €10,000.
These figures can be scaled up according to someone’s situation. For those with large non-compliant investment portfolios and equally onerous wealth tax obligations, investing in a Spanish compliant investment bond will reduce the income base and combine with the 60% rule to help lower taxation without foregoing income.
Finally, it’s important to highlight the role of professional advice in these situations. Axis Financial Consultants work alongside suitably knowledgeable tax advisers and accountants to ensure our clients fully utilise the Spanish tax code.
If you would like more information on how to limit your liability to Spanish wealth tax, please contact us below.