Understanding tax in Spain is essential, not just if you live here, but also if you own a property in Spain.

The Spanish tax year runs from 1st of January to 31st December.  Residents have to complete their income tax return, declaracion de la renta, by 30th of June the following year, and non-residents have until 31st December.

Spain has a double taxation treaty with the UK, US and many other countries so if you are a foreign national from one of those countries living in Spain with income from your home country you can avoid getting taxed twice on the same income.

Resident or Non-Resident for Tax in Spain?

You are considered to be tax resident in Spain if any of the following apply:

When buying holiday money or sending money abroad, many banks and brokers include hidden fees and or a mark-up in the exchange rate.  Not surprising, a recent study into international money transfers and payments found that 75% of consumers do not know about, or do not understand currency exchange rate mark-ups.

In recent years specialised currency exchange companies have broken the monopoly on the supply of currency exchange services.  Banks and high street exchanges are no longer the go to choice for changing currency.

These currency exchange companies deliver much more competitive exchange rates to consumers, more personalised service, and faster transfer times than banks offer. It’s no surprise than savvy overseas property buyers and expats choose these companies to get a better deal.

A high street bank may seem like the easy or convenient option, and may be your choice through habit, however using a specialist foreign currency exchange provider is just as easy and more importantly works out much cheaper!

Andalucía has become one the top 3 regions in Spain with the least taxes.  On the 21st September 2021, the regional president, Juanma Moreno, announced the scrapping of Wealth Tax in Andalucía.

The tax has accounted for just 0.6% of income for the regional government (€95m annually), and Moreno believes the change will have a very positive impact on increasing revenue by attracting investment.

A large number of the highest wealth tax payers left Andalucía in 2020, resulting in a loss of income of estimated at around €18m (€3.5 million euros in wealth tax and €14 million in personal income tax).

The president is hoping that removing Wealth Tax will encourage people with high income who spend long periods in Andalucía, but are not tax resident, to make it the region their permanent home and pay tax there.

Moreno’s estimate is that the tax reduction will attract 7,000 new residents, the result being that the 0.6% of income lost will be far exceeded, through income tax and other indirect taxes collected.

As wealth tax hasn’t been abolished, the annual tax return still has to be done according if, according to the law, ‘ . . . the value of their assets or rights, determined in accordance with the tax regulations, is greater than €2,000,000 euros.’  However 100% tax relief will be being granted to zero the liability.

New ‘Large Fortune’ Tax Proposed

The good news of Andalucía’s Wealth Tax reform, was shortly muted by news that the Spanish government plans to impose a temporary national ‘tax on large fortunes’.  The tax is yet to be approved by parliament, but is is expected to be implemented for 2023 and 2024 and will affect individuals with net wealth above €3 million.

Since wealth tax is collected by the regional Government, it was confirmed that any wealth tax paid would be offset against any ‘large fortune tax’ bill.  As Andalucía now give 100% wealth tax relief, residents in Andalucia won’t have to pay wealth tax, however if their net assets equal €3 million or more, they would have to pay the ‘large fortune tax’.

The proposed rates are as follows:

• 0% up to €3 million of net wealth
• 1.7% between €3 million and €5 million of net wealth
• 2.1% between €5 million and € million of net wealth
• 3.5% for a net wealth of over €10 million

According to the information provided by the Spanish Ministry of Finance, the tax on ‘large fortunes’ tax will affect 23,000 taxpayers and raise €1.5 billion in revenue, which will be used to finance policies to support the most vulnerable who are affected by the recent steep rises in cost of living.

Aside from Local (IBI), Capital Gains, Wealth and Inheritance Taxes, non residents must pay tax on any income they receive that arises in Spain.  Income tax for non-residents is charged at a fixed rate of 19% if you are a resident in an EU or EEA country  For non-residents from the rest of the world, the rate is 24%.  This includes a non residents property tax.

Non Residents Property Tax on No Income

If you own a property in Spain and earn rental income from it, then this has to be declared.  What some non-resident owners of property in Spain are not aware of, is that they are also required to pay tax, regardless of whether the property is let out or not!

This tax is often referred to as an imputed income tax. Spanish tax legislation for some reason assumes that a non-resident owner derives some sort of benefit from owning property and provides a system to tax it.

When changing tax residency from the UK to Spain, there are potentially costly mistakes that can be made due to not taking advice, or getting the wrong advice, as well as advantages that can be achieved with well advised planning.

Our legal, financial and tax professional associates assist our client with all the formal matters related to taking up residency in Spain, in particular Spanish tax planning.

Tax in Spain

Most are aware that the Spanish tax system is very different to that of the UK.  Income tax allowances vary depending age and whether you have dependents.  Tax rates for earned income are higher, and there are different rates for other types or income, such as that from investments or from letting residential property.

You have your non-lucrative visa, and you’re on your way to Spain to start your new life in Spain.  Congratulations!

You now start the process of getting yourself registered and set up in Spain.

Here’s our rundown of all the essentials that you’ll need to get done in your first few months of your non-lucrative residency.

Click / tap on the tabs to expand.

We usually arrange the set up of the digital certificate at the same time as the padron, as it requires and ID verification which can be done at the town hall.

With your TIE in hand you can move onto getting other things done which require proof that you are resident in Spain.

Healthcare

Private Medical Insurance – If you have private healthcare, check where the Dr’s and medical centres are in your area that are on your policy providers list, so that when you need attention, you know where to go and don’t go one which isn’t covered by you provider.

S1 NHS Certificate – If you have the S1, you can complete the application to register it with the social security as soon as you get your TIE.  The registration takes around 3 months, and one that is done you can enroll at your local healthcentre ‘centro de salud‘ and GP.

In either case, locating an English speaking medical centre or GP if there is one in your area, will be useful when you need medical attention.

Financial & Tax

Aside from getting banking and currency arrangements set up, there are a few things financial and tax that you need to do or be aware of.

Preparing for Your Non-Lucrative Residency Renewal

If you only just arrived in Spain with your non-lucrative visa, it mighty seem a bit premature to be thinking about the renewal, but it will come round quickly, and there are some key things to be aware of during your first year to help you get a speedy approval when you renew.  The main things that hold up renewal applications are:

Lack of Evidence of Living in Spain

Immigration expect to see a day to day living expenditure in Spain in you current account, preferably a Spanish bank account.  Use you bank card to pay for everything you spend in Spain in your first year.

Missing Border Control Stamps

Make sure that if you visit the UK or travel outside of the Schengen area and are stamped out, that you get stamped back in when you return.  Keep boarding passes in cases stamps are missed.

Taxes in Spain Not up to Date

The most common cause of an issue here is unpaid non-resident property tax where renewal applicants owned a property as a holiday home before getting their non-lucrative visa, and were not even aware that they should have been paying this tax.

Gap in Healthcare

This can happen when changing Private Medical Insurance provider or switching to state healthcare, e.g. via the S1.  It is important to make sure you do not have any gap in your healthcare cover.

This list is intended as a basic guide for the main things that most new non-lucrative residents need to do and think about in their first 6 months in Spain.  Of course everyone’s situation is different and along with everything here there will likely be many other things on your getting set up in Spain checklist.  The above is hopefully a good starting point for you.

Since the introduction of legislation in 2012, (LEY 7/2012, de 29 octubre, de prevención y lucha contra el fraude fiscal), Spain has required all Spanish residents to make an overseas assets declaration, notifying the authorities of the worldwide assets that they own or control.

Under the Law, failure to make an overseas assets declaration, or submission of an inaccurate one, would result in costly penalties.  Unreported overseas assets that were later discovered by the authorities, were treated as undeclared income on which tax should have been paid. The fines and penalties for such could amount to more than 150% of the undeclared asset value.

Whilst the law was aimed at deliberate high level tax evaders, the fact it allowed penalties to be imposed simply for non-declaration of overseas assets, meant that expats and other foreigners living in Spain, who are likely to have such assets, could fall foul of this rather intrusive legislation.

Indeed many received harsh penalties, simply for making the declaration late or making a mistake on the form, despite having legitimately acquired their overseas assets BEFORE taking up residency in Spain.

Understanding and planning fiscal residency and Spanish tax is a very important when making the transition to become a resident in Spain.  Tax in Spain is very different to the UK, and has become even more complicated since the UK left the EU as the way certain types of income are treated changed.

Here we provide an overview of the tax related requirements and key points that most need to consider when becoming a Spanish resident.

We wrote an article recently detailing that many British nationals living in Spain and other EU countries, have received letters from their UK banks telling them that their accounts will be closed at the end of 2020.  This due to no Brexit trade deal having been agreed.  

That article explained the impact of no Brexit trade deal on financial services providers in the UK.  After 31st December 2020, these service providers will not legally be able to carry on providing services to their expat clients who reside in Spain or other EU countries.

The Brexit transition period ends at the end of the year, and with it the financial services licence EU ‘passporting’ rights which allow UK firms to provide financial services in EU countries. 

As a result many providers, including Financial Advisers, are withdrawing their services as advisers where their client is a UK national living in the EU.  It is only a small minority of financial service providers that have taken the necessary steps to establish themselves in the EU so they can continue providing their services. 

It is therefore quite likely that from 2021, most expats living in Spain or other EU countries will not be able to receive advice or services from their UK Financial Adviser.  Clients and advisers alike who are affected by this, should be acting now to make alternative financial arrangements. 

ISA’s are very tax efficient ways to save or invest, as you pay no tax on savings interest, (not that you get any these days), and virtually no tax on investment returns. They are therefore usually the first type of saving or investment account that people will have.  For this reason, and the fact that there is a generous annual allowance to save into them, you like many other may have built up sizeable amounts in ISA’s.

You may also have reached, or be approaching retirement, and relying on this tax efficient ISA nest egg, to provide extra income to supplement your pension.  For some, an ISA may even be their ‘pension’.

ISA’s and moving to Spain

So if you’re moving, or have moved to Spain, can you keep your ISA?  The short answer is yes.  According to gov.uk:

If you open an Individual Savings Account (ISA) in the UK and then move abroad, you can’t put money into it after the tax year that you move (unless you’re a Crown employee working overseas or their spouse or civil partner).

You must tell your ISA provider as soon as you stop being a UK resident.

However, you can keep your ISA open and you’ll still get UK tax relief on money and investments held in it.

You can pay into your ISA again if you return and become a UK resident 

Great – you can keep your ISA, and continue to benefit from it’s tax efficiency!  Well not exactly.  When you move from the UK to Spain, you also move from the UK tax system to Spain’s tax system.  So you will continue to get UK tax relief, however your ISA will (or should), get Spanish tax treatment.