Spain

Tax Planning Opportunities in Spain

Tax Efficient Opportunities in Spain – Spanish Compliant Bonds
Non-compliant tax
Spanish compliant bond taxation

Living in Spain

Reporting on Foreign Assets

Since March 2013, anyone living in Spain must declare their assets in excess of 50,000 EUR outside of Spain. Failure to declare your assets can result in serious penalties or even criminal charge, if the tax avoidance is in excess of 120,000 EUR. Assets include the likes of property, shares, life insurance policies, assets in a bank account such as ISAs and also cryptocurrencies if held on centralised exchanges.

The Spanish law implemented this rule to increase Spanish tax revenue while also reducing levels of tax avoidance.

As a result, many of the assets held offshore will no longer be tax efficient in Spain and the rules can be quite confusing to understand so it’s important that you speak to an independent financial adviser to explain how you can make these assets more tax efficient.

Defining a Resident in Spain

All individual tax residents in Spain are taxed on their worldwide income at progressive rates. It is important to note; that the Spanish tax year runs from 1st January to 31st December.

Taxes in Spain

Tax Position for Residents

If you have been living in Spain for more than 183 days in a calendar year, you are deemed as a resident of Spain for tax purposes. This is also the case if your spouse is a tax resident in Spain, your economic interest is in Spain or your main interest is in Spain which could include things such as your family etc. This means if one of the spouses is working in a country with no taxes, Spain could still tax them if their family and ties are in Spain.

Spanish Tax Position for Non-residents

If you live in Spain for less than 183 days per calendar year, you will be classed as a non-resident in Spain for tax purposes. Non-residents only pay tax on income earned in Spain, not worldwide assets. Your income is taxed at a flat rate of 24% for non-EU citizens and 19% for EU citizens. To apply for non-resident income tax status in Spain you must complete a Modelo 149 form. To make your annual declaration, use Modelo 150.

The Beckham Law

This Spanish tax law is named after English footballer David Beckham as he was one of the first people to ever use it. The law applies to everyone but was designed to attract footballers who didn’t want to fall under Spanish tax rules and pay Spanish tax on worldwide assets if they lived in Spain over 183 days a year. It has been applied to expatriates since January 1, 2004.

The law allows people to choose whether they are taxed as a resident or non-resident of Spain so long as certain criteria are met, such as:

• A person cannot have been resident in Spain over the last 10 years.
• Must have moved to Spain to take up employment under a contract.
• The company you work for must be a Spanish company or must operate through a permanent establishment in Spain.
• Must not have been in Spain longer than 6 months before applying.

Under ‘the Beckham rule’, Spanish income is taxed at a rate of 24.75% on gross income only arising in Spain. There is no Spanish income tax on any income arising outside of Spain including foreign pension income.

Income Tax in Spain

2023 income tax bands are as follows for annual earnings between:

Please note, that tax rates can vary depending on the region where you live. If self-employed, additional fees are charged based on your earnings between EUR 230,15 & EUR 542,13 per month.

Below are the following tax deductions and credits available per year in Spain:

Private Pensions – If you are self-employed, you can make up to EUR 5,750 of annual contributions. EUR 1,500 is capped in a plan de pension and EUR 4,250 towards a plan de pension de empleo. If you are employed, you can make up to EUR 10,000 of annual contributions. EUR 1,500 is capped in a plan de pension and EUR 8,500 towards a plan de pension de empleo.

Private Healthcare – EUR 500 per person per annum only if you are self-employed with a business activity.

Self-Employment Fees – This is all tax deductible.

Child Allowance – Mothers with children aged between 0-3 receive EUR 1,200 per year for childcare/nursery costs regardless of whether the mother is employed or not.

There are also tax deductions per child under 25:

• First child – EUR 2,400
• Second child – EUR 2,700
• Third child – EUR 4,000
• Fourth and subsequent child – EUR 4,500

General Salary Allowance – EUR 2,000 applicable for all employees per year.

Capital Gains Tax (CGT) in Spain

Capital gains in Spain come under “Savings tax”. Your savings income includes any income from:

• Interesting from savings
• Dividend payments
• Income from life assurance policies
• Income from annuities
• Gains made from the disposal or transfer of assets (property, shares, ETFs, funds etc)

These rates have gone up considerably in recent years, with the last 2 brackets of 27% and 28% being introduced to try and bring in more taxes to the Hacienda.

Withholding tax is fixed at 19% and applies to all Spanish residents and the “Beckham regime” taxpayers.

Inheritance and Gift Tax in Spain

Inheritance tax in Spain affects everyone who owns assets in the country, regardless of whether you are a resident or not. There are certain limits on who you can leave your assets to. Below are the rates:

Inheritance allowances:

Group I – Children, grandchildren, adopted children, and minors all under the age of 21
EUR 15.956,87 plus EUR 3.990,72 per year if the child is under 21 without exceeding EUR 47.858,59

Group II – Children and adopted children over the age of 21, parents, grandparents, spouses
EUR 15.956,87

Group III – Brothers, sisters, aunts, uncles, stepchildren, step parents
EUR 7.993,46

Group IV – Cousins, other family members and non-family members
No allowance

Rates differ per autonomous region

Wealth & Solidarity Tax in Spain

A wealth tax is a tax based on the market value of assets that are owned by an individual. In Spain, the rate of wealth tax varies between 0.2% – 3.5%. Non-residents will only pay wealth tax on assets in Spain while residents will pay wealth tax on worldwide assets.

Solidarity tax is complementary to wealth tax meaning you don’t pay both. Andalucia and Madrid don’t have any wealth tax which means solidarity tax would apply.

Wealth tax & Solidarity tax exemptions include:

• There is a EUR 700,000 exemption for Spanish residents only (can change depending on the autonomous region).
• You have an exemption on your main home up to EUR 300,000, or pension plans & household items etc.
• Interests in family companies or business assets may also benefit from a tax exemption
• Spanish residents: worldwide assets.
• Non-Spanish residents: Spanish assets only.
• Exemptions apply per person, so married couples can receive up to EUR 1,000,000 exemption each
• The taxable base only applies to assets above the exemptions applied.

Many methods can reduce your tax liabilities correctly, although if done incorrectly you could face serious consequences and penalties. If you have any concerns regarding how your assets may be taxed now or after death, we recommend you speak to tax experts or independent financial advisers.

VAT/IVA in Spain

You have to pay 21% IVA (VAT) regardless of your annual turnover on goods and services. It has to be paid every January, although it needs to be recorded every quarter and annually via the VAT declaration or Modelo 390. You don’t have to submit a VAT return nor can reclaim VAT on your costs if you provide exempt services. You may be exempt from paying VAT if you provide business services outside of Spain but within another country in the EU where you pay VAT in.

Corporation Tax in Spain

Corporation tax is subject to a rate of 25% in Spain, although newly formed companies only pay 15% in the first 2 years. If turnover is less than EUR 1,000,000, the rate drops to 23%. Business tax returns need to be done every 6 months, 25 days after the accounting period.

Social Security in Spain

If you are registered as self-employed also known as ‘autonomo’ then you will need to contribute a specified amount per month depending on how much you earn. This entitles you to health care, and a pension if you have paid into the scheme for over 15 years. You can pay additional contributions to receive a higher pension. Below is a table showing you how much you will pay per month based on your monthly earnings:

This has been a very controversial topic as Spanish self-employed individuals are now paying the highest fees in Europe.

Exit Tax in Spain

Spain introduced an exit tax in 2015. It applies to individuals who have been resident in Spain for at least 10 out of the previous 15 tax years, and who hold shares that meet certain criteria.

The exit tax is triggered when the individual leaves Spain and moves to another country. Importantly, Spain’s exit tax is applied to the entire gain since the date the shares were acquired, not the gain arising from the date the individual acquired residence in Spain.

With appropriate planning, it is possible to avoid the exit tax by holding investments in assets that are outside the scope of the exit tax. Exit tax applies to all unrealised capital gains derived from shares or interests in an entity that meet the following conditions:

• The total value of all shares held by the taxpayer is more than €4m, or
• The taxpayer holds an interest of at least 25% in a single entity and the value of that holding exceeds €1m. In this case, only the value of the gains derived from that interest are taxed.

UK Pension Planning

There are 2 main types of pensions you can transfer from the UK:

Defined Contribution – a pension pot based on how much is paid in

Defined Benefit – usually a workplace pension based on your salary and how long you’ve worked for your employer.

Defined Contribution Pensions

Below is a list of some of the reasons people would transfer away from a defined contributon scheme:

Avoid purchasing an annuity – MMany UK schemes only allow the option to purchase an annuity such as Prudential, Scottish Widows, Canada Sun Life and many more. At the time of writing, annuity rates are at record lows, meaning you must live around 40 years to get your money back. They also provide no flexibility and are the main reason pension freedoms came into play to give people the freedom to transfer to more flexible schemes such as an SIPP or QROPS. You are unlikely to be able to have an annuity being based in Spain.

Multi-currency options – UK pensions only have the option to have your pension denominated in Sterling whereas SIPPs and QROPS allow multi-currency. This has become ever more important in times when Sterling has weakened against its peers as retirees who are relying on an income in any currency other than Sterling have seen their income drop in recent years due to currency fluctuations alone. If this reduction reduces your income below your means of living, then you may find yourself requiring larger withdrawals.

Diversified investments – UK pensions are only invested in UK markets. This can have a detrimental effect on your returns as the UK market vs the US market for example has underperformed by hundreds of percent since 2000. Another benefit of transferring is having access to thematic ETFs, allowing you to invest in megatrends which are going to change the way the future works. It often makes sense to have the option to diversify into thematic ETFs and invest outside of the UK market, both of which are options if you transfer to a SIPP or QROPS.

Death Benefits – we often find with DC schemes that the death benefit options can cause serious issues if beneficiaries are outside the UK, because in the UK for example, if you passed away pre-75, the beneficiary can receive the pension tax-free. Post 75 they pay tax at their marginal rate but if the beneficiary lives outside the UK, regardless of when you pass away, it is almost always taxed based on the beneficiary’s marginal tax rate, so what we can do is transfer to an alternative arrangement which gives the option of a dependent’s pension meaning the funds can stay within the scheme and the beneficiary only draws out money when they need it.

Consolidating pensions into one pot – Should you have various pensions with different providers then it can be difficult to manage pre- and post-retirement. Consolidating them into one place with online access and a financial adviser providing regular updates can help you manage your pensions much more effectively.

Defined Benefit Pensions

Before discussing some of the potential benefits, it’s important to mention that a lot of times it might not be beneficial to transfer your DB pension. You are giving up guarantees for something that isn’t guaranteed, so the decision is not black and white. However below are some of the reasons people transfer away:

Greater Flexibility – Defined Benefit Schemes offer a guaranteed income for life from your normal retirement date. This is a good guarantee that is lost should you transfer away. However, a guaranteed income is rigid and cannot be changed once you begin to receive your pension. Transferring to a SIPP or QROPS allows you to have the following flexibilities:

1. You can access your pension earlier or defer it to a later date without penalties, unlike a DB scheme.
2. You can invest in any regulated investment.
3. You can take 100% of your pension as a lump sum, provided you are over 55.

1. You can increase or decrease your income. The reasons could be:
   1. You become ill and want to spend the money while you can.
   2. You never want to access the funds and therefore pass them to your family.
   3. You can decrease or stop your income if you find part-time work or receive an inheritance in retirement.
   4. There are many other reasons.
2. You can take ad-hoc lump sums through retirement. The reasons could be:
   1. To give money to a loved one.
   2. To go on holiday.
   3. To buy a property.
3. You can take your 25% pension commencement lump sum and then defer taking the rest of your pension until whichever age you wish. The reasons could be:
   1. You want to pay off your mortgage and then defer taking the rest of your pension until you are retired.
   2. Purchase an investment property or business idea and then defer the rest of your pension until you are retired.

Cash equivalent transfer values (CETVs) – The CETV you receive is closely linked to UK gilt rates so if interest rates are low, CETVs go up significantly. If rates are high, it becomes unattractive to transfer a DB pension.

Your scheme will provide you with a “Cash Equivalent Transfer Value” (CETV) which is the amount of money the scheme requires to purchase your guaranteed income in today’s money. As yields fall, transfer values go up. If yields fall too much, schemes will struggle to pay guarantees as the performance of the assets they hold could become lower than the amount of money they need to pay for your guarantees. What once was a benefit, could, in turn, become a drawback, as schemes have the right to offer a reduced transfer value should they be unable to pay members benefits.

Reduced Life Expectancy – Although this is a very morbid thing to think about, it is an important factor to consider when reviewing a defined benefit pension. The analysis you receive will compare the income between when you retire and when you die and work out whether you would be better off in the scheme you are in or in a SIPP or QROPS. Advice is calculated using the average life expectancy for both males and females in the UK.

Therefore, if the life expectancy is much lower in your family, spending more in earlier years becomes much more important as you can access 100% of your pension from age 55 in a SIPP or QROPS. This means that should you become ill, you can spend your pension before you die or pass 100% of the remaining pension to your loved ones.

Avoid your pension going into the PPF – The pension deficit of defined benefit schemes has been increasing significantly over the past decade. Many large defined benefit schemes have gone into liquidation over the past few years such as BHS, British Steel, Carillion and many more. When schemes go into liquidation, they enter the pension protection fund (PPF) and you automatically lose 10% of your pension and potentially much more. In many instances, some of your guaranteed increases could also be lost completely.

It is important to note that the PPF is not backed by the treasury and could also go into liquidation should too many schemes enter. The PPF as of June 2020 is in fact in deficit. Upon transfer to a SIPP/ROPS, you will be protected against your scheme going into liquidation. Your funds are completely ring-fenced inside a SIPP/ROPS, meaning that if the SIPP/ROPS trustees go into liquidation, your funds are completely protected.

There are many other benefits and drawbacks in addition to the ones mentioned above. Some schemes have restrictions or penalties to transfer away which may defer a transfer being in your interest. We help you understand whether it is worth looking into alternative options and if it is, we can then assess whether a QROPS or SIPP would be more beneficial.

UK Pension Options in Spain

You have 3 options with what to do with your UK pensions in Spain:

• Retain the existing benefits 
• Transfer to an overseas scheme (QROPS)
• Transfer to an alternative UK scheme (SIPP)

Retain the existing benefits 

Before Brexit, leaving your pension where it is might have been the best option, depending on whether you have a defined contribution or defined benefit pension but since Brexit, it has become very difficult to access UK pension schemes in Spain. If you have an annuity as the only retirement option, you most likely won’t be able to access your pension in Spain. Some schemes don’t even allow access to flexi-access drawdown outside of the UK. If this is the case, you have to transfer.

Some UK pensions have very good guarantees before and after retirement as well as on death. Other pensions may have restrictions about how you can access your funds, high fees, limited investment and currency options among other things.

Understanding what your pension offers you as well as understanding what your needs and objectives are is important before looking at other options as your pension could be suitable where it is currently based. We provide a free initial consultation to first understand what type of scheme you have to give you a fair understanding of whether it is worth looking into alternative options.

Some of the main reasons people look at moving away from their scheme are listed below:

Transfer to an overseas scheme (QROPS)

A QROPS stands for Qualifying Recognised Overseas Pension Scheme; an alternative pension that accepts transfers from the UK defined contribution and defined benefit scheme. Spanish residents qualify for a transfer to a QROPS; however, in 2017 the government announced a 25% overseas transfer charge to anyone who transfers to a QROPS that is based outside of the EEA.

Following the UK government’s spring budget on 8th March 2017, HMRC released an update in their Pension Schemes Newsletter on a few key points, including the QROPS rules, which we need to bring to your attention:

Transfers to QROPS requested on or after the 9th March 2017 will be subject to a 25% tax charge, unless;

• The QROPS is in the EEA and the Member is also resident in an EEA country.
• Subject to the 5-year rule, where the exemption proceeds no longer apply, the 25% charge can be retrospectively applied. However, curiously, within the newsletter from HMRC, they confirm that “A change in member’s circumstances within 5 years may result in a change to the tax treatment of the original transfer and could lead to a repayment being due.”

In the 2024 tax year, anyone transferring to an QROPS with a pension scheme above the lifetime allowance will be taxed 25% on the excess.

Benefits of a QROPS are as follows:

• Payments from a QROPS are paid gross from UK income taxes.
• You will be entitled to a 25% lump sum from the age of 55.
• You will be able to withdraw from your pension via drawdown or Flexi-access in Malta but not in Gibraltar (GAD).
• You can withdraw 100% of your pension from age 55.
• Greater investment choice.
• Have your pension denominated in any major worldwide currency.
• You will no longer be subject to UK pension legislation changes.
• UK inheritance tax tax does not apply.

As you may be aware, trusts can cause many problems in Spain, similar to most civil law jurisdictions. Most QROPS fall under a trust law framework hence are not completely ideal for some individuals in Spain. This is why it is extremely important to speak to one of our independent financial advisers before choosing a QROPS as it could seriously impact the amount of tax you will have to pay.

Few QROPS providers have established schemes based on contract law which becomes friendly under Spanish law, although jurisdiction is extremely important when choosing a QROPS provider as Spain has an anti-abuse provision against any jurisdiction that is deemed to be a tax haven under Spanish law.

There will be no ‘overseas transfer charge’ providing you remain an EEA resident for 5 years from the date of transfer.

Transfer to an alternative UK scheme (SIPP)

SIPP stands for ‘Self-Invested Personal Pension’. It is recognized as an international pension scheme that HM Revenue & Customs (HMRC) identifies as eligible to receive transfers from registered pension schemes in the UK. To qualify as an international SIPP, the scheme must meet the requirements set by UK tax law and you must be a non-UK resident. SIPPs can receive the transfer value from your scheme and then the funds are invested to provide you with retirement benefits at any time from age 55.

Most SIPPs are ‘money purchase’ or ‘defined contribution’ schemes where the member knows how much they are investing, but not what they will receive, because the pension fund size will depend upon the performance of the underlying investments of the SIPP. The performance is not guaranteed.

A major benefit of a transfer to one of these arrangements is that your pension fund does not force you to buy an annuity and could therefore be passed on to a nominated beneficiary on your death – in some cases, free of UK tax. Additional benefits would include wider retirement options, greater investment choice, the ability to have your fund managed by an overseas IFA, choice of any major currency denomination, plus more:

• Payments from your UK pension will be taxed as ‘earned income’ at source by HMRC, although this can be avoided, although this can be claimed back under the double taxation treaty.
• You will be entitled to a 25% lump sum from the age of 55.
• You will be able to withdraw from your pension via drawdown or Flexi-access.
• You can withdraw 100% of your pension from age 55.
• Much greater investment choice.
• Have your pension denominated in any major worldwide currency.
• You will be subject to any UK pension legislation changes.
• UK pension death tax applies to UK pensions regardless of where you are resident. This means if you die after the age of 75, your pension will be taxed at your beneficiary’s marginal rate on receipt up to 45%. In Spain however, you would be taxed if the beneficiary is a Spanish resident regardless.

 Comparison of SIPP vs QROPS

• There could be a 25% overseas transfer charge applied to a ROPS transfer if you don’t live in the EEA or you move outside of the EEA within 5 years of the transfer. This does not apply to a SIPP transfer.
• There could be an additional charge if your pension values are above the LTA amount and you transfer to a QROPS. This doesn’t apply in a SIPP
• Both a SIPP and QROPS do not force you to buy an annuity.
• They both offer the ability to take benefits through drawdown or flexi-access.
• They both allow you to hold your pension fund in any major currency of your choice.
• They both can be managed by an independent financial adviser.
• A SIPP has a lifetime allowance of £1,073,100 that increases by inflation unless you have lifetime allowance protection, whereas a QROPS has no lifetime allowance.
• A SIPP is cheaper than a QROPS.
• A SIPP is FCA regulated whereas a QROPS is regulated by either the MFSA or GFSC.

Taxation on UK Pensions in Spain

UK pensions are taxed as earned income in Spain. Non-residents are subject to UK income tax at source at the member’s marginal rate. You have a few options which can be complex without the correct advice.

Spanish tax law treats income from a UK Occupational Pension Scheme in a simple manner. The amount received is subject to income tax in Spain as earned income. Please refer to the applicable income tax bands in Spain. Such pensions are not deemed as having a capital value, hence they are not subject to wealth tax nor are declarable under the M720 rules that require the declaration of foreign assets.

Spain´s DTA (Double Taxation Agreement) allows residents to obtain an NT tax code from HMRC to allow them to withdraw income from their pension without the deduction of UK tax at source. You can only receive an NT tax code if you have taken income from a pension before (not including your 25% PCLS which is free from UK tax at source anyway). You can also avoid paying emergency tax if you have a P45 dated the same year you requested the payment – this can only be if you are receiving any other UK sources of income for that year and live overseas. Should you not have an NT code or a P45 for that year, you have three options:

• Option 1 – When you withdraw your 25% PCLS, also withdraw the minimum withdrawal amount of income from your pension at the same time. The pension will then be informed of your NT tax code/tax code which can then be used to avoid income tax being deducted at source for all future payments. This can take months to obtain.
• Option 2 – Withdraw the minimum amount of income and wait for your NT tax code before taking the desired income/ad-hoc amount
• Option 3 – Take a withdrawal and then claim the tax back from HMRC at the end of the year. It is your job to reclaim the tax with HMRC every year. If you are a Spanish resident, you shall only be taxed in Spain as stated under the new double taxation agreement (DTA) that came into effect on 1 January 2015. This means a claim can be made to HMRC so that no UK withholding tax applies.

It is important to note that a 9.1% social charge is payable on any income taken from a pension (7.4% for pension income under €2,000 a month/€3,000 per couple unless you hold EU Form S1 or are not affiliated with the Spanish healthcare system. The rules surrounding this can be quite complex and require specialist advice.

Taxation on QROPS in Spain

The Spanish tax system’s definition of pensions excludes retirement schemes outside of Spain even if they received tax relief on contributions in the country of origin. For this reason, they could be treated as income from capital invested rather than earned income. Different accountants and tax advisers will argue differently regarding how QROPS are taxed which poses the argument about whether it’s worth taking the risk if we cannot be sure. Furthermore, the taxation is seen as potentially not on the amount received but rather on the profit element received as investment income tax. The Spanish system taxes retirement schemes in two separate ways:

1. Plan de Pension– This is equivalent to a UK Pension, i.e. Individuals are subject to Spanish tax relief on contributions into the scheme and income received is taxed as earned income.
2. Plan de Jubilacion– A retirement savings scheme, such as an endowment savings plan in the UK, is subject to investment income tax on the profit element only.

Some argue that a QROPS is treated as a ‘Plan de Jubilacion’. The Spanish provider is required to calculate the profit element when making the withdrawal and issue an annual tax certificate to the member although this is often not the case and there have been many arguments against this theory. You may find it difficult to obtain this kind of information from a QROPS trustee as this falls outside of their day-to-day business. As with any tax legislation, the argument remains a grey area until tested in court. As the theory hasn’t been tested in court yet, it remains a risk to assume the tax treatment of a QROPS is treated this way.

Wealth tax applies to a QROPS as it can be cashed in at any time although this is subject to the scheme’s rules. QROPS should be regarded as personal assets and declarable and subject to Wealth tax via the M720 at the end of the year

Taxation of Lump Sums in Spain

The Spanish tax law treats lump sum withdrawals, drawdowns and lifetime annuities all as earned income hence there is no tax-free element like in the UK. For this reason, if you are over 55 and considering moving to Spain from the UK, you should think about taking your lump sum in the UK before you move to avoid paying Spanish tax.

Lump sums in Spain can be taxed in a number of different ways which are as follows:

1. Marginal rate – You can choose to be taxed at your marginal rate of income tax if no other provisions are made.
2. Four-year rule – You can choose the lump sum to be taxed as an ‘exceptional payment’ over four consecutive years. The lump sum is therefore divided by 4 and paid over four years. This may reduce your tax liability if it takes you into a lower tax band.
3. Fixed Rate – This method is proven most popular among Expats in Spain. You can choose to opt for the first lump sum to be taxed at a fixed rate of 7.5%, known as ‘prélèvement forfaitaire libératoire’. This is only applicable to the first lump sum taken. A 7.4% Social Charge is also applicable on the lump sum. This is often used when taking a first lump sum withdrawal within a pension.

However, one exception does apply to the way lump sums are taxed. If the pension rights were acquired before 1 January 2007 through an occupational pension scheme, lump sums benefit from a reduction in tax of 30%. This relief ended in 2020. These rules are complex and need to be explained on a case-by-case basis. For this reason, it is important to speak to a tax specialist or an independent financial adviser.

Death Tax on Pensions in Spain

UK pension death tax applies to UK pensions regardless of where you are resident. This means if you die after the age of 75, your pension will be taxed at your beneficiary’s marginal rate. It is taxed as earned income in the relevant year, which could be a significant amount. Death tax can be avoided should the beneficiary be a resident outside of the UK. Should the beneficiary be resident in the UK then there are ways to reduce the income tax liability upon death.

Death tax does not apply to QROPS, meaning 100% of your pension fund passes to your beneficiaries free of tax, although this can be avoided in most circumstances should the pension remain in the UK.

UK State Pensions in Spain

Income from UK government service pensions remains taxable in the UK (and not Spain). You still include it on your Spanish income tax return, but receive a credit equal to the Spanish tax and social charges. Government pensions are exempt from social charges in Spain and they still increase to UK inflation which is a great benefit to have. You can claim your Spanish and UK state pensions together or separately (if you meet the minimum required amounts in both countries). You can top up your UK state pension from abroad too, giving you a great tool to increase your retirement income.

Tax Planning Opportunities in Spain

Spain may have high taxes, but it can be a very tax-advantageous country to live in if you have already accumulated wealth and you invest in a Spanish compliant bond.

Tax Efficient Opportunities in Spain – Spanish Compliant Bonds

Using Spanish Compliant Bonds offers a direct tax advantage. Specifically-designed plans for expats in Spain offer income tax and succession tax advantages. The Hacienda recognises them as tax-efficient. Probably the best way to illustrate this is by a direct comparison between non-compliant investments and Spanish-compliant investments.

Non-compliant tax

Mr Expat invested €100,000 in a non-compliant offshore investment bond in September 2019, and a year later the bond had grown by 10% to €110,000. Good news so far, until the taxation is considered as follows:

• No withdrawals have been taken at all.
• The Gain is €10,000, taxable as savings income (renta del ahorro).
• The first €6,000 is taxed at 19%, the remaining €4,000 at 21%. The calculation needs to be made by Mr Expat (or he could pay a Gestor or Accountant to do it) and the tax paid on the annual tax return.
• The total savings tax bill would be €1,140 + €840 = €1,980 (19.8% tax).

Had Mr Expat invested in a Spanish Tax Compliant Bond instead, no savings tax would be payable as no withdrawal was taken and he would not even need to declare the plan to the Hacienda.

Spanish-compliant bond taxation

Firstly, if no withdrawal is made, there is no tax to pay – a huge saving in tax.

Now assume the €10,000 gain is withdrawn. The important consideration here is that partial withdrawals are apportioned partly between “redemption of capital” (from the original investment) and partly from the gain.

Most clients we meet wrongly assume the tax would be the same as their current non-compliant investment of €1,980 (19.8% of the gain). But this is not the case at all. The tax due would be reduced significantly as calculated in the three stages below:

First calculation

• €110,000 minus €100,000 = gain €10,000, straightforward so far.

Second calculation

• New value €110,000 / gain €10,000 = 9.09% Therefore €10,000 x 9.09% = €909 (slightly confusing but bear with me).

Third calculation

• The €909 is the taxable gain as the Hacienda sees it. Therefore €909 taxed at 19% = €172.71 (1.72% of the gain).

Mr Expat would be taxed €1,980 in a non-compliant investment even if no withdrawals had been made, whereas in a Spanish tax compliant bond he would only have a tax bill of €172.71 even when taking the full €10,000 and zero if no withdrawal was made. A tax saving of €1,807.29 in the first year. This is a spectacular difference in a country’s treatment of investments where tax is concerned.

If these dramatic tax savings have not made your ears prick up, then consider these additional advantages of Spanish-compliant investments:

• No need to declare on Modelo 720.
• They are “tax-compliant” as seen by the Hacienda.
• Tax is calculated by the bond provider and paid directly to the Hacienda on your behalf with no need for you to do any calculations or to pay someone else to do it.
• No need for probate on death.
• Multiple currencies available €, £, $ etc.
• They are Inheritance Tax efficient.
• Large range of available investments whether you like investment risk or not, including some capital-protected funds for low-risk investors.

Your current investments may be causing you problems with non-declaration or draconian tax bills. The time to review your investments in line with your Spanish tax Residency is now.

*Please note: The information provided on this page is general information based on our understanding of the current Spanish tax legislation as of 2024. Should any of the information be inaccurate or misleading, we take no responsibility for any reliance placed on it. We recommend that individuals always seek specialist advice before making any decisions.