The tax system in Spain is very different to the UK. If you are considering taking up residence in Spain, it is essential that you seek tax advice well in advance of your planned departure from the UK to ensure that you have sufficient time to carry out relevant tax planning before you leave the UK.
When planning a move to Spain, some of the most important considerations are:
Understanding the date from which you will become non-UK resident is particularly important as this will affect your liability to UK tax and may therefore influence the timing of certain transactions.
Under UK residence rules, you may become non-UK resident part-way through the UK tax year. Care needs to be taken, however, as the UK residence rules are particularly complex and it is often the case that the date you 'leave' the UK is not the date from which you will be treated as non-UK resident.
Any tax planning should also take into account the date from which you will become resident in Spain, which, in most cases, is unlikely to sit neatly with the date you become non-UK resident since Spain does not split its tax year for residence purposes.
The tax year in Spain is the calendar year, and you are either resident or non-resident in Spain for the whole of the tax year concerned. Your Spanish residence position will usually depend on when during the calendar year you move to Spain.
If, for example, you move to Spain during the first half of the calendar year, you may find that you are regarded as tax resident in Spain for the whole of that calendar year. If you are also UK tax resident up to the date you moved to Spain, there would be a period time when you are resident in both countries. In these circumstances, the provisions of the double tax treaty between the UK and Spain are unlikely to resolve the position.
This means that you may be liable to tax in both the UK and Spain on any income and gains arising during that period of dual residence, although Spain should allow a tax credit for any UK tax paid on those income and gains. However, you may end up paying a higher rate of tax in Spain than in the UK and this would leave you disadvantaged compared to the position where you delay your move to Spain until the latter half of the calendar year.
If you are able to delay moving to Spain until the latter half of the calendar year, you would normally become resident in Spain from the following 1st January. If you are non-UK resident during this period under the UK's split year residence rules, there would be short period of time during which you are not resident in both the UK and Spain, and this could present a unique opportunity for tax planning.
Particular care is needed to ensure that appropriate steps are taken to achieve this window of non-residence in both jurisdictions, and specialist advice should be sought.
Timing of Transactions
Depending on the circumstances, it may be possible to delay the sale of certain assets or the payment of a large dividend, for example, so that the transaction takes place during the window of non-residence in both the UK and Spain.
In this way, and provided certain conditions are met, certain types of income and gains may escape tax both in the UK and Spain.
Income tax rates tend to be higher in Spain than in the UK, although the exact position will depend on the nature and quantum of income. There are two sets of income tax rates in Spain: one for savings and investment income (e.g. interest, dividends, royalties, gains on withdrawals from life insurance policies), and one for all other income (referred to as 'general income').
The general income tax rates are made up of the State rates (which apply throughout all Regions), and the Regional rates (which are set by the individual Autonomous Communities). The overall income tax rates therefore differ between the Regions. The Autonomous Communities of Andalucía and Cataluña have among the highest overall income tax rates of up to 47% and 50% respectively on income above €300,000.
Savings and investment income is more favourably taxed than general income, with the maximum rate being 26% on savings income over €200,000.
As a resident of Spain, your UK pension income is generally taxable only in Spain and not in the UK, with the exception of a UK government service pension which remains taxable in the UK only.
Where pension income is taxable only in Spain, an application will need to be made to HMRC to allow the income to be paid gross, otherwise the pension provider will continue to deduct UK tax at source.
Any pension lump sum will be taxable in Spain if taken whilst resident in Spain, and therefore where possible the lump sum should be taken whilst still UK resident.
Planning can be undertaken to ensure that your pension is structured in a way that allows the income to be taxed as savings income, at the lower rates of tax, rather than as general income.
Retaining a UK property
It is commonplace for individuals moving overseas to retain a UK property either for personal use on visits back to the UK or for investment purposes. Keeping a property in the UK could affect your residency status in terms of the number of days you can visit the UK whilst retaining non-UK residence, and also in respect of whether or not you are eligible for split year treatment.
If the property is rented out, the rental income will be taxable in both the UK and Spain, with a tax credit in Spain for the UK taxes paid. Tax is payable in Spain on rental income at the general income tax scale rates, not the lower savings tax rates.
You should seek investment advice regarding the most favourable investments to hold as a resident of Spain. Other forms of investments that are taxed at the lower savings tax rates may be more tax efficient.
Selling your UK home
Whilst Spain does have a relief for gains arising on the sale of a main home, the rules are very different to the UK, and the relief is unlikely to apply if you sell your UK home after you have become tax resident in Spain.
Generally, if you sell your UK home whilst tax resident in Spain, the entire gain (i.e. the gain arising from the date of acquisition, not the date you moved to Spain) would be subject to capital gains tax in Spain, even though the property may have been your main residence for the majority of the ownership period, and even if you have lived in Spain for only a short period of time.
This is a common trap that can be avoided by taking professional advice well in advance of your planned move to Spain.
In addition, now that the UK has introduced a capital gains tax charge on non-residents who sell UK residential property, there may also be a UK capital gains tax liability at the time of sale.
Individuals resident in Spain are subject to an annual wealth tax on the value of their global assets held at 31st December each year. Generally, there is an individual allowance of €700,000 plus an additional allowance of €300,000 per owner against the value of your main home. Allowances can therefore total up to €1m per person. However, these allowances may be slightly higher or lower depending on the particular Autonomous Community you live in. Typically, the rates start at 0.2% and increase progressively up to 3.5% on wealth in excess of €10.7m, but the rates can and do vary between each Autonomous Community.
Currently, Madrid does not impose wealth tax on its residents, and is the only Community to provide such an exemption, although you are still required to file an annual return if your total wealth exceeds €2m.
There is a restriction on the combined level of income tax and wealth tax that may be levied in Spain. This is a total of 60% of taxable income. Tax planning can be undertaken by investing in certain types of tax efficient investments in Spain to ensure taxable income (but not actual income) is reduced, which in turn may result in reduced wealth tax liabilities. Advice should be taken in relation to your specific circumstances.
Reporting Overseas Assets – Form 720
All individuals who are resident in Spain are obliged to file a Form 720 (Modelo 720) if they hold overseas assets in any one of three categories which are worth more than €50,000. This is not a tax declaration, it is simply a reporting obligation but the Spanish authorities will compare the information on the Form 720 with income and assets declared on tax returns to check for any discrepancies.
The form is based on the value of assets held at 31st December and must be submitted by the following 31st March. After the initial return has been filed, a further return is only required where the total value of assets in any one category has increased by more than €20,000.
This is a particularly complex area of taxation in Spain. Each Autonomous Community has the ability to set its own rates and allowances, and, as a result, there are significant variations in rules and rates depending on which area you move to.
Some Regions offer a 99% reduction in the succession tax liability, provided various conditions are satisfied. The specific conditions vary depending on which Region you are living in and therefore it is essential that you take advice specific to your own circumstances and Region.
Unlike the UK where inheritance tax (IHT) is levied on the deceased's estate, Spain taxes the beneficiary on the amount they inherit. The allowances are higher, and the rates lower, for beneficiaries who are close family members. More distantly related beneficiaries will usually suffer higher rates and have minimal allowances.
Generally, non-Spanish assets passing to a non-Spanish resident individual are exempt from succession tax in Spain. However, there may be inheritance tax to pay in the country where the asset is located. For example, a UK rental property owned by a Spanish resident that passes on death to children resident in the UK would not be chargeable to succession tax in Spain, but would fall within the scope of UK IHT, although no tax may ultimately be payable depending on the value of the property, the value of any other UK assets the deceased owned, and available UK allowances.
Whilst tax planning may not be at the forefront of people's minds when they are considering a move to Spain, moving to Spain can present a unique opportunity to arrange your affairs in a tax efficient manner with a view to becoming Spanish tax resident.
You should seek tax advice well in advance of your planned departure from the UK, so that you can take advantage of this unique opportunity for tax planning, as well as ensuring you avoid some common tax pitfalls.
We specialise in advising on cross-border matters relating to tax, wealth management, financial advice and retirement planning, in Spain and the UK, as well as other countries.
The content of this document is intended as a general guide only. It is not intended to constitute advice and De Giorgio Wealth Management Ltd does not accept any responsibility to any person relying on its contents. Professional advice should be obtained about your specific circumstances.