‘I’m an expert – key tax for UK expats in Spain – including one always forgotten about’ (Image: Tax Natives)
With the number of Britons relocating to Spain steadily increasing every year, more face the risk of overlooking crucial tax rules, which could lead to severe penalties.
The Spanish tax system is complex, with details varying based on the type of tax and region.
Autonomous communities have the authority to set their own tax rates and exemptions, contributing to the intricacy and making it even more important for expats to prepare “well in advance”, an expert has said.
Andy Wood, founder and director at Tax Natives told Express.co.uk: “It is probably stating the obvious that there are significant differences between the tax systems of the UK and Spain.
“So, if you’re upping sticks and moving overseas, you need to consider Spanish tax arrangements well in advance.
Understanding the date a person becomes a non-UK resident is “pivotal”, according to experts (Image: Getty)
Residence status
According to Mr Wood, understanding the date a person becomes a non-UK resident is “pivotal”. He explained: “The UK residence rules are complex and it will often be the case that a departure date is not the same date at which they become non-resident status.
“As we know, in the UK, we have a tax year running from April 6 to April 5. We are rather odd in that respect. In Spain, the tax year more sensibly aligns with the calendar year.
“The point of relocation in the year to Spain determines tax residency. Moving earlier in the year may lead to full-year residency status, causing a dual residency scenario between the UK and Spain.”
This can result in tax obligations in both countries, though Mr Wood said Spain might credit UK taxes on the income and gains.
He added: “Strategically delaying relocation until the latter part of the year might establish Spanish residency from January 1 of the following year. Under the UK’s split-year residence rules, this might create a brief period with no residency in both the UK and Spain, offering a window for tax planning.”
The Spanish tax system is complex, with details varying based on the type of tax and region. (Image: Getty)
Income tax and pensions
Income tax rates in Spain, notably on general income and savings, can be higher than those in the UK.
Mr Wood said: “Spain’s regional and state rates collectively determine tax obligations, which vary across regions. For instance, Andalucía and Cataluña impose higher rates, up to 47 percent and 50 percent, respectively, on incomes exceeding €300,000 (around £263,000).”
According to Mr Wood, Spanish tax treatment typically covers UK pension income, excluding Government service pensions. This requires an application to HMRC for gross payments.
He said: “Structuring pensions can optimise taxation by potentially categorising income as savings, taxed at lower rates. Under Article 17 of the double tax treaty between the UK and Spain, pension income will be taxable in the country of residence only. So, other than for Government and similar pensions, even a UK pension would be taxable in Spain.”
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Property
Retaining a UK property post-relocation can also impact residency and tax implications, Mr Wood said.
He explained: “Rental income from UK properties is subject to taxation in both countries, often at general income tax rates in Spain.
“Selling a UK home while a tax resident in Spain incurs capital gains tax in both countries.”
Mr Wood said double tax relief will be available in most cases, but the practical effect is that people usually pay the higher of the two rates. However, he noted: “This can be a bit of a faff.”
Alastair Johnson from the blog Moving To Spain told Express.co.uk: “There are no standard tax rates across Spain, each autonomous region sets tax rates, and some taxes are set at a local level. So, do your research, there are significant differences depending on where and what you purchase.
“A new build house attracts two additional taxes. VAT (or IBA in Spanish) on the transaction – you’ll need an additional 10 percent on top of the purchase price.”
Secondly, AJD. Mr Johnson said: “This varies by region – for example, you’ll pay zero percent in The Basque Country, 0.75 percent in Madrid, and 1.25 percent in Catalunya.”
Meanwhile, Mr Johnson said: “Pre-owned homes are liable for a Property Transfer Tax (ITP) – this ranges from four percent in The Basque Country to 10 percent in Cantabria, Catalunya, and Galicia.”
Spanish wealth tax
Spain imposes an annual wealth tax on global assets, with varying allowances and rates across Autonomous Communities.
Mr Wood said: “Tax-efficient investments can minimise liabilities. Both residents and non-residents are subject to paying Spanish wealth tax. Someone who is resident in Spain will pay tax on worldwide assets.”
UK inheritance tax and Spanish death taxes
Mr Wood said: “This is always the one that expats forget about.”
UK inheritance tax is based on domicile, which refers to the country a person treats as their permanent home. As such, Mr Wood said: “If you remain UK domiciled, then you will pay UK IHT on worldwide assets. Domicile status is rather sticky and difficult to lose.”
In addition, Mr Wood said: “The expat will need to be au fait with Spain’s version of inheritance tax.”
However, Spanish IHT rules are notably complex and, along with the rest of the taxation rules, seeking financial advice from an expert can be beneficial.
