Spain and Taxation: Busting the Myths
There are estimated to be one million Britons living in Spain, with UK expatriates making up the largest group of European foreign nationals. Many Britons arrive with certain misconceptions around the tax and financial make-up of the country.
The foreign perception of the Spanish tax system is made up of two, connected parts; it is regarded as a high-taxing jurisdiction, but where it is commonplace to exist below the tax radar, or not declare the full degree of one’s wealth.
As is often the case with misplaced perceptions, they often arise out of exaggeration, mis-information or are out of date.
In more recent years, the Spanish tax authorities, or Hacienda, have been working extremely hard to collect the taxes, making it much more difficult to avoid declaring your real overall wealth.
One of the most common areas of tax avoidance has been property sales, which was believed to account for up to a fifth of the entire Spanish underground economy. In the past it was customary to declare a lower sale price than the actual price (with the difference paid in cash), to avoid capital gains and other property taxes.
The Hacienda cracked down on this practice by using a specially designed program which links their computers with those of the public notary and property register offices throughout the country, comparing sales of similar properties in the same area to establish if a sale value was realistic.
Spain has also suffered from the non-declaration of overseas assets. They have worked to rectify this on both an international and domestic basis.
From 6 April 2001 Spain, along with 30 other nations agreed to exchange information on accounts held in one jurisdiction where the account holder resided in another. In 2005 the European Savings Directive added withholding tax powers, and the upcoming OECD automatic exchange of information will enable the Spanish authorities to obtain whatever they need, to compare to what is being declared to them by the individual.
Domestically, Spain has improved considerably and in particular on Wealth Tax, where the current version has been in place since September 2011. For Spanish residents this requires the completion of a Wealth Tax return, showing worldwide chargeable assets. In 2013, they introduced, the Modelo 720, a declaration of non-Spanish (offshore) assets, where the individual values exceed €50,000.
Since the summer of 2014, the Hacienda has been comparing the Wealth Tax and Modelo 720 returns for discrepancies, or compared to information they already hold and receive from other countries. As a result they have raised thousands of enquiries.
The modernisation of the Spanish tax administration process has not only significantly increased their tax-raising capabilities, but also gone a long way to dispelling the myth that Spain is laid back in respect to tax collection.
With regard to the other myth, is Spain really a high taxing jurisdiction? It is certainly the case for those very wealthy families and high earners. Spanish residents are taxed on their world-wide ‘general’ income (basically anything other than “savings income”), at progressive scale rates. The income tax scale rates are made up of the ‘State tax rates’ and the ‘Community tax rates’ (which are set independently by the particular Autonomous Community).
Generally, the top combined rate of tax is 47%, but can be lower or higher with adjustment to the Communities element.
The world-wide savings income of residents and the Spanish savings income of non-residents have been taxed since 2012, at 20% (first €6,000), 22% (next €44,000), and 24% thereafter.
But it is the dreaded Wealth Tax which can really impact the wealthy. Spain has imposed a maximum rate of 2.5%, but again where the Communities can increase the rate (as an example Andalućia is 3.03%), on assets valued over €10,695,996.
However, simple arrangements can significantly reduce the overall tax payable.
Spain allows you to declare your income as an individual, or alternatively jointly, where the total income is combined. This can be of particular benefit where one spouse is in receipt of the majority of income (perhaps where a pension is payable to the spouse who previously worked), and would otherwise suffer a much higher scale rate of taxation if taxed individually.
For those who live off savings, the highest tax rate is roughly half of the highest rate applicable to general income. Also, much like the situation in the UK, by utilising a Spanish compliant investment bond as an investment holding vehicle, there are considerable tax saving benefits to be had.
No tax is payable if no withdrawals are made from the bond and even when a withdrawal is taken, it is only the proportion of “profit” deemed as included in the proportional withdrawal which is taxable. A withdrawal of €11,000 from a bond with an original investment of €100,000, and worth €110,000 12 months later has a taxable element of €1,000. With a savings income rate of the maximum of 24%, a tax liability of €240 would arise on the total withdrawal of €11,000 is only 0.022% of the total.
If the €100,000 had been held directly, then the increase in value of €10,000 over 12 months would have suffered tax of €2,400.
These practices can also have particular benefits in reducing the Wealth Tax exposure substantially.
An unexpected journey
Many UK expatriates find themselves eventually returning to live in the UK. In this situation the offshore investment bond has real tax savings through encashing the bond soon after returning to the UK and benefitting from time apportionment.
This eliminates the profit on the bond which relates to the period of non-UK residence. If the bond was taken out after leaving the UK, and is encashed soon after returning, then only the profit relating to the period of UK residence, when compared to the whole will be taxable.
With the considerable differences in property values, and improvement in the exchange rate, Spain is again becoming an attractive location for Britons to reside. The advances made by the Spanish authorities in modernising their tax system, particularly around declaration and tax collection, will not present any problem to the UK expatriate used to the organised tax system in the UK with its strong levels of compliance.
If a UK expatriate chooses to take advice from a suitably qualified firm, well versed in the interaction of the UK and Spanish tax systems, and how to optimally arrange their tax and financial affairs from a Spanish perspective, then not only will they have peace of mind they are being fully compliant, but they will are also be minimising their tax exposure wherever possible.
Blevins Franks has been providing specialist, professional financial advice to British expatriates for decades, and is an international tax and wealth management adviser to UK nationals living in Europe, with 10 offices in Spain alone.