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.

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.

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.

The UK press and expat papers in Spain have all carried articles warning that thousands of Brits living in the EU will have their UK bank accounts closed by the end of the year.

In the UK the The Daily Mail, The Guardian, The Times and The Daily Telegraph to name a few, have all detailed how banks including Lloyds, Barclays and even the Queen’s bankers Coutts, will be closing expat accounts and withdrawing services.  The reason for this is the UK’s failure to agree a post-Brexit trade deal to allow cross border Financial Services to continue.

Banks are having to make decisions as to which EU countries to pull out of and which to continue operating in.

The bank, which is Britain’s biggest banking group, started writing to its customers living in these countries since August, telling them that their UK bank accounts would be shut on December 31.

Barclays also confirmed that its banking and credit-card customers living in the EU had started receiving letters.

Why Are UK Banks Closing Accounts & Withdrawing Services for Brits Living in the EU?

Modelo 720 is the form which has to be completed by Spanish residents to declare overseas assets to the Tax Office.  The requirement applies to anyone who lives in Spain, who owns, or is beneficiary to overseas assets worth €50,000 or more.

The Modelo 720 overseas assets reporting requirement, was introduced to clamp down on tax fraud being committed by Spanish residents who have acquired, or intend to acquire, assets, and or hide wealth outside of Spain in order to evade paying tax.  You can read more about this in our article – Overseas Assets Declaration.

The TIE, Tarjeta de Indentidad de Extranjero, is the Spanish identification card for citizens from third countries (non-EU) who reside in Spain.  Since July 2020 British UK nationals moving to Spain have also had to apply for this card, as the UK is no longer in the EU.

If you already have a Spanish residency certificate, you do not have to apply for the TIE, but you can voluntarily exchange your certificate for the card.

Both the Spanish and UK Government websites and their Consulate pages confirm that the green residency certificate, A4 and credit card sized, remain valid for UK nationals and prove the holders residency and retained rights under the withdrawal agreement, having settled in Spain before the UK left the EU.  However considering the issues some have encountered during the recent Covid19 travel restrictions, e.g. multiple incidences of authorities and airlines not understanding the rules and denying certificate holders entry to Spain, it is advisable to get the TIE.

Aside from this the card is a full bio-metric national ID card, therefore so much more useful than the paper certificate.  The card also has the words ARTICULO 50 TUE, a reference to note that the holder was resident in Spain before the end of the transition period and has retained rights.

For a long time private holiday rental regulation in Andalucia was uncontrolled.  This changed at the beginning of 2016, when the regional government, Junta de Andalucia, brought in a host of regulations to conform with changes in national legislation.

Properties under Holiday Rental Regulation in Andalucia

Holiday rental regulation in Andalucia applies to:

• Individual privately owned properties where the complete dwelling is let for holiday purposes.
• Rooms in individually privately owned properties, in which the owner resides, e.g. bed & breakfast, Airbnb.

The maximum capacity, i.e. number of beds/people that can stay in the accommodation is limited by the occupation license, subject to overall maximum of 15 beds for complete dwellings and for bed & breakfast type arrangements – 6 beds, with no more than 4 beds in any one room.

Owners of holiday rental properties that fall into these categories, firstly need to list their property with the Registry of Tourism of Andalusia (RTA), in order to meet the first part of the regulatory requirements; secondly, meet the requirements within a year. During this time owners will not be allowed to host tourists/rent accommodation until fully compliant.

The Requirements of Holiday Rental Regulation in Andalucia

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.