We first published this article in February last year.  At that time Brexit had finally just ‘been done’, and the transition period begun.  Through 2019 and 2020 unprecedented numbers of British nationals formally registered as resident in Spain to secure their residency rights under the Withdrawal Agreement.  The numbers of residency applications spiked in the last months of 2020.  Immigration reported receiving many thousands of last minute applications in December alone.

This year we’ve been receiving a lot of queries this year relating to Spanish residency and tax in Spain.  For many it seems, the main priority was getting residency with the consideration of tax, put to one side on in some cases completely overlooked.

So we’ve refreshed and republished this article, and it will hopefully provide answers to most general questions that you may have about tax in Spain, if you’ve recently taken up residency in Spain.

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, which means 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:

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.

As of January 1st 2018, significant changes to the inheritance tax allowance in Andalucia, came into effect. These changes affect both expats who reside in the region, and non-residents who own assets such as holiday homes here.

The generous move by the regional Government of Andalucia raises the inheritance tax allowance to 1 million euros, where the heirs receiving the assets of a deceased direct family member, are classified as falling into Kinships Groups I and II, i.e. spouses, children, grandchildren and parents.  For this group of beneficiaries, there will be no inheritance tax (Impuesto sobre Sucesiones y Donaciones), when the sum of the assets received does not exceed this new 1 million threshold.

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

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

Whilst the law is aimed at deliberate high level tax evaders, the fact it allows penalties to be imposed simply for non-declaration of overseas assets, means that expats and other foreigners living in Spain, who are likely to have such assets, really need to understand the implications of this law, make their declaration correctly, so as not to fall foul of this rather intrusive legislation.

The overseas assets declaration is an information gathering exercise, and not a tax return, so someone making or considering an overseas assets declaration should be aware that they are not declaring assets so that they can be directly taxed. They should however be mindful that declaration of certain types of assets, may make the authorities aware of sources of income or capital gains for example, that could be deemed to be subject to tax in Spain. It is also important therefore, to make sure that assets are organised efficiently in order to avoid paying additional tax or amounts unnecessarily.

An overseas assets declaration is made by completing a form known as ‘Modelo 720’. The deadline for submitting the form is the 31st of March.  Generally speaking the declaration only needs to be made once, as subsequent declarations are only necessary if assets have been acquired, or disposed of, or if existing declared assets have increased in value above a given amount.

The legal requirement to make an overseas assets declaration in Spain and the potentially high penalties for not doing so, brought a massive change for both foreign and Spanish nationals resident in Spain. Some have even made the decision to leave the country as a result – these were  primarily those whom the law is aimed at – individuals for whom making the declaration would implicate them in tax avoidance or indeed evasion.

Whilst this law and reporting requirement might seem intrusive, it is in reality only a small move by the authorities, in their steps to counter the country’s rampant tax evasion. For British expats, in particular retirees, Spain can actually be tax efficient. If you have concerns relating to the overseas assets declaration, we recommend that you consult a relevant and suitably qualified professional.