A brief guide to tax in Spain – Spanish taxes (July 2007)
The tax year in Spain runs from 1st January to 31st December. This can be a slight advantage if you plan ahead before leaving for Spain.
The law dictates that you will become a tax resident in Spain if you spend more than 183 days of the tax year in Spain. The days do not have to be consecutive and you become liable whether or not you formally register as a resident of Spain.
So, for instance, you could leave the UK at the end of its tax year, say 30th March, move to Spain, then spend time out of Spain in another country so that your total days in Spain for that year are less than 183 days. In this way you can delay becoming a tax resident until the following year providing you then spend 183 days or more in Spain.
The 183 day rule is not the only provision in determining tax resident status. If you don’t spend 183 days in Spain in a calendar year you can also become a tax resident if your “centre of vital interests” is in Spain i.e. the base of you economic or professional activities is in Spain; or unless proven otherwise, you are presumed Spanish resident if your spouse lives in Spain and you are not legally separated.
Spanish tax residents are liable for tax on their worldwide assets which includes any assets they may still have in the UK.
Income tax – Income is split into general income (renta general) and savings income (renta del ahorro). General income is taxed at progressive scale rates. There are four tax bands which range from 24% to 43%. Anything not categorised as ‘savings income’ is included here such as salary, pension and rental income. Savings income is taxed at a fixed rate of 18% and includes income from interest and dividends, income from a purchased annuity and capital gains.
Remember that this is tax on your worldwide income and most assets taxable in the UK can be credited against the Spanish liability under the terms of the double tax treaty.
Wealth tax – Spanish wealth tax is payable based on assets held at 31st December each year. There are deductions of €108,182 (individual) and €150,253 (own home). Tax rates vary from 0.2% for assets up to €167,129 and 2.5% for assets valued at €10,695,996 and over.
Succession tax – This tax on inheritances and gifts is paid by the beneficiary and not the estate as is the case in the UK. It is paid if the beneficiary is a resident of Spain or the asset concerned is located in Spain. Succession tax rate ranges from 7.65% on assets valued at €7,993.46 or under to 34% on assets of €797,555.08 or over. Once you have worked out the tax due it has to be multiplied by a factor of between 1.0 and 2.4 depending on the relationship and existing Spanish wealth of the beneficiary. There are various allowances depending on the beneficiary’s relationship with the deceased.
It is worth noting that although there is no blanket exemption for inheritances between spouses in Spain as there is in the UK, Spain is slowly reducing succession tax between spouses and direct line descendants. In Valencia, Alicante and Castellon the inheritance tax rate is now less than 1% between resident spouses and direct line relatives. So if you have not yet settled permanently in an area in Spain it may be worth researching the rules for the different regions.
It is important to note that if you remain a UK domiciled person while living in Spain you will be liable for UK inheritance tax on your worldwide assets which will include Spanish assets, as well as be liable for Spanish succession tax. Although there is no Spain/UK double tax treaty for inheritance taxes, any tax paid in Spain can be deducted from the UK tax due on the same asset.
Tax returns relating to the income and capital gains made during the tax year ending 31st December have to be made in May or June of the following year. So if you are a new arrival in Spain during 2007 you will not have to make your first return until June 2008. Tax forms can be obtained from most tobacco kiosks (estancos). If your tax affairs are straightforward and your total income is less than €22,000 you do not have to submit a tax return provided certain conditions are met. In many cases people would be entitled to a tax refund if they filled in a Spanish tax return.
Organising tax returns and paying tax is not something that most people do with enthusiasm. Nevertheless, it is the law and when relocating to Spain it is good to know what to expect tax-wise so that you are not taken by surprise or fall foul of the law. As daunting as it may feel to some, it does not have to be difficult. A professional tax adviser can help with your tax planning and advise you on how you can legitimately mitigate your tax liabilities both in Spain and the UK, even if in the future you decide to return to the UK to live.
The above are summaries of complex issues and usually specific advice should be sought.
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