Advisers with clients thinking of moving to Spain need to be aware of their revised income tax and wealth tax positions, according to Jason Porter, director of specialist expat financial planning firm Blevins Franks and head of its European Emigration Advisory Service.
In a briefing note, he said Spanish wealth tax is payable on the net value of most capital assets, including real estate, savings and investments, as well as personal items such as jewellery, art, antiques, cars.
While exclusions include pension rights (other than purchased annuities), a May 2019 binding ruling from Spain's Directorate-General for Tax (DGT) concluded that non-EU pension plans do not qualify for the wealth tax exemption, stating ‘the consolidated rights and economic rights of pension plans established in non-EU Members States may not benefit from the exemption'.
This means that Spanish wealth tax now applies to a UK pension fund, from the point at which a member can take benefits (currently age 55). UK personal pension funds will be added to other worldwide assets to calculate tax liability each year, Porte continued.
"This is a new development, and a client could try defending their pension plan with the Spanish tax authorities. Alternatively, consider a transfer of the funds into a Spanish or EU pension plan, such as an EU-based Qualifying Recognised Overseas Pension Scheme (QROPS).
"A couple's wealth tax exemption amounts to €2m, including main home relief. The state rates start at 0.2% for wealth up to €167,129 and rise progressively to 3.5% for wealth above roughly €10.7m, while each Spanish autonomous region has its own set of rates."
He further cited a possible means of reducing wealth tax for a Spanish resident by utilising the rule which says the cumulative wealth and income taxes cannot exceed 60% of the general and savings net taxable base amount.
While this limitation is subject to a payment of a minimum of 20% of the full wealth tax calculation, some relatively simple tax planning can reduce assessable income, and in turn wealth tax liability, he said.
"You should beware of a further 2021 binding ruling from the DGT, which sets out that a pension deemed to not originate from Spain, or from within the EU (protected under the 2016 EU Pensions Directive), which is transferred to another scheme, is a transfer of a third country pension resulting in the entire value of the pension being taxable.
"Therefore, the potential transfer of a UK scheme to an EU-based QROPS to avoid Spanish wealth tax would also avoid Spanish income tax on the transfer only if it occurs prior to the scheme holder acquiring tax residence in Spain."
