Whether you are thinking of moving to Spain or already living here, tax is a major part of your financial life that needs to be considered and planned for carefully.
Tax tips for living in Spain 2023
By Barry Davys
This article is published on: 3rd April 2023
1. In the UK, probably the best savings vehicle is an Individual Savings Account (ISA). This is because the income and capital growth is free of income tax and capital gains tax. It is, however, a UK tax scheme and is not recognised in Spain. Selling your ISA whilst you are still a UK tax resident can save you paying tax in Spain both on an ongoing basis and when you sell. There are also options where you can replace the ISA investments with very similar ones in Spain in a tax efficient manner once you have sold your ISA.
2. If you can, take your 25% tax free lump sum from your pension before you come to Spain. Again this is a UK based tax rule and it does not exist in Spain. You may be able to take part of a pension without tax in Spain, but there are rules and conditions. In the UK it is a clear rule and we recommend taking advantage of it. Like the ISA it is possible to reinvest the money with similar investments as you had in your pension on arrival in Spain.
3. You can pay into a UK private pension for up to five years on leaving the UK and continue to receive tax relief on the contributions. You will need to start the pension before you leave the UK. The limit is a maximum of £3,600 per annum but you only pay £2,880. The government will pay your pension company the difference to make it up to £3,600. A husband and wife paying into a pension for five years would qualify for a UK Government “top up” of £7,200. At the end of five years they would have a pension pot of £36,000 which will remain free of income tax and capital gains tax in Spain, until you start taking money from the pot.
4. Do you need to top up your National Insurance Contributions to improve your UK state pension? It is easier to do this before you leave the UK.
5. The sale of a main residence in the UK is free of capital gains tax. In Spain, the rules are different and you may have to pay capital gains tax on the change in value between the purchase price and the selling price of your home. As an example, a £200,000 gain (not at all uncommon if you have had your house for 10 years) could mean a tax bill of £44,800.
6. If you and your family are considering inheritance tax planning, consider making or receiving gifts before you leave the UK. These gifts can be potentially exempt from UK inheritance tax. In Spain, they would be subject to gift tax.
Once you are living in Spain
7. Are you eligible for the “Beckham Law”? This is a law that was introduced to encourage skilled workers to Spain. The tax rate is set at just 24% for your employment income for a period of five complete Spanish tax years. This is the part of the scheme that you will see most heavily promoted.
However, the scheme also allows you to receive capital gains and investment income from outside of Spain without paying Spanish tax. Careful structuring of your affairs can lead to a plethora of planning opportunities. Perhaps the biggest opportunity is selling your UK business and paying 0% tax on the sale. For further information please email barry.davys@spectrum-ifa.com
8. If you are approaching retirement or retiring to Spain, it is possible to save tax on the income you receive by planning the source of your income. As a brief example, pension income is generally taxed as employment income and taxed at your highest rate. Drawing funds from an investment can result in tax as little as 2%. From another source there can be 0% tax. To benefit from this planning it is important to have an adviser who understands your situation and requirements at the same time as having a clear understanding of how investments are taxed in Spain.
9. Different investments attract different tax treatments in Spain in the same way as they do in other countries. There are investments in Spain that are taxed more than others. Try to use the lower tax ones where the investment matches your requirements. You can benefit from many years without paying income tax and capital gains tax.
10. In Spain, inheritance tax is based on taxing the person receiving the inheritance rather than taxing the estate of the person who has died. If inheritance tax is a concern, with the right advice you can build a plan which manages the amount of tax due. The bedrock of the plan should be that you are not left short of money in later life. Your plan should then match your personal requirements. Some planning is simple and straightforward, so it is worthwhile looking at inheritance planning before events overtake you.
11. Are you considering returning to the UK? It is also worthwhile thinking about the possibility of an unplanned return to the UK if one partner were to die, for ill health or ill health of a family member in the UK such as a parent. If a return to the UK is a possibility, make sure you have the type of investment which will not tax you in the UK for the time you have spent in Spain.