Organising your finances and tax can feel a bit daunting and fiddly in your own country, let alone abroad. Here, you will have your answers to tax on rental income, inheritance tax, pensions, and more. This article was written by Nicole Sandler and John Diking from financial advisors in Spain and our partner, Chase Buchanan.
Once we help individuals create a strategic plan for their visas, logistics and timings before moving to Spain; these are the most common questions we tend to receive about their finances. They are also the same questions we receive from individuals already residing in Spain which is why we decided to collaborate these together.
We have worked with thousands of foreign nationals moving to and living in Spain and have lived here for 20 years and 9 years respectively. Our focus is to help clients live in Spain in the most tax efficient way so they can enjoy peace of mind for themselves and their families.
1. I am a Spanish resident with a UK property, where do I pay tax on the rental income I receive?
UK rental income will be liable to tax in the UK because that’s where the property is physically situated. You will also be subject to tax in Spain where you are a Spanish resident because you’re subject to tax on your worldwide income and gains. However, there is a double taxation treaty (DTA) which ensures you don’t pay tax twice. What happens is, any tax already paid in the UK will be credited against any tax liability due in Spain. So, you are subject to income tax in both jurisdictions of the UK and in Spain.
Remember to declare the UK property on the Modelo 720 in Spain which is the overseas asset reporting declaration due at the end of March each year.
2. I´m resident in Spain but selling a UK property. Where do I pay capital gains tax on the sale profit?
If you’ve owned the property prior to April 2015, when you sell the UK property you will be subject to capital gains tax (CGT) in the UK on the gain element since the 6th April 2015 until the sale date. You will also have your UK CGT allowance to use, even though you are a Spanish resident.
However, because you are Spanish resident, the sale of the UK property will also mean you will be subject to CGT in Spain. Again, there is a DTA for this so you won’t pay tax twice. Any CGT paid in the UK, will be credited against the tax liability due in Spain.
As time goes on, potentially the UK tax liability may become greater if the value of the property there become higher. So, if you are a Spanish resident with a UK property and you are considering selling it, now may be a good time to consider your planning.
As you can see, Spanish residents who hold UK property are really not tax efficient since you are subject to income tax, CGT and eventually death taxes in both Spain and the UK.
It is important that you seek professional financial advice before you move to Spain as it can save you a lot of tax. If for example, this property was your main residence in the UK, you could potentially have sold it tax free before you became a Spanish tax resident.
3. Can I draft a Will in Spain to look after my worldwide assets? Like an international Will?
Typically, we would recommend that you draft a Will in any country where you hold assets to speed up the probate process and ensure they do not contradict one another. So, you can have several Wills if you have assets in several countries.
A Spanish Will needs to be drafted at the Notary and a lawyer can ensure Wills do not contradict one another and are tailored to your situation.
4. Does opting for British law to apply in my Spanish Will mean UK taxes will therefore apply?
Several years ago there was a piece of European legislation that came through called Brussels IV. It states that as a resident of Spain, you can opt for your country of your nationality (e.g. British Common Law) to apply to your Spanish Will. This has nothing to do with taxes and is purely how your assets will be distributed on death.
Spanish (Civil) law dictates how assets are distributed under forced heirship rules, whereas British law allows you to choose who the beneficiaries are and also to choose the percentage terms you wish each beneficiary receives.
If your Will is not up to date or you don’t have a Will in place, we would urge you to contact a lawyer or a Notary to draft one.
5. Does UK inheritance tax apply now that I am living in Spain?
If you have UK assets they are always going to be subject to UK inheritance tax (IHT) because the assets are physically located in the UK. For example, if you hold UK property or a UK bank account that will attract UK IHT since they are UK situated assets.
If you are also deemed to be UK domiciled when you pass away you are subject to UK IHT on your worldwide assets, irrespective of where you live. Keep in mind your domicile can be completely different to where you are tax resident and it can be different to your nationality.
Domicile is a complex part of financial planning and whether you are UK domiciled or not depends on how long you’ve lived abroad and any ties you still retain with the U.K. We can guide you further on this particular point if necessary.
If you have Spanish assets or if you live in Spain and receive an inheritance from anyone, anywhere in the world you’re also going to be subject to Spanish IHT.
With death taxes there are no DTA´s between the UK and Spain, however any taxes paid in the UK will be credited against taxes due in Spain, so it does work in a similar way to having a tax treaty in place.
6. If one of us passes away, is our joint investment frozen as happens with some Spanish bank accounts?
Whilst Spanish sited assets would typically be frozen, we specialise in is setting up international Spanish tax compliant investments for our clients. Tax compliant means they are liked and approved by the Spanish tax authorities. Such investments will continue in the survivor’s name and nothing is frozen, the surviving spouse will then be the sole owner of that policy and can continue to take withdrawals as and when they need to.
7. Are my UK ISA´s and premium bonds tax efficient in Spain?
The short answer here is no. Whilst premium bonds and ISA’s are very tax efficient in the UK, they are fully subject to income tax in Spain. In fact, they are not tax efficient investments to hold in Spain at all.
It is best to make use of these investments whilst you are still a UK resident.
If the value of these investments is greater than €50,000 don’t forget you will need to declare these on the Modelo 720 overseas asset reporting form.
8. Can I take my pension lump sum tax free in Spain, like I can in the UK?
In the UK you can draw up to 25% as a tax-free lump sum on most pensions, once you reach pensionable age. Whilst it is tax free in the UK, that 25% is fully subject to income tax in Spain.
So, if you are still a UK resident and are thinking of moving to Spain with a pension; it’s really important that you seek financial advice on your pension before moving to Spain.
9. I have a long-standing relationship with my financial adviser in the UK, can they continue to advise me on my investments/pensions?
UK based financial advisers no longer have passporting rights in the European Union (EU) post Brexit. This means that unless the UK firm have sought passporting rights in the EU (and most of them haven’t), unfortunately they can no longer provide you with financial advice once you are no longer resident in the UK.
It is something that could have a huge impact on your policies going forwards. Basic administration such as withdrawals, updating your details or more importantly, fund changes can’t take place without advice.
These Brexit-related changes have applied since 1st January 2021 however we still receive a lot of enquiries on this topic. A lot of people still aren’t aware of this fact.
If you haven’t yet left the UK, we would advise you to update your financial planner that you will soon move abroad.
We would also recommend that you engage an adviser based in Spain who is regulated under the relevant European directives (MIFID II and IDD) who possesses qualifications, experience and knowledge necessary to give professional wealth management advice, relevant specifically to Spain and with vast knowledge of regional tax laws in the area where you will live.
10. I have pension pots in the UK, do I need to take any action when I move to Spain?
The pension landscape has changed dramatically over recent years. In addition to consideration over the tax-free lump sum, understanding what your pension options are once you move is very important.
Factors such as whether you should keep your pension where it is or transfer it to something more suitable once you live in Europe should be discussed.
Individuals who have pensions that were close to the UK lifetime allowance potentially have a window of opportunity right now to act. This is because Labour have claimed they will reinstate the allowance if they gain power. Therefore, understanding whether a pension transfer out of the UK is suitable, is a very worthwhile discussion right now.
Pensions are highly complex and involve a lot of analysis to make the right decision for you. We can help guide you on these points to see what is the most suitable option for you.
This article was originally published on the website of the British Chamber of Commerce in Spain.