Tax Information in Spain


Tax Information in Spain – Property taxes for non-residents

Tax Information in Spain – The tax you pay, and the declaration you have to make, largely depends upon whether you rent out your property or no. Foreigners may be surprised to discover they are expected to pay income tax even if they don’t rent out their property in Spain.

Income tax for non-residents who do not rent out their property (standard declaration)

Spanish name Impuesto de la renta de no residentes, declaración ordinaria (IRNR)
Description You pay this version of income tax in Spain if the following conditions apply: 1) You do not reside in Spain, 2) You own property in Spain, 3) The property is exclusively for personal use and you do not rent it out, 4) You have no other source of taxable income in Spain. Although you do not earn an income from the property, in the eyes of the Spanish tax authorities you still derive a benefit from owning a property in Spain and therefore have to pay an imputed income tax.
Tax base and rate Tax base: 2% of the cadastral value of the property (found on the IBI receipt), or 1.1% if the cadastral value has been revised since 1st January 1994. Tax rate 2016: Residents of EU, Iceland and Norway 19%, all others 24%.
Form Use general section 210-A and indicating income type 02.
Dates Presented before the 30th June each year. For example you have from 1st January to 30th June 2006 to declare tax on income during 2005.
Example Cadastral value of property = 200,000 Euros
Base = 2,200 Euros
Tax = 19% x 2,200 Euros = 418 Euros

Wealth tax for non-residents (Patrimonio)

Spanish name Impuesto sobre el Patrimonio (Patrimonio)
This tax was eliminated as from 01/01/2008, then reintroduced in September 2011 for the years 20011 & 2012, then extended to 2013, with several important changes and other issues that are explained in depth in the section on the Spanish Patrimonio wealth tax
Description Everyone who owns property in Spain (residents and nonresidents alike) has to pay an annual wealth tax based on the net value of their assets in Spain after permitted deductions, such as mortgages. This tax is collected by regional governments.
Tax base and rate The tax is based on the net value of your property (less mortgage, if any) or another value deemed appropriate by the tax authorities, with a tax-free allowance of €700,000. The tax rate works on a sliding scale with marginal rates starting at 0.2% and rising to 2.5%.
Form 714
Dates Presented in June for previous calendar year.
Example Depends upon the autonomous region where your property is located. No wealth-tax to pay in most regions if the net value of your property does not exceed €700,000

Income tax for non-residents who do not rent out their properties, combined with the wealth tax

Spanish name Impuesto de la renta de no residentes, y Patrimonio (IRNR y Patrimonio)
Note: See changes to the ‘patrimonio’ wealth tax above. Until the wealth tax situation is clarified it is hard to say if this form will be brought back. But it is likely that, for most non-residents, the form 210 (see above ‘Declaración ordinaria Impuesto sobre la Renta de no Residentes’) will suffice for 2011 and 2012.
Description Under certain conditions non-residents can pay the two taxes mentioned above (IRNR and Patrimonio) in the same declaration and using the same form. Therefore this is not an extra tax, just a more convenient way of paying the two taxes previously mentioned. To present these taxes together in the same form you have to meet the following conditions: 1) You do not reside in Spain 2) you only own one property in Spain, and 3) this property is exclusively for personal use and is not rented out.
Tax base and rate The value of the tax is the sum of the two taxes as explained above.
Form It used to be Form 214 (Cancelled in 2008)
Dates Presented any time during the following calendar year, deadline 31 December. So you present in 2013 for taxes in 2012.
Example N/A

Income tax for non-residents who rent out their property

Spanish name Impuesto de la renta de no residentes, declaración ordinaria (IRNR)
Description If you 1) do not reside in Spain 2) own property in Spain and 3) rent out your property, you have to pay income tax on the rent instead of the imputed tax described above. (If you rent out your property to a Spanish company the company will deduct tax at source and pay it to the tax authorities. Under these circumstances a nonresident is not obliged to present the forms 210 or 215.)
Tax base and rate The tax base is the net rent, deductions of expenses allowed (since 01/01/2010), and the Tax rate in 2016: Residents of EU, Iceland and Norway 19%, all others 24%
Form 210 (use general section 210-A and indicating income type 01) or 215
Dates 210 = Monthly, one month after rent is due
215 = Quarterly, in the first 20 days of the month following the end of the quarter.
Example Annual net rental income of 20,000 Euros
Tax @19% = €3,800

Municipal property tax

Spanish name Impuesto sobre Bienes Inmuebles (IBI)
Description This tax is the Spanish equivalent of the rates and is collected by local government.
Tax base and rate The tax base is the cadastral value of the property and the rate varies from 0.405% to 1.166% depending upon the region. The following table shows rates per regions, and the year in which the cadastral value was lasted updated.
ibi-por-region-enero-2013
Form N/A
Dates Payment period determined by the local authority.
Example Varies, but 200 Euros – 800 Euros per annum will be common.

Notes

Cadastral value The cadastral value (valor catastral) is the rateable value of a property as determined by the municipal government. The cadastral value is usually much lower than the market value of the property. The cadastral value of a property is identified on municipal property tax receipts (IBI).
Joint ownership Bear in mind that if a property is owned by a married couple or shared by various individuals, in many cases they will be treated as separate taxpayers and must file returns separately.
Capital gains tax When they sell-up, non-residents have to pay capital gains in Spain on the difference between the sale and the acquisition value of their property.

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Spanish Capital Gains Tax Rates on Property
When you sell a property in Spain you have to pay capital gains tax on any profit after taking into account all deductions and allowances.

Capital gains tax rates in Spain

Capital Gains Tax (CGT) rates in Spain have changed in recent years. The following tables show the present CGT rate (final column to the right), and also give previous tax rates to help clarify the confusion surrounding this topic. Most of the websites you will find doing an internet search do not give you the latest, updated tax rate.

Capital Gains Tax on Spanish Real Estate

The following only applies to E.E.A. and EU-residents. Residents from outside the European Union pay 24% in general (there are some exceptions).

GGT rates on real estate assets sold in Spain by EEA/EU residents have changed over the years as follows (tax rate at time of sale):

Period Up to 31/12/06 Up to 31/12/07 2008 2009-2011 2012-2014 2015 2016
Rate 35% 25% 18% 19% 21% Up to 11-Jul 20%
From 12-Jul 19.5%
19%

19% is the current rate, but it’s more complicated than that. EEA/EU vendors who are NOT resident in Spain at the time of sale pay a flat rate of 19% CGT, but EEA/EU vendors who ARE resident in Spain at the time of sale pay a sliding scale starting at 19%:

Capital Gain in Euro CGT Rate
Fist €6,000 19%
€6,000 – €50,000 21%
Above €50,000 23%

You can check the latest rates at the Tax Agency website here.

3% retention or withholding tax when vendor is non-resident

When the vendor does not reside in Spain, the buyer has to pay 3% of the price to the tax authorities as a CGT withholding tax retention (to cover the vendor’s capital gains liability), so if you are a non-resident vendor you don’t get your hands on all the money until long after the Spanish tax man is satisfied that all tax has been paid.

Stories abound of non-residents having problems reclaiming the capital gains retention with the tax authorities refusing to believe they have sold at a loss, or dragging their feet about returning any funds due, sometimes for years. See what others are saying about this subject in the forum discussions on the Spanish 3% CGT withholding / retention tax.

+ Agencia Tributaria reference page (English)

When buying property in Spain, always keep digital and hard copies of all invoices related to your purchase like legal fees, notary fees, and property register fees. Likewise, if you ever do building work on the property once you own it, keep copies of all licences and invoices. You may be able to offset these expenses against capital gains when you sell, and so reduce your Spanish capital gains tax on property sales.

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Spanish income tax for expatriates
The key things expatriates need to know about becoming a taxpayers in Spain

Do you need to pay income tax in Spain?

Well, if you spend more than 183 days in Spain during the tax year (calendar year) you will become a Spanish tax resident liable for Spanish income tax, whether or not you take out a formal residence permit. The days do not have to be consecutive. You will also be Spanish tax resident if your “centre of vital interests” is in Spain i.e. it is where most of your personal, financial and economic interests lie, or if your spouse lives there for more than 183 days each year. There is no split year treatment; you are either resident or not resident for the whole tax year (unless resident elsewhere for part of a year under the terms of a tax treaty).

Income tax in Spain

As a Spanish tax resident you will be liable to pay Spanish tax on your worldwide income which includes your UK state retirement and other pensions and interest earned on deposit accounts in the UK or offshore.

If you live in the UK and so are not a Spanish tax resident, you will be liable to Spanish tax only on your Spanish income and gains etc.

Rental income worldwide is taxable in Spain for a Spanish tax resident, but only 50% of the net rental income is taxable. The net rental income is the amount of rent due after deducting the usual day-to-day running costs for the period in question including local taxes, repairs and maintenance, managing agents’ fees and commissions, interest on loans for purchase or improvements and depreciation of 3% a year of the cost of the property excluding land value. Deductible items do not include improvements that add further value to the property rather than just restoring it to its former state.

A Spanish non-tax resident is liable to tax on Spanish rental income at the fixed rate of 25% on the gross income and no deductions are allowed.

Where practical the tenant is obliged to withhold 15% of the rent for a Spanish tax resident and 25% for a Spanish non-tax resident and pay it to the Spanish tax authority, the Hacienda.

There is also a notional tax levied on deemed rental income on property that is not your main home or not rented out. It is normally based on 2% of the official value (valor catastral). This rate drops to 1.1 per cent of the valor catastral if this has been revised since 1994. Where such a property is only let for part of the year, the notional income is calculated for the part of the year that the property is unlet. The notional income is added to your other income and taxed at the appropriate rate (or a flat 25% for a non-resident).

If you live in Spain, or if you own a property even as a non-resident, you need a número de identificación extranjero (NIE). Most significant property transactions require you to provide this fiscal identification number. The number identifies you to the Spanish taxman and is required when you pay your taxes or have any dealings with the Hacienda.

Income tax in Spain – bands

Spanish income tax rates for 2006 income range from 15% to 45% (now out of date):

Returns for 2006 income (1st January to 31st December) have to be submitted in May/June 2007.

 

TAXABLE INCOME € % TAX TOTAL TAX PAYABLE AT TOP OF BAND €
0 – 4,161 15 624
4,162 – 14,357 24 3,071
14,358 – 26,842 28 6,567
26,843 – 46,818 37 13,958
46,819 and over 45

The state tax varies in Basque Country and Navarra and in certain others.

As a taxpayer in Spain you can complete an individual return or a joint return with your spouse. But you would only do a joint return if one of you had income of less than the personal allowance (€3,400 each; plus €800 if 65 or more and €1,000 if 75 or more).

You do not have to complete a Spanish tax return if:

  • Your income is from one source only, it is earned income (which includes pensions), it is less than ?22,000 a year and tax has been deducted at source in Spain. Your UK pension does not comply as there is no Spanish withholding tax on it.
  • Where your income is from more than one source, or where there is no withholding tax at source, and it is no more than ?8,000 in the year you will not have to fill in a Spanish tax return. So if your UK pension is less than €8,000 and this is your only income, it means you do not have to complete a tax return.
  • Your income of both investment income and capital gains is no more than ?1,600 gross in the year, but subject to withholding tax at source.
  • Imputed rental income is no more than ?1,000 per year.
  • If your total income from all sources is less than €1,000.

Note that these limits are for per tax return. If you decide on a joint return, the same limits apply (there’s no increase in the limit).

If as a Spanish tax resident you want to claim any tax relief, you will have to file a tax return. For example, you are entitled to a Spanish tax break if you have a mortgage or a special Spanish tax-qualified savings account to buy a house. You are also entitled to UK/Spanish double taxation relief if you have income taxed at source in the UK or for payments into a pension fund or similar scheme. For a Spanish non-tax resident the UK/Spanish double tax treaty means that any tax paid in Spain can be offset against any tax due in the UK.

Unless your financial affairs are very simple it would be advisable to seek the advice of an accountant or tax adviser with comprehensive and up to date knowledge of both the UK and Spanish tax rules. You may be able to use legitimate structures like an offshore insurance bond or an offshore trust to reduce your tax liability significantly. A little time and effort now taking expert advice could reap some financial reward, and minimise your Spanish income tax.

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Spanish succession tax

It is important for anyone who owns property in Spain, or other Spanish assets, to familiarise themselves with Spanish succession tax on inheritances. It is different from UK inheritance tax and has a real top rate of nearly 82%! It is payable if the beneficiary resides in Spain or the asset being passed on is in Spain.

Inheritance tax in Spain

The most significant difference between UK inheritance tax and Spanish succession tax is that, unlike in the UK, in Spain there is no exemption between husband and wife. So, if you live in Spain with your spouse, on the first death the survivor can be liable for Spanish succession tax on worldwide assets.

In some of the seventeen Autonomous Regions in Spain there is a trend towards increasing the relief or abolishing succession tax between spouses and direct line relatives. The rules vary from region to region and will depend on certain conditions being met. Where the regional rules are not yet set or not met, the state rules will apply. The state rules also apply where the deceased is not resident in Spain – in other words, if you own property in Spain but do not live there, your heirs will be faced with the state rules regardless of what the rates and rules may be in the area your property is located.

There has been quite a bit of hype about the proposed changes to this tax but in fact it still has a long way to go and often amounts to less than expected. So far, only Andalucia and Murcia have introduced significant new reliefs and even then many people will not benefit because they do not meet all the requirements or because their taxable assets amount to more than the ceilings.

You therefore need to be familiar with the rules in the area where you are thinking of buying or have already bought. If there has been talk of new rules in the area but nothing concrete has happened yet, it may be wise not to assume too much, and to stick to estate planning with the existing rules in mind.

The state rules

The tax rates differ depending on the value of the amount inherited. These range from 7.65% on the first €7,933, up to 34% on €797,555 and over. Beneficiaries are graded into four different groups and the more remote the beneficiary’s relationship is to the deceased the lower the tax allowance and the higher the tax rates.

The four groups are:

Group 1 – natural and adopted children under 21

Group 2 – natural and adopted children aged 21 and over; grandchildren; parents; grandparents; spouses; unmarried partners registered as a pareja de hecho (registered couple) in Andalucía or Cataluña

Group 3 – in-laws and their ascendants/descendants; stepchildren; cousins; nieces/nephews; uncles/aunts

Group 4 – all others including unmarried partners unless registered under pareja de hecho

There is an allowance available between husband and wife, or direct line descendants and ascendants, which is a little under €16,000 – very low if you own Spanish property!

If an inheritor is a direct line descendant under the age of 21, there is an additional deduction of €3,990 for each year they are under 21. The total deduction is restricted to €47,858 per child or grandchild.

For more distant relatives (e.g. those in Group 3) the exemption is €7,933. There is no exemption for beneficiaries who are not related, including unmarried couples unless they can be registered.

A main home in Spain may be virtually exempt from Spanish succession tax provided the beneficiaries are either your spouse, parents or children and they continue to own the property for ten years from the date of death. The exemption can also apply where the beneficiary is a more distant relative over the age of 65 and they have lived with you for at least two years before death.

Assuming that all the conditions are met, the value of the house can be reduced by 95% in calculating the tax base liable to succession tax, subject to a maximum reduction in value per inheritor of €122,606. This only applies to a principal private residence owned by a Spanish resident.

As mentioned there can be variations from the State rules in the different Regions.

UK inheritance tax

Even if you move to live in Spain you are still likely to be ‘UK domiciled’ and therefore liable to UK inheritance tax on your worldwide assets. Domicile is a longer term concept than residency and more akin to a person ‘belonging’ to a country. It is largely dependent on your father’s country of origin, but can be varied through life. To prove that you are not UK domiciled you need to have cut all ties with the UK and firmly put down roots in your new country of abode.

For anyone living in Spain who is UK domiciled, there is an inheritance tax liability in both countries. However, any tax paid in Spain can be offset against tax due in the UK and vice versa. If inheritance tax is paid in the UK and is higher than the Spanish succession tax liability, you will not receive a refund of the difference.

Spanish succession tax can be reduced if a ‘usufruct’ is created whereby a surviving spouse is left a ‘life interest’ in the property rather than the deceased’s half of the property outright.

To mitigate your succession tax further you might set up an offshore discretionary trust which can in the right circumstances protect your assets from inheritance tax both in Spain and the UK. Once you have lived in Spain for three years with the intention of staying there indefinitely and to shed your UK domicile status, a ‘Golden Trust’ can be set up where assets are outside of the estate for both Spanish and UK inheritance tax purposes, whilst you continue to benefit within your lifetime and your spouse’s. If eventually either of you return to the UK to live, the assets remain outside your estate indefinitely for the benefit of all your beneficiaries.

Inheritance tax can be a crushing tax wherever you live. It can have devastating effects on inheritors already in grief. To avoid your beneficiaries from having to suffer the consequences of bad planning or no planning at all, if and when you move to Spain, or you own property in Spain, forward planning is the answer.

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Spanish Wealth Tax (Patrimonio)
The Spanish wealth tax, known as patrimonio, might catch you buy surprise.

The Spanish wealth tax, known as patrimonio, might catch you by surprise. It has been reintroduced during Spain’s financial crisis, but with a much higher tax-free allowance of €700,000 per person that also applies to non-residents.

The information for this article was provided in part by Blevins Franks, an international tax advisory service, with updates by Raymundo Larraín Nesbitt, a lawyer qualified to practise in both Spain and the UK. This information is provided to help you do your background research, but not as a substitute for qualified legal advice.

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The Plusvalia Property Tax in Spain
Here we explain the Plusvalía Municipal tax, a type of local or municipal capital gains tax on property in Spain.

What is the plusvalia tax in Spain?

The plusvalía is a local (municipal) tax charged by the town hall on properties when they are sold. It is calculated on the rateable value of property and the number of years that have passed since the property last changed hands. The objective is to tax the increase in the value of the land on which the property stands, some of which is due to improvements to the area carried out by the local government and the community at large.

The base for this tax is the valor catastral (an administrative value that is usually lower than the market value, sometimes considerably so) of the property. The amount due in tax will depend on how long the seller has owned the property: the longer the period, the higher the amount of tax.

Who pays the plusvalia tax in Spain?

In theory the vendor, though both parties are free to negotiate who pays it. During the boom, when vendors had all the negotiating power, it was reasonably common for buyers to agree to pay it, especially in areas like Andalucia. However, since boom turned to bust in 2008, any vendor lucky enough to find a buyer is almost certainly going to have to pay the plusvalía municipal tax, as buyers are now in the stronger negotiating position.

How do you pay the plusvalia tax in Spain?

You have 30 days from the date of sale to pay the plusvalia to the town hall.

If you (the vendor), are not resident in Spain (whatever your nationality), the buyer may insist on withholding funds to pay the plusvalía on your behalf, as the new owner would become liable for the plusvalía in the event of non-payment (i.e. if a non- resident does a runner without paying).

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Three percent Capital Gains Tax retention on property sales by non-residents
Explanation of the Spanish capital gains tax retention, or three percent withholding tax, on property sales by non-residents

When a non-resident sells property in Spain, they buyer is obliged to retain 3% of the price and pay it to the tax authorities to cover the vendor’s Capital Gains Tax (CGT) liabilities.

If the 3% retained exceeds the taxes due, the vendor can expect a refund once all taxes have been paid. On the other hand, if the vendor’s tax bill is greater than the 3% retention, the Spanish tax authorities may chase the vendor back home, though it is unlikely.

If the vendor is due a refund after taxes have been settled, it can take years to get paid (see link to forum discussions below for more information on how long it takes to get refunded).

Various terms in English and Spanish are used to name this tax retention. In Spanish it is known as the ‘retención (sobre la venta de inmuebles) a cuenta del impuesto de la renta de los no-residentes’, whilst in English it is referred to as the capital gains tax retention on property sales. Some people also talk about a withholding tax or money withheld, deducted, or kept back on a property sale in Spain.

The 3% retention is meant to cover CGT liabilities. GGT rates on real estate assets sold in Spain by EEA/EU-residents have changed over the years as follows (tax rate at time of sale):

Period Up to 31/12/06 Up to 31/12/07 2008 2009-2011 2012-2014 2015 2016
Rate 35% 25% 18% 19% 21% Up to 11-Jul 20%
From 12-Jul 19.5%
19%

+ Agencia Tributaria reference page (English)

The 3% retention does not cover the vendor’s ‘plusvalia’ tax liability, which is paid to the town hall at the time of sale.

After the sale, the buyer has one month from the date of sale to pay the 3% retention to the local tax office using the form (modelo) 211. A copy of the submitted form should then be given to the vendor or his lawyer, so a refund can be claimed.

Capital Gains Tax Reclaim

If the vendor believes he is owed a refund (that the tax liability is less than the 3% retention), he has 3 months to present form 212 requesting a refund. This step is done at the local tax office (delegación de hacienda).

If a refund is due, how long does it take? It depends upon the tax office; some are quicker than others. In theory it shouldn’t take more than a few months, though some people report it taking up to 16 months. Around a year seems to be quite common according to comments in our Spanish property forum discussion on the 3% retention tax, though some people report it takes more than two years to get a refund.

Be warned that if there are any minor errors in the documentation the tax authorities will jump on them as a reason to delay any refund. So make sure all the information in your 212 reclaim form is correct.

In some cases, the vendor’s tax liability is greater than the retention. What then? Depending upon the size of the liability, the Spanish taxman may try and come after you for it back home.

So, for example, if a British person living in London sells a holiday home in Spain for 200,000 Euros, the vendor will retain 6,000 Euros and pay it to the tax office. Say the vendor originally bought the home for 100,000 Euros, meaning a capital gain of 100,000 Euros, and a capital gains tax of something in the region of 18,000 Euros (there will be some relief for inflation). In this case the vendor will not be entitled to a refund, and may be pursued for 12,000 Euros back home by the Spanish taxman.

But if you don’t hear from them within 4 years you know you’re safe, as that is the legal deadline for the tax authorities to take action.

Note: This issue only applies to vendors who are considered non-resident by the Spanish tax authorities, i.e. fiscal non-residents. To be considered a fiscal resident you have to get a certificate from the tax office (hacienda) certifying that you are a fiscal resident. You will get this if you have been doing tax returns (declaración de la renta) for several years. Do not make the mistake of thinking you are fiscally resident just because you have an NIE number, or once had a residency card (tarjeta de la residencia). A notary will only accept a certificate from the tax office.

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Transfer tax on resale homes – Impuesto de Transmisiones Patrimoniales (ITP)
Home buyers in Spain have to pay a transfer tax, known as ITP (Impuesto de Transmisiones Patrimoniales) when they buy a resale property. The rate varies from region to region

Home buyers in Spain have to pay a transfer tax, known as ITP (Impuesto de Transmisiones Patrimoniales) when they buy a resale property. The rate varies from region to region.

ITP applies if the property is deemed to be a second or posterior transfer (i.e. not the first time a newly built home is bought), and is paid by the buyer. If any deposit is paid before completion of the sale it is not subject to ITP pro rata. However the full amount of ITP still has to be paid upon completion. In this scenario there is no VAT to pay, and stamp duty is already included in this tax.

The Transfer Tax rate is ceded to the autonomous regions, who can choose to apply the general rate, or their own rate.

The general (national) rule of ITP is 7%, but many of the autonomous regions have applied higher local rates. The rate you pay depends upon the autonomous region where you buy.

This table summarises ITP rates by autonomous region over the period 01/01/2013 – 01/08/2013 (after which ITP was raised to 10pc in both Catalonia and the Valencian Community, and lowered to 6pc on 01/01/2014 in Madrid) ref:

Spanish transfer tax itp impuesto de transmisiones patrimoniales table for autonomous regions 2013

Exceptions to the 7% general rule as follows:

  • Andalucia: As of 01/01/2012, up to €400,000 @8%, next €300,000 @9%, everything after that @10%. So a property of €1 million would attract (€400,000 x 8% = €32,000)+(€300,000 x 9% = €27,000)+(€300,000 x 10% = €30,000) = total of €89,000 in ITP tax.
  • Cantabria: (7% below 300k; as from said amount onwards its taxed at 8%)
  • Asturias: From 8 to 10%
  • Catalonia: 10% (with exceptions for first time buyers / young buyers, disabled, and large families. Raised from 8% as of 01/08/2013)
  • Extremadura: From 7 to 10%
  • The Canaries: 6,5% (no change)
  • Valencian Community: Raised from 8% to 10% in August 2013 with lower rates for certain resident groups like young buyers, disabled buyers, or buyers with large families
  • The Balearics: As of the beginning of 2013, ITP has gone up to between 8% and 10% depending on the property value (the first €400,000 attracts 8%, the next €200,000 attracts 9%, and everything after that pays 10%) ref
  • Madrid: Lowered from 7pc to 6pc on 01/01/2014

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How you become a tax resident in Spain
If you move to Spain permanently for six months or more you will almost certainly become tax resident and be obliged to pay income, capital gains, and wealth taxes on your worldwide assets and be subject to Spanish inheritance and gifts tax rules.

If you move to Spain permanently for six months or more you will almost certainly become tax resident and be obliged to pay income, capital gains, and wealth taxes on your worldwide assets and be subject to Spanish inheritance and gifts tax rules.

You will become tax resident in Spain under Spanish rules if:

a) you spend more than 183 days in the calendar year in Spain. These days do not have to be consecutive, and temporary absences from Spain are ignored unless you can show habitual residence in another country for more than 183 days in the year.

OR       b) your ‘centre of interests’ is in Spain, e.g. the base for your economic or professional activities is in Spain.

OR      c) your spouse is resident in Spain and you are not legally separated, even though you may spend less than 183 days there (unless you can show habitual residence in another country for more than 183 days in the year).

The tax year in Spain ends on 31st December. You are either resident or not resident for the whole tax year (subject to any residence elsewhere under treaty rules).

So, the date from which you become resident will largely depend on the time of year you arrive in Spain.

If you arrive in Spain in the first six months of the year with the intention of staying there indefinitely, you are likely to be regarded as tax resident for the full calendar year. However, if you move directly from the UK, then it is likely that, because of the UK/Spain Tax Treaty, you will be regarded as UK resident up to the date you leave the UK and resident in Spain thereafter.

If you move to Spain in the latter half of the calendar year, then you are likely to find that you are regarded as non-Spanish resident for that year, on the basis you have not spent 183 days there during the year.  However, if you have made previous visits to Spain and these have been significant or frequent, the Spanish authorities could deem you to be resident in Spain from an earlier date, and regard any subsequent time spent outside of Spain as a temporary absence (unless you were clearly resident at that time in another ‘tax treaty’ country such as the UK).

UK/Spain Double Tax Treaty

The UK/Spain Double Tax Treaty has a tie-breaker clause that comes into operation if you are resident both in the UK under the UK rules and in Spain under the Spanish rules.  The purpose is to determine in which country you will ultimately be regarded as tax resident – it cannot be both.

The agreement works as follows:

  • If you are dual resident in practice, you are deemed to be tax resident in the country in which you have a permanent home available to you.
  • If you have a permanent home in both countries (or neither), you are deemed to be resident in the country where your ‘centre of vital interests’ lies. ‘Vital’ means the whole pattern of your life.
  • If this test is indeterminate, you are deemed to be resident in the country in which you have an habitual abode (a place where you spend most of your time during the tax year), but if this is not clear you are deemed to be resident in the country of which you are a national.  UK nationals will at this point be regarded as UK residents.

If you are thinking of making a permanent move to Spain it might be worth giving some careful consideration as to the timing of your move. As the UK tax year runs from 6th April until the following 5th April, you could, for instance, leave the UK near the end of a tax year, move to another country for a few months, or travel, and be in Spain for the latter part of the year for less than 183 days. This way you can avoid becoming Spanish tax resident for that tax year.

It is always best before making the move to Spain to take professional tax advice from a specialist who knows both UK and Spanish tax legislation.

The above are summaries of complex issues and usually specific advice should be sought.

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Are you resident in Spain for tax purposes?
It can be surprisingly difficult to establish one’s tax residence in certain circumstances. The onus is on the taxpayer to get it right in order to avoid the charge of tax evasion, which can lead to financial penalties and/or criminal charges.

It can be surprisingly difficult to establish one’s tax residence in certain circumstances. The onus is on the taxpayer to get it right in order to avoid the charge of tax evasion, which can lead to financial penalties and/or criminal charges.

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. Laws and tax rates change over time, so this information may be out of date. Please consult a tax specialist or the tax authorities for the latest information. There are no guarantees that this information is correct and up-to-date, so you use this information at your own risk.

This question is best explained using an examples.

Mrs Smith is a divorcee living nine months of the year in Spain.

Her neighbour, Mr Davis, works in the oil industry travelling throughout the world. He spends only two months in Spain per calendar year.

Now you might think that Mrs Smith, spending nine months in Spain is tax resident in Spain, whereas her neighbour Mr Davis, spending only two months there, is not Spanish resident.

In fact, it is quite possible for Mrs Smith not to be Spanish resident, whilst Mr Davis is.

How can this be?

Mrs Smith

Well Mrs Smith owns a business based in Manchester, and her two children go to boarding school in the UK, where she has another home. She has decided to live in Spain for nine months to write a book, returning to the UK during her children’s holidays and to attend Board meetings.

As she remains UK resident under UK tax rules (because she spends more than 3 months in the UK per UK tax year), whilst she is also a Spanish tax resident under the 183 day rule in Spain, the UK/Spain Double Tax Treaty (“DTT”) overrules the Spanish residence determination. She cannot be tax resident in both countries under the DTT, and the DTT tie breaker rules will probably find her to be UK resident despite her spending nine months in Spain.

Mr Davis

Mr Davis, on the other hand, is not tax resident anywhere else. His wife and children live in Spain, and he returns to be with them on all the major holidays, birthdays etc. Even through he only spends a mere sixty days or so a year in Spain, it is his centre of interests and the Spanish rules make him Spanish tax resident.

Worldwide Income

If you are tax resident in Spain, you are liable to pay tax on your worldwide income, worldwide gains, and worldwide assets (wealth tax).

Not Resident Anywhere?

There is no law which states you must be resident somewhere, but if you wish to fit into this category (called “permanent traveller” or “fiscal nomad”) you need to ensure you do not fulfil of any one country’s tax rules. There are many people who legally are not resident in any single country. There are even those people who claim not to be tax resident anywhere, but in fact they are an undisclosed resident of a country either through ignorance or by simply pretending that they are “non resident”. You need not only to understand very carefully the rules, but also to ensure you live by them.

Poor Pilot

An English national BA pilot thought he understood the UK tax rules well, as he had read the UK Inland Revenue’s book on residence, IR20, and was very careful to lead his life whereby he stayed less than ninety days a year in the UK.

Unfortunately, he didn’t pay too much attention to the inside cover of IR25 which states that the book is a guide and not the law. He was found to be a UK tax resident, despite his protestations to the contrary. Do It Yourself tax planning can be very expensive if you get it wrong. Experienced professional advice in this tricky area is worth every penny.

Residency criteria in Spain

You will become resident for tax purposes in Spain if:

  • You spend more than 183 days in Spain in one calendar year. You become liable whether or not you take out a formal residency permit. These days do not have to be consecutive. (Temporary absences from Spain are ignored for the purposes of the 183-day rule unless it can be proved that the individual is habitually resident in another country for more than 183 days in a calendar year.)
  • Or, your “centre of vital interests” is in Spain, e.g., the base for your economic or professional activities is in Spain.
  • Or, your spouse lives in Spain and you are not legally separated even though you may spend less than 183 days per year in Spain

Note that the Spanish tax years is the same as the calendar year (1 January – 31 December), unlike the UK, which is from 6 April to following 5 April.

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Non-resident tax summary
The acquisition of a real estate in Spain by a non-resident natural person entails periodic tax obligations which go beyond the initial payment of those taxes derived from the act of acquisition (Impuesto sobre el Valor Añadido or Value Added Tax, Impuesto sobre Transmisiones Patrimoniales or Transfer Tax, or Impuesto sobre Sucesiones y Donaciones or Inheritance and Gift Tax, as applicable) or annual payment of other taxes of local nature (Impuesto sobre Bienes Inmuebles or Property Tax, Tasa de recogida de basuras or Garbage Tax, etc.).

The acquisition of a real estate in Spain by a non-resident natural person entails periodic tax obligations which go beyond the initial payment of those taxes derived from the act of acquisition (Impuesto sobre el Valor Añadido or Value Added Tax, Impuesto sobre Transmisiones Patrimoniales or Transfer Tax, or Impuesto sobre Sucesiones y Donaciones or Inheritance and Gift Tax, as applicable) or annual payment of other taxes of local nature (Impuesto sobre Bienes Inmuebles or Property Tax, Tasa de recogida de basuras or Garbage Tax, etc.).

As a first consideration, under Spanish law any natural person not having its habitual residence in Spain is non-resident for domestic tax purposes, to the extent it does not spend 183 or more days in a given natural year in Spanish territory and it does not have its centre of economical interest in Spain.

Non-residents owning real estate located in Spain are liable to the following taxes: a) Non-Resident Income Tax (Impuesto sobre la Renta de No Residentes; “IRNR”); and b) Wealth Tax (Impuesto sobre el Patrimonio; “IP”). The Wealth Tax (IP) has been set at zero from 01/01/2008, which means it no longer has to be declared.

A. Under IRNR, a non-resident individual is liable for any income deriving from the rental or other form of exploitation of the real estate. In cases where the real estate is not exploited, IRNR imputes income to the non-resident, accruing a tax liability as a result of such imputed income.

In general terms, such imputed income generated by the possession of property amounts to 2% of the cadastral value of such property. However, for properties which cadastral value has been revised later than January 1st 1994, such percentage shall be fixed in 1,1% of the above mentioned value. Likewise, when the non-resident has not been the owner of the property throughout the whole taxable period (January 1st to December 31st), during the fiscal year of the acquisition or sale, or when within such year the property has been rented or used for business activities, such revenue shall be prorated according to the number of taxable days during which the conditions for imputation of the income were met by the non-resident owner.

The amount to pay in relation to the IRNR shall be the result of applying the general tax rate (24%) over the actual and/or imputed income, as the case may be. For such effects, and subject to the possibility of filing a simplified tax return as described below, the non-resident has to file the tax return and, given the case, make payment of the tax liability within the period comprised between January 1st and June 30th of the year following the fiscal year of accrual. For the case of imputed income, accrual takes place on December 31st of each year.

B. Under IP, non-resident owners are taxed on the net wealth represented by the real estate. Conversely to the regime of Spanish tax residents, no minimum value is applied as a condition to the accrual of the tax liability.

The tax base of the IP shall be the value of the property, which is deemed to be the highest of the following three values: (i) the cadastral value of the property; (ii) the value of the property determined by tax authorities for the purposes of liquidating other taxes; or (iii) the acquisition value of the property, after deduction of liabilities and encumbrances that may charge the real property.

The amount to pay in relation to the IP shall be the result of applying, over the value of the property calculated as per the description above, a progressive rate (dependant on the net value of the property) which is established between 0,2% and 2,5%. Subject to the possibility of filing a simplified tax return as described below, the non-resident owner has to file the tax return and, given the case, pay the resulting tax liability within the term established annually by the corresponding Treasury Department Order (for the year 2007 between May 2nd and July 2nd).

Finally, non-resident owners who only own one real estate property in the Spanish territory which is not rented or used for business activities are entitled to file a joint and simplified tax return for IRNR and IP: Form 214. Such form simplifies the tax return and presents the additional convenience of an extended filing term which corresponds to the natural year that immediately follows the year to which the tax return refers, that is, up to December 31st of each year.

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A double tax saving opportunity
The double tax saving opportunity in the light of the EU-wide Savings Tax Directive of July 2005.

Ever since taxes were first imposed, people have been finding ways of avoiding them. In today’s world, though, tax planning has become highly complex, with the Spanish, UK and international tax agencies declaring war on tax evasion and teaming up to track down evaders. In July 2005 we also entered into a new era in how expatriates structure their financial affairs with the start of the EU wide Savings Tax Directive.

One of the first things many Britons do on moving overseas is to open an offshore bank account. These accounts have many practical uses, particularly if you will be spending time in more than one country, and banks in the Isle of Man and the Channel Islands offer services specifically geared to expatriates.

Another reason many people choose to deposit their capital offshore is because they believe it’s an effective means of tax avoidance. However, according to the law in both Spain and the UK you must declare your worldwide income, so you are as obliged to declare your offshore interest earnings as those from onshore banks. Failure to do so is tax evasion – a crime under money laundering laws.

The EU savings Tax Directive ensures that these offshore savings will be taxed regardless of whether they are declared or not, and will help the tax authorities find out who has been illegally under declaring their income.

The key points of the Directive are:

  • Most EU States automatically exchange information on your personal tax situation, including identity, residence and interest earnings.
  • Your tax authority will compare this information with your tax return. If the figures do not match up, they are likely to investigate.
  • Some jurisdictions, including Jersey, Guernsey, Isle of Man, Switzerland and Luxembourg are, instead of automatic information exchange of information, applying a withholding tax for a transitional period. It is currently 15% but rises to 35% in 2011.
  • The definition of “savings income” is broad and includes interest earnings from bank accounts and some income producing investment funds.
  • UK investments like PEPs, ISAs and premium bonds are not tax free in Spain, and fall under the scope of the Directive.
  • Some income payments are excluded from the Directive. These include pensions, dividends from shares, income withdrawals from life assurance policies and payments to companies or trusts.

The fact that life assurance policies are not subject to the Directive is particularly good news, especially as they benefit from a very advantageous tax treatment in Spain.

Insurance bonds therefore provide a possible solution to a wide range of tax planning concerns. They have a variety of names, including Personal Portfolio Bonds (PPB) and Offshore Bonds, and they are also sometimes referred to as tax “wrappers”. It is basically a specialised form of life assurance arrangement, specifically designed to enable investors to hold their own choice of assets.

The PPB offers many unique tax benefits, but when held within a suitable Trust the advantages are exceptional.

In summary, the benefits of a PPB in Spain are:

Income and capital gains:

These are not taxed when retained with the Bond. If you do not need to take withdrawals you do not pay tax, allowing the gain to accumulate entirely tax free within the Bond.

Withdrawals:

In the event of a withdrawal, only the gain element is taxed and not the whole value of the withdrawal. For example, if your bond has increased by 10% and you withdraw €10,000, only €1,000 is liable to tax and €9,000 is tax-free. Of the amount taxable, there is a further reduction depending on the length of time you own the Bond. It is reduced by 40% if held between two and five years and by 75% if over five years (although only one withdrawal per year qualifies for this remarkable tax benefit).

Wealth tax:

Holding your assets inside a Bond usually leads to a significant reduction in wealth tax too. This helps high net worth individuals lower their tax bills considerably. It is also possible to set up your Bond so that is has no value at all for wealth tax purposes and will therefore be excluded from your wealth tax return.

Succession tax:

On death, if the contract is not a Spanish one and it is left to an individual who is not resident in Spain (or is held in trust for such beneficiaries), succession tax is not payable either.

Assigning your Bond to a Trust arrangement can create some very unique tax and other advantages. However this is a very specialised field and it is therefore essential that you seek professional guidance about what is appropriate to your personal circumstances.

Some of the advantages of a Trust include:

Succession tax:
The assets in the Trust are not liable to succession tax in Spain.

Inheritance tax:
If the settlor dies in Spain as a non-UK domicile there is no liability to UK inheritance tax.

Probate:
No probate is required and your heirs can obtain benefit from the Trust quickly and easily.

Family situations:

With a Trust the Trustees act to look after your beneficiaries without the assets being dissipated. For example, the Trustees can ensure that your children do not lose any of the Trust assets if they get divorced. The Trustees will look after the money if they think any of your dependants could be a spendthrift or simply incapable of managing the money, for whatever reason. The Trustees will be guided by you.

Asset protection:
Assets in Trust are normally protected from personal creditors.

If you are looking for a “home” for your investments which is both tax efficient and capable of producing above average returns, a Personal Portfolio Bond, with your choice of underlying investments and which is held in Trust, is highly likely to be a possible solution to both your tax and investment requirements.

When it comes to tax planning, the earlier you start thinking about it the better. You can evaluate your options, quantify your tax liabilities, plan your investment strategy, decide on ownership structures and take steps to avoid tax on leaving the UK (if you have not already done so) at the same time as minimising them in Spain.

Expert professional advice is essential. The tax experts at Blevins Franks have in depth knowledge of both the UK and Spanish tax rules and can guide you through the process. The PPB can be a beneficial structure for both Spanish and UK residents, as long as you set up your financial affairs correctly and, ideally, from the outset.

The above are summaries of complex issues and usually specific advice should be sought.

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Preparing for retirement in Spain
Are you planning to retire in Spain? If so, now is the time to review your finances to ensure you can afford your dream and that you’ll have enough capital to support you right through your retirement years.

Are you planning to retire in Spain? If so, now is the time to review your finances to ensure you can afford your dream and that you’ll have enough capital to support you right through your retirement years.

Statistically, people can expect to live 20 years in retirement. That’s plenty of time to enjoy your retirement dreams. You’ve probably worked hard and saved money for many years and retirement is the time to start reaping the rewards – but you’ll need a careful plan to help ensure you don’t outlive your accumulated income. Without a salary coming in, your pension and savings will need to enable you to live comfortably in the manner you have chosen for the rest of your life.

Choosing your retirement lifestyle

Most people still need an estimated financial budget during retirement. Estimate your monthly expenses based on the lifestyle you plan to live. The rule of thumb for people wishing to continue living their pre-retirement lifestyle is to estimate at 80% of your current expenses. This is based on the fact that you’ll no longer have work related expenses such as commuting, lunches, dry cleaning, work clothes etc.

However many people actually spend more money in retirement than they do whilst working, for example, if they travel, play golf etc. On top of this a move to Spain will mean different and new expenses so it will be necessary to sit down, study the Spanish costs of living and work out a new budget. Allow for extra “hidden costs” associated with settling in over the first couple of years, and don’t forget to include medical insurance and a reserve for emergencies. Also, although on average a 65-year old retiree will live another 20 years, others live much more than this so take this possibility into account as well.

If you calculate that your money may not support the lifestyle you have chosen, you will need to make adjustments. You may wish to make adjustments in any case to improve your standard of living in Spain.

Re-examine your investment strategy

Whilst planning for retirement your strategy is likely to have been focused on long-term wealth accumulation. Now that you’re retiring, some of your goals will have changed. You’ll be withdrawing money from your retirement account, rather than just accumulating, so you may need to move some of your wealth into investments designed for short-term needs.

Having said this, many retirees make the mistake of abandoning their long-term strategy completely once they retire. Bearing in mind that you need to plan for 20+ years ahead, a long-term approach is still very relevant. To get the balance right, you need to sit down with a financial adviser, one familiar with both Spain and the UK, to examine your needs and current investment strategy and determine the best way forward for you.

Balancing your risk tolerance and future needs

Retirees often become risk averse. Without a steady employment income they worry that their nest egg could diminish unexpectedly. As a result they only seek out very low risk investments. The most common method is to simply leaving it as cash in a savings deposit account. Although this attitude is understandable, it’s often unwise.

Your goal during your retirement is to maintain your financial independence for your entire life time. This means that inflation is your enemy, and your investment strategy should be designed to at least outpace inflation, if not continue to build your nest egg. Inflation can easily erode the spending power of your capital, even if you are earning interest.

Another issue for expatriates to consider is the rate of exchange. If, for example, you keep your savings in a Sterling account and you only convert to Euros when you need them, the value of your capital will be affected by exchange rate movements. This could work in your favour, but it is likely to work against you and you won’t want to rely on luck.

Finally, interest and tax rates can change. Interest rates can fall dramatically so you should never rely on receiving a certain interest rate to earn enough money for retirement. Likewise, the tax rate you pay on the interest you earn could also increase, eroding your income.

We recommend holding a well diversified portfolio, possibly including equities, bonds, property and cash. This should be structured to your income and capital growth requirements.

Everyone has different needs and circumstances, so ask your financial adviser for advice on the right investment mix for you.

Pension planning

Nowadays there are quite a few choices on how to receive your pension. Depending on the type of pension and whether you have started drawing income, there may be ways to improve your pension fund and earn more from it. A pensions expert will be able to point you in the right direction. Remember that you will need to take the Spanish rules into consideration, as these are different, so it is essential to take advice from an adviser conversant with both UK and Spanish pension and tax rules.

Tax planning

Finally, you paid income tax when you earned your money in the first place, so paying tax again on interest and dividends can be very frustrating. One way to increase your income in retirement is through careful tax planning. Don’t even think about tax evasion – it’s illegal – but there are legitimate vehicles you can use to defer, reduce or avoid tax completely. The less tax you pay, the more you have to spend in retirement.

Retirement should be the time when you take it easy and reward yourself for all those years of hard work. You shouldn’t have to worry about money all the way through. The earlier you get your financial planning in order, the better. Then you can sit back and enjoy your new life in Spain.

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