Noticias de la Cámara
Living in Spain – 10 Frequently Asked Questions - Part 2
14/06/2023
John Diking and Nicole Sandler have recently hosted a couple of webinars where they discussed the most frequently asked questions they receive regarding individuals finances.
These events were very well received and an article based on the questions in the first webinar was published by the British Chamber of Commerce in Spain.
They have worked with thousands of foreign nationals moving to and living in Spain, they both permanently live in Spain, for 21 years and 9 years respectively. Their primary focus is to help their clients live in Spain in the most tax efficient way so they can enjoy peace of mind for themselves and their families.
Please find below the 10 new questions and answers discussed in the second webinar. John and Nicole believe this will be of benefit to you whether you are still planning your move or have already relocated to Spain.
Question 1) - For purposes of determining Spanish or UK tax residency, does it matter when in the year I purchase a Spanish home?
No. The 183-day rule is the primary method to determine Spanish tax residence and you can also be deemed Spanish tax resident if the centre of your economic interest is Spain or if your spouse or dependent children are Spanish tax residents. Since Brexit there is now an additional complication, as Non-Lucrative and Digital Nomad Visa´s have certain Spanish tax reporting obligations. It is important that you seek professional advice before you move to Spain, as it can save you tax on certain transactions.
Question 2) - I am over age 65 and have already moved to Spain. Will I be taxed on the sale of my UK home?
Whilst keeping in mind tax obligations linked to certain types of Visa´s following Brexit, the simplest way to sell your UK main residence is before you leave the UK and avoid spending 183 days in Spain in the calendar year of sale, so that you declare yourself as Spanish tax resident from January 1st in the following year. This option may be a bit inconvenient if you sell a property early in the year and are unable to move down to Spain until the 2nd half of the year (to avoid the Spanish capital gains tax liability), but it can save you a lot of tax.
However, as you have already moved to Spain:
Spanish perspective
As a Spanish resident, if you have lived in your main home for +3 years, are over 65 years old and you sell it within 2 years of moving out, you are exempt from paying CGT in Spain. There is nothing in the Spanish tax law which says that this allowance is restricted to Spanish sited property. This same exemption applies if you are under 65 years old and reinvest all of the proceeds into purchasing a new primary residence.
UK perspective
There is a UK capital gains tax liability even if you are no longer a UK resident. The only exemption is if you lived in the property the entire time you were in the UK and dispose of it within nine months of leaving the UK.
Due to the difference in the Spanish/UK tax years and regulations, you should seek professional financial advice before you undertake any important financial transactions.
Question 3) - I have a UK share portfolio which pays me dividends, as well as Premium Bonds, how will they be taxed in Spain?
Regardless of the Spanish region, the returns will be taxed under savings tax rates at 19-28%, depending on the amount of investment/interest income or capital gains realised in the Spanish tax/calendar year.
Unlike the UK, there is no dividend allowance, nor is there any capital gains tax allowance should you decide to sell the shares. If the shares are held in a UK ISA any dividends or capital gains are still fully taxable in Spain on an arising basis. As a Spanish resident it is thus not tax-efficient to own shares directly. There are Spanish compliant structures available to Spanish tax residents which can be used to hold investments more tax-efficiently.
Question 4) - Are there any personal allowances in Spain to reduce my income tax liability?
Most regions have a general personal allowance of €5,550 which increases by €1,150 for people aged +65 and again €1,400 for age +75 (regional variances exist). General Income Tax rates vary by region and they are approximately 19-45%. There are ways to minimise income tax in Spain through Spanish compliant investment options. Certain types of pensions can also be restructured for tax efficiency.
Question 5) - I have heard that Wealth Tax (WT) has been abolished in some regions but not all and there is a new Solidarity Tax (ST). I find all confusing, can you explain the changes?
Spain has 17 autonomous regions with different tax rules. WT is a charge payable by Spanish residents should their total net worldwide assets exceed the allowances available, calculated on 31st December each year. National rates apply, but the total tax liability varies between autonomous regions as they have their own rules or exemptions.
Following abolishment in Madrid a few years earlier, Andalusia and Murcia effectively eliminated WT in 2022 however the central Government decided to replace it with a new state level personal tax on large fortunes (“Solidarity Tax”) which applies to net wealth above €3,000,000 in all regions. Each resident has a tax-free personal allowance of €700,000 plus an allowance of up to €300,000 against the value of their Spanish main home.
Effectively, if you live in Madrid, Andalusia or Murcia you will only be taxed on your wealth if you have net assets exceeding €3.7M. In other regions where WT still applies, the general personal allowance is €700,000, however in other regions such as Comunidad Valenciana for example, it is only €500,000.
As the WT and ST overlap in the regions where WT still exists, you will receive credit for any WT paid on your ST return.
A professional financial adviser can estimate your WT & ST liabilities before you move to Spain, so that you can prepare and plan ahead, as there are ways to reduce the tax.
Question 6) I have a cash surplus from having sold my UK property before moving to Spain, is it best to retain it in a UK bank or send it to a Spanish bank?
This really depends on what your objectives are. For example, do you need the cash for your living expenses or are you looking to invest it?
If you plan to invest it you don’t need to bring the money into Spain.
For living expenses some people prefer to keep it in the UK so they can pick and choose when they are comfortable to transfer funds across with the exchange rate at that point in time. Using a currency transfer service could be a sensible idea since the fees will be lower than transferring from bank to bank.
Online banks have become popular among U.K. expatriates in Spain, even more so after Brexit as they offer cost-efficient conversion between Euros and Sterling. Brexit is not a problem for these banks as they offer GBP based accounts based in the European Union to Spanish residents.
Keep in mind there are financial service compensation scheme limits to be aware of, this means your money is only protected in a bank to a certain limit. Inflation is also eroding the cash since the cost of living is increasing plus you will need to report the UK bank account in Spain if the value is greater than €50,000.
This topic requires a conversation as there are lots of variables to consider here.
Question 7) Will my children in the UK be liable to pay Spanish inheritance tax (IHT) when I die in Spain?
Spanish IHT is due if the beneficiary lives in Spain or if the asset is based in Spain. Therefore, if your UK based children inherit a Spanish asset such as a property for example, Spanish IHT will be due.
There are ways to pass assets to your family in a tax efficient way that completely avoids the lengthy Spanish probate process. This is via a Spanish tax compliant investment based outside of Spain. As long as your family are also based outside of Spain, it will avoid all Spanish death taxes and probate.
It is also worth mentioning that step-children generally do not qualify for any tax benefits when they receive a Spanish inheritance. If you have step-children it is important to plan carefully as the tax bill can be quite high if they inherit a Spanish property for example.
Question 8) I have a UK Will in place – do I need to set up another Will in Spain now that I live here?
Typically, we would recommend that you draft a Will in any country where you hold assets to speed up the probate process and ensure they do not contradict one another. You can have several Wills if you have assets in several countries.
If you have a property or other assets in Spain then you should also have a Will here.
A Spanish Will needs to be drafted at the Notary and a lawyer can ensure any Wills do not contradict one another and are tailored to your specific situation.
Question 9) I am age 52 and would like to move to Spain however I have a pension pot with the 25% Pension Commencement Lump Sum (PCLS) not yet drawn as the minimum age is 55. What will be the tax implications of moving to Spain this year?
There are no tax implications when you move to Spain and hold a UK Pension at the age of 52. You can’t access the pension therefore it’s not reportable. Keep in mind the 25% PCLS is only tax free for residents in the UK. When you draw from your pension once you reach 55, the PCLS is fully subject to income tax in Spain.
There are many options to consider even before you reach pensionable age so we would suggest seeking professional advice.
Question 10) I live in Spain and have a UK pension worth £2M. I have seen that the UK budget has effectively abolished the Pension Lifetime Allowance (LTA) from April 6th 2023. Does this mean that it is best to leave my pension pot in the UK?
Previously, benefit crystallisation events such as transferring your pension abroad would trigger the LTA charge, which was generally a tax of 25% when the pot was worth at least £1,073,100. If you had a pot of £2,000,000 you would have paid a UK tax bill of £231,725 on the transfer.
Following the new rules introduced with the budget, what’s best for you and the pension depends on many factors and you would need advice since it’s a complex area of financial planning. An analysis of your specific pension would be the first step.
There is a window of opportunity for individuals such as yourself to transfer the pension out of the UK if it’s feasible; since Labour have stated they would reinforce the LTA if they gained power. Therefore, some individuals in this position are transferring their pension out of the UK whilst there is no LTA to take advantage of that opportunity, while the window is still open.
by Nicole Sandler & John Diking, Chase Buchanan
Links:
FAQ Part 1 article: www.britishchamberspain.com/Chase-Buchanan-discusses-Living-in-Spain-10-Frequently-Asked-Questions-from-individuals-living-in-Spain-or-looking-to-move-here.html
FAQ Part 1 webinar recording: https://youtu.be/KYYW2W8HgX4
FAQ Part 2 webinar recording: https://youtu.be/X5xxQlXGCbU
https://chasebuchanan.com/offices/spain/
