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Inside the guide:-
- Taxes in Spain for non-residents
- Tax residency in Spain: why you need it
- Becoming a tax resident in Spain
- UK taxes that Spain residents might be liable for
- Spanish taxes
- How much tax will I have to pay in Spain?
- Spanish succession tax and inheritance
Taxes in Spain for non-residents
If you live in Spain for less than six months (183 days) in a calendar year, you are classed as a non-resident.
In this case, you will only pay taxes on income earned in Spain. For example, you will be taxed in Spain if you have a property in Spain that you rent out, a savings account, or any other assets that earn you income.
Your Spanish income will be taxed at flat rates with no allowances or deductions. The rates are 24%, or 19% if you are a citizen of an EU/EEA state.
Non-residents who have a property in Spain must submit a tax return and pay a property tax for non-residents. This is what’s known as imputed income tax on your property.
In addition, non-residents must pay local Spanish property taxes regardless of whether they rent it out or not.
Tax residency in Spain: why you need it
To make sure you don’t pay income taxes in both the UK and Spain when you live in Spain, you have to acquire a non-resident status in the UK.
In simple terms, it means that you need to persuade HMRC that you have truly become a resident of Spain and therefore are obliged to pay taxes in Spain.
In some cases, the process of acquiring non-resident status can take up to three years. During this time, you might be granted conditional non-resident status by HMRC, and if at the end you qualify, full status will be granted retrospectively.
Residency status is based on the number of days you spend in the UK in the tax year (6 April to 5 April the following year).
You’re automatically classed as resident if you spend more than 183 days in the UK in the tax year, or if your only home is in the UK and you spend at least 30 days there during the tax year.
You’re automatically classed as non-resident if you spend fewer than 16 days in the UK in the tax year (or 46 days if you haven’t been classed as a UK resident for the 3 previous tax years).
If you fall in between, which might easily be the case in your first year of establishing your life abroad, then HMRC might decide to look into your circumstances to define your residency status.
This means you will have to prove that your intention to retire abroad and take up residence in another country is genuine.
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The examples given in the note clearly demonstrate what information helps HMRC to establish your residency status if you don’t meet the conditions for automatic qualification.
The fact that you had informed HMRC about your move abroad before you left the UK is just a first step. In case HMRC doubts your tax residency, you need to officially become a tax resident in Spain.
Becoming a tax resident in Spain
You are considered a tax resident in Spain if you stay in the country for more than 183 days a year. To confirm this, you can apply for a Certificate of Tax Residency in Spain.
A Certificate of Tax Residency in Spain (Certificado de Residencia Fiscal en Espana) is a crucial document when it comes to some very important issues:
- Proving to the HMRC that you’re now a Spanish tax resident and therefore don’t have to pay UK taxes any more,
- Proving your residency if/when you sell your Spanish home to avoid having 3% of the sale price retained,
- Proving your residence to avoid complications if there’s an inheritance claim,
- Proving your residence to minimise your inheritance tax.
A Certificate of Tax Residency in Spain is the only document that can help you resolve all the issues above, so it’s well worth applying for.
It is issued by the tax office (Agencia Tributaria or Hacienda). You can apply for one only after you have submitted and paid (if applicable) your first personal income tax return in Spain.
For the sole purpose of obtaining your tax residency certificate, it’s advisable to submit your tax return even if you are below the tax threshold. It’s quite difficult to obtain a Certificate of Tax Residency in Spain otherwise.
UK taxes that Spain residents might be liable for
If you have any assets in the UK, savings or any income (a rental income, for example), you will still be liable for UK tax on those even when you become non-resident for tax.
In many cases, it’s worth hiring a UK-based accountant to deal with all your UK tax liabilities. This way you don’t need to worry about deadlines and HMRC queries.
UK inheritance tax
Even if you are living outside of the UK, you will still pay inheritance tax in the UK if you are deemed to be of a UK domicile status.
If your estate is valued over £325,000, it will be taxed at either 40 percent, or 36 percent (if a certain amount is willed to the charity), on everything over this amount.
Since 2007, this threshold has increased to £650,000 for married couples and civil partners, but only if the spouses/partners will their share to each other after they die.
If you wish to protect your UK estate (which you probably would if it’s valued at over £325,000), changing your domicile is not an easy option.
The best way is to seek professional advice. With careful planning and independent advice, it is possible to legally avoid a significant amount of inheritance tax in the UK.
In general, taxes in Spain aren’t an easy thing to understand. This is made worse by the fact that the Spanish government changes tax rules pretty often. So keeping up to date with Spanish taxation can be challenging, particularly if you are an expat and have multiple income streams and assets abroad.
Hence the most important advice is to consult a tax specialist. It will save you a lot of time going through paperwork and will give you peace of mind that no nasty surprises will be ever coming your way from the Spanish tax office.
Spanish tax year and reporting deadlines
The Spanish tax year runs from 1 January to 31 December.
As a tax resident of Spain, you are required to complete a resident tax declaration (your personal income tax declaration) every year.
However, it’s not as simple as that. Depending on your income streams, and your own occupation status (whether you are a pensioner, a sole trader, self-employed, or a company owner), there are different reporting requirements and deadlines.
There are also various options for how you file your declarations: in most cases, you can do it online, over the phone, or in a traditional way – filling out paper forms.
The easiest way to make sure you do everything correctly is to delegate all the work to a professional accountant. Or at the very least get professional advice on how to DIY tax reports correctly.
Remember that failure to comply can result in hefty fines and penalties, so it’s best to try to keep your taxes in order.
Declaring offshore assets to the Spanish Tax Authorities
If you have assets worth more than €50,000 anywhere in the world (for example, your house in the UK), you have to report them to the Spanish Tax Authorities.
You do this using something called the 720 Asset Declaration Form. It is used for residents of Spain to record their assets in other countries.
The authorities do not collect any tax from the form directly, and they claim it’s for informational purposes only and to help them prevent tax fraud.
The deadline for filing is the 31st of March. You only have to submit the 720 form once; however, if your circumstances change, you will have to do it again.
What you have to declare on the 720 form
Well, basically everything you have outside Spain in excess of €50,000, including:
- Assets held in any bank accounts with a total balance over €50,000
- Shares, bonds, life insurance policies, pension plans, annuities, etc. with a total value over €50,000
- Business premises or/and property with a purchase value over €50,000
If your circumstances change, you will have to file the 720 form again. It’s worth keeping in mind that the value of your assets fluctuates depending on exchange rates, and this may make a considerable difference to how much your offshore assets are worth.
Fines and penalties for non-reporting
When the 720 asset declaration form was first introduced, not many expats appreciated the seriousness of Spanish Authorities.
However, the heavy fines and penalties for non-reporting, late reporting, and misinformation are now bringing it home. The submitted forms are investigated and in some cases in great detail.
It’s better to submit your 720 late than not do it at all. The fines for late submission aren’t as extortionate as the penalties for being found out.
So, if you have become a Spanish resident and it’s your first year, or if there’s a change in the value of your offshore assets, you must file the 720 form between 1st January and 31st March of the same year.
Thus, you will ensure that you never get a letter from the Spanish Tax Authorities concerning your 720 declaration form.
How much tax will I have to pay in Spain?
Spain has tax thresholds, according to which residents pay income tax:
Spain income tax rates and allowances for 2018/19
The general income tax rates are made up of the state tax rates and the regional tax rates. Regional rates are set independently by each particular Spanish Autonomous Community so they vary a little across regions.
State income tax bands (without regional adjustments):
Personal tax allowance €5,550
|€5,550 – €12,450||19.0%|
|€12,450 – €20,200||24.0%|
|€20,200 – €35,200||30.0%|
|€35,200 – €60,000||37.0%|
|€60,000 or more||45.0%|
65 years and over – €6,700
75 years and over – €8,100
Capital gains and dividends tax rates
Dividends up to €1,500 are tax-free
€0 – €6,000 – 19%
€6,000 – €50,000 – 21%
Greater than €50,000 – 23%
For families with children the following child allowance applies if a child/children are under 25, living with the parents and have an income under €8,000:
First child – €2,400
Second child – €2,700
Third child – €4,000
Fourth and additional children – €4,500
Additional for a child under 3 – €2,800
Wealth tax in Spain
If your wealth is over €700,000, you will be liable for a wealth tax of 0.2–2.5% on net assets. Residents pay tax on worldwide assets, while non-residents pay tax on their Spanish assets only.
Spanish local council tax
IBI (Impuesto Sobre Bienes Inmuebles) is a council tax in Spain. It is collected annually by your town hall to pay for local services.
The tax is calculated based on the rateable value of your property (the valor catastral), which takes into consideration the size, condition, location, title, lease details, cost of improvements, and construction cost of the property.
The tax rates vary a lot depending on your location and can be between 0.4% and 1.17%.
It is important to pay IBI on time. If you miss a year then this might not be chased up immediately but a record will be held against your property. It might cause trouble later when you want to sell or bequeath it.
Spanish succession tax and inheritance
If you live in Spain, your or your family’s succession tax depends on where in Spain you reside. Regional inheritance rules – where they exist – are almost always more beneficial than the state rules.
In some regions, there’s a 99% succession tax relief and substantial exemptions for spouses and descendants. However, the local taxes apply only to habitual residents who have lived in the area for five years or more. Otherwise, the state rules apply.
Under the state rules, an inheriting spouse, for example, can have an allowance of just €15,956 before paying tax.
Children or grandchildren under the age of 21 would receive an additional tax-free allowance based on their age.
Any inheritance above the allowance amount for the relevant heir would then be taxed, starting from 7.65% up to 34%.
The actual tax rates also depend on the relationship between donor and beneficiary.
The calculations are complex and vary according to the circumstances and exact habitual residence of the deceased and the heirs, so taking legal advice is recommended.
Cross-border estate planning is a complex process and requires professional advice. If you are concerned about your Spanish and UK estate and want to protect family assets, seek independent advice.
If you are retiring to Spain from the UK, read our ‘UK pensions in Spain‘ guide to understand what pension options you have and how you can reduce taxes on your retirement income in Spain.