Personal Tax Returns Archives - Legal Financial Tax Spain

Beautiful,Luxury,Holiday,Villa,House,In,Marbella,Town,On,Costa

Understanding tax in Spain is essential, not just if you live here, but also if you own a property in Spain.

The Spanish tax year runs from 1st of January to 31st December. Residents have to complete their income tax return, declaracion de la renta, by 30th of June the following year, and non-residents have until 31st December.

Spain has a double taxation treaty with the UK, which means you can avoid getting taxed twice on the same income.

Resident or Non-Resident for Tax in Spain?

You are considered to be tax resident in Spain if any of the following apply:

Overseas Assets Declaration

27 February 2024

by sd_editor Legal Personal Tax Returns

Spain has legal requirement for its residents to make an overseas assets declaration, notifying the tax authorities of worldwide assets that they own or control.

Until relatively recently, failure to make an overseas assets declaration, or submission of an inaccurate one, could result in extremely costly penalties. Unreported overseas assets that were later discovered by the authorities, would be treated as undeclared income on which tax should have been paid.

The legislation, (LEY 7/2012, de 29 octubre, de prevención y lucha contra el fraude fiscal), was passed in Spain in 2012. It was aimed at deliberate high level tax evaders, and the fines and penalties could add up to more than 150% of the undeclared or incorrectly declared asset value.

In January 2022, the European Court of Justice passed it’s ruling agreeing with the European Commission, that the penalties for failing to properly disclose overseas assets are excessive and contrary to EU statutes and principles.

The three judges ruled that the excessive sanctions for incorrect or late compliance are disproportionate and discriminatory. Adding that the penalties may deter businesses and individuals from investing or moving across borders in the EU single market, thus interfering in key founding principles of the EU, the four freedoms.

As the ruling was binding, Spain had to take steps to comply. Where previously the late filing penalty was the greater of a minimum of €10,000, or €5,000 per undeclared asset, this is now a fee of €150 or €20 per asset. The fine for incorrect or missing information, is a minimum of €300 and will vary depending on the deemed infraction.

The tax office can now only review or investigate overseas assets declarations going back 4 years, and if you had assets abroad, and you can show that they originated in years outside this, you cannot be taxed or penalized for undeclared income.

The EU agree with the principle of the law, so putting aside the EU ruling regarding penalties and sanctions, the declaration of overseas assets continues to be mandatory, for all residents in Spain.

Making an Overseas Assets Declaration

Modelo 720

An overseas assets declaration is made by completing a form known as ‘Modelo 720‘. The deadline for submitting the form is the 31st of March, and generally speaking the declaration only needs to be made once, as subsequent declarations are only necessary if assets have been acquired, or disposed of, or if existing declared assets have increased in value above a given amount.

Modelo 721

In 2023 new regulations were passed to require the declaration of crypto currencies held on overseas exchanges. The Royal Decree 249/2023, de 4 april, and Orden HFP/886/2023, de 26 Julio, which approved the “Informative declaration on virtual currencies located abroad”.

The declaration is done by completing the form Modelo 721. The declaration requirement began in 2024 in reference to the year 2023.

Whilst this overseas assets reporting requirement might seem intrusive, it is in reality only the result of what was a small move by the authorities, in their steps to counter the country’s rampant tax evasion.

Changing from UK to Spanish Residency and Understanding Tax in Spain

14 February 2024

by sd_editor Brexit Latest Personal Tax Returns Tax

Needless to say when taking up Spanish residency, understanding tax in Spain and planning for fiscal residency is important. Tax in Spain is very different to the UK, so for anyone making the move, planning this part of the transition to full-time Spanish residency is should be firmly on the agenda.

Here we provide an overview of the tax related requirements and key points that most need to consider when moving in Spain.

Tax related requirements once you’ve taken up residency in Spain

There are lots of things to consider when taking up residency in Spain, and where tax is concerned, the starting point is understanding all the differences Spanish resident status brings with it.

You are generally liable to pay taxes in the country in which you reside. This means that once you have taken up residency in Spain, you will be subject to Spanish taxation. The obligation to pay taxes in Spain arises when you meet the residency measure based on the 183 day rule. This responsibility applies regardless of whether you have registered as a resident or not.

As a resident in Spain you are liable to pay tax on:

General income
Interest on savings and investments
Capital gains on sale of assets
Wealth (if your total wealth is €700k or more – €1m including allowance for family home)*
Gifts and inheritance

*Allowances are lower in some regions – in Madrid and Andalucia wealth tax is currently waived.

Large fortune tax is a new national tax on wealth that kicks in on net wealth above €3m. (Regionally paid wealth tax is applied as a tax credit)

Spanish residents must also declare assets they own outside of Spain such as:

Property
Investments
Savings
Pensions
Insurance

When do you become resident for tax purposes in Spain?

Tax obligations arise for the fiscal year in which you become resident in Spain, not from the date you got your residency. New residents in Spain need to be mindful that the Spanish tax authorities apply the default assumption that an individual who has obtained residency, (formally registered as a resident), in Spain, has done so because they are switching their habitual residence from the country that they were living in, to Spain.

Depending on your circumstances, this means that you could be deemed to be fiscally resident in Spain despite not having lived in Spain for 183 days of the year. For example if in August last year you sold your home in the UK, bought a home in Spain, moved over and obtained residency, under the habitual residence rule you will be deemed to be Spanish tax resident in last year. This is because Spain do not split the tax year, so the fact that you now only have a home in Spain overrides the 183 day rule, i.e. you cannot claim habitual residence in the UK if you no longer have a permanent home there.

On the other hand, if you moved to Spain and obtained residency, however have kept a permanent home in the UK, you could claim that your habitual residence did not change in last year applying the 183 day rule, as you spent more time in your home in the UK than you did your home in Spain. This year as you will spend more than 183 days at your home in Spain, then you will be resident for tax purposes this year.

What do you need to do after becoming a Spanish resident?

Individual circumstances are of course all different. It’s therefore important to know the key things that apply and need to be done in your own personal situation.

Generally speaking, when you change residence from one country to another, in most cases there is, or should be an element of financial and tax planning.

Basic planning begins with knowing the taxes that will apply, the returns that need to be done, and when. Then it’s a case of getting a clear picture of how these will apply in your situation, and the implications so you can plan accordingly.

The following is a summary of the Spanish key tax dates and when they apply according to when you became resident.

Spanish Tax Return Deadlines

Non resident property tax Modelo 210 – 31^st December following year (e.g. 2023 must be submitted by end of 2024)

Overseas assets declaration Modelo 720 – 31^st March the year after becoming tax resident

Income tax return Modelo 100 – 30^th June the year after becoming resident

Tax Return and Declarations Guide for Change of Residency

New Residents Last Year

If you took up residency and became resident for tax purposes in Spain last year, assuming that you were in receipt of income, your personal tax return is due in June this year. If you owned assets outside of Spain, of value €50k or more, you should also have submitted an overseas assets declaration (Modelo 720) in March this year.

Anyone who took up residency in the second half of last year who can claim that their habitual residence did not change, assuming they spent less than 183 days in Spain in the year, then this year is their first fiscal year in Spain. If they were an owner of a property owner in Spain the previous year, they will complete their last non resident property tax return this year and in June next year their first resident income tax return will be due.

New Residents This Year

Anyone who moved to Spain in the first half of this year, will generally be deemed tax resident in Spain this year. If applicable, the Overseas Assets declaration, Modelo 720, is due in March next year and income tax returns by end of June next year.

If you take up residency in the second half of this year, and are able to show that your habitual residence didn’t change, then next year will be your first fiscal year in Spain. The Overseas Assets Declaration and income tax returns will not be due until the year after next.

What are the differences between UK taxation and tax in Spain?

Tax in Spain has a general reputation of being excessive compared to the UK. This is not surprising if for example you compare income tax. The basic income tax allowance in Spain is €5,550 (low income €14,000), vs £12,500 in the UK, and the tax rate rises to 30% as soon as your taxable income reaches €20,200. These are clearly negative differences.

There are however also many positive differences. For example, in a family with 4 children, the parents get an addition €19,100 tax allowance between them Rental income from a residential property also has a substantial 60% reduction applied before it is taxed, and the top rate of tax on dividends in Spain is 26% versus 38.1% in the UK.

In some circumstances pensions may also attract less tax in Spain than in the UK. Read more about Taxation of UK Pensions in Spain.

We aren’t going to list every difference in this article, and the above examples illustrate that the differences aren’t necessarily all negative. How it works out for each individual taking up residency in Spain, depends on their situation and how they plan and prepare for their transition to being a Spanish tax payer.

Planning for tax in Spain before taking up residency

Contrary to perception Spanish taxation is often not as bad as many thought, or were lead to believe that it would be. The reality is that if you become resident in Spain, you are liable to pay tax in Spain.

For most it is certainly not a matter to be avoided. Anyone who has recently take up residency in Spain or who is planning to, should be considering the fiscal aspects of their move, the possible tax implication what they need to do to be ready for Spanish taxation.

By taking time to plan, it is possible to minimise potential Spanish tax exposure, limit it, or at very least fully understand it.

We recommend anyone moving to Spain to follow these 5 steps:

Simple Steps to Successfully becoming a Spanish Tax Resident

Learn about the tax system – what needs to be done and when
Understand how the Spanish tax regime differs in your situation and what tax you will have to pay
Find out what tax treatment applies to assets you own and tax breaks that you currently enjoy
Make changes in your financial set up to minimise, limit or avoid Spanish tax
Get professional advice on financial or tax matters in both the UK and Spain

Spanish Residency Financial & Tax Consultation

If you are not sure about your tax position, have questions about tax in Spain, or would like assistance with any of the steps above, we can provide you with an initial review of your situation. We’ll highlight key tax points relating to tax, your situation and answer your general questions.

You may need further help understanding how tax in Spain affects you, or planning to limit how much it does. In which case our team of financial and tax consultants specialised in change of residency planning between UK and Spain, are here to help.

Spanish Residency Financial & Tax Consultation

Taxation of UK Pensions in Spain

8 April 2021

by sd_editor Pensions Personal Tax Returns

Spanish residents are subject to tax on all their worldwide income, and this may also include taxation of UK pensions in Spain. Unlike the UK where aside from the tax free lumpsum, payments from pensions above the earnings threshold, are subject to income tax, in Spain, the applicable rate of tax and whether you pay tax, depends on the type of pension.

Since Brexit, the variation in taxation of UK pensions in Spain has become even more complicated due to the fact that some types of UK pensions are no longer considered to be pensions in Spain. To illustrate how complicated taxation of UK pensions in Spain can be, the following shows all the different tax scenarios that could apply to various UK pensions and payments from them. They can be:

Exempt from declaration
Declarable but totally exempt from being taxed
Partly exempt from taxation
Taxed as regular income
Considered as withdrawals from a savings account
Taxed as investment income
Treated as capital gains
Exempt from Wealth Tax
Included as assets for Wealth Tax purposes

Considering the above, it’s clear that working out or understanding taxation that will apply to a UK pension in Spain isn’t straightforward and requires a good level of knowledge on the matter. So how does Spain differentiate the types of pension or income that in the UK we consider to simply be a pension?

Taxation of UK Pensions in Spain vs Retirement Savings

One of the biggest differences in taxation of UK pensions in Spain, arises due to the fact that personal pension schemes, such as Self Invested Personal Pensions, or SIPP’s, are no longer considered as pensions for Spanish tax purposes. Instead they are treated as retirement savings or investment schemes and therefore subject to taxation as general investments, i.e. tax on the capital gain.

In many circumstances this can be advantageous as Spain’s rates of tax for capital gains are a lot lower than general income tax rates. Additionally, if you are planning to move to Spain, you could potentially crystalise all gains, prior to taking up residency and thus ‘arrive’ in Spain with 100% capital in your retirement savings scheme.

Conversely as retirement savings or investment schemes are counted as assets forming part of overall wealth, larger UK personal pensions may create or increase a Wealth Tax liability, whereas pensions in Spain are exempt from Wealth Tax.

The second major difference is the Pension Commencement Lump Sum, or 25% UK tax free cash payment. This is taxable in Spain. If paid from a scheme considered to be a pension in Spain, e.g. a company pension, it will be subject to general rates of income tax, if taken from scheme considered to be retirement savings, e.g. a SIPP, capital gains tax rates will apply.

Let’s now look in more detail at the taxation of different types of UK pensions in Spain.

UK pensions treated and taxed as general income in Spain

UK state pension

The UK state pension is considered as pension income and therefore taxable as general income in Spain.

UK company pensions

Income from UK employment pensions such as final salary and group pension schemes, is treated as general earned income by Spain, the same as if it were a salary paid by an employer.

UK Government pensions

Pensions paid by the UK Government, would be to subject to general income tax, however under the terms of the double tax agreement between the UK and Spain, these pensions may only be taxed in the UK and are exempt from taxation in Spain.

To name a few, UK Government pensions including Teachers, NHS, Fire Service, Police, Armed Forces, Civil Service, Local Government are all pensions that are exempt. Whilst the pension may not be taxable itself, it will be considered against the Spanish personal tax allowance, so if you have other income may use up lower tax rates, so the other income is taxed at higher rates.

There are some exceptions to the UK Government pension Spanish tax exemption. If the pension administered and by a third party, e.g. some NHS pensions are a Capita scheme, then the pension is counted and taxed as general income in Spain

UK pensions treated and taxed as retirement savings or investments in Spain

Under Spanish tax law, for a personal pension held outside of Spain to be counted as a pension in Spain, it must be regulated as pension in the EU. Until the UK left the EU, all UK personal pensions fell under EU pension regulation, but since Brexit they no longer do, and are therefore deemed to be retirement savings or investments.

Generally speaking, any personal pension that is not a work pension paid by the employer or the employers pension scheme, gets this treatment.

Under tax rules in Spain, it is only the capital gain in a retirement savings scheme that is taxed when a withdrawal is made. So to work out how much of a payment is taxable, you need to know the difference between the amount that was paid in, the contributions into the scheme, and the value of the scheme at the time of the withdrawal. This is often quite complicated and could involve checking through hundreds of transactions over many years. If records are not available, it will be impossible to prove the difference to the tax office, in which case the tax office would require the full amount withdrawn to be taxed as a capital gain

Annuities Purchased by with a UK Personal Pension

Once again another different way a type of UK pension income is taxed in Spain. Income from annuities purchased using funds saved in a UK personal pension scheme has a separate tax treatment.

The annuity payment is deemed to be a part return of capital and part taxable income. The split between capital return and taxable income, is determined by the age of the person at the time the annuity is taken out. The table below shows the splits for lifetime annuities according to age when purchased.

Up to age 40 years 40% is taxable
Age 40 – 49 years = 35%
Age 50 – 59 years = 28%
Age 60 – 69 years = 24%
Age 66 – 69 years = 20 %
70 years plus = 8%

Taxation of UK Pension Transfers & Lump Sum Payments

A Spanish resident transferring a UK company pension into a personal pension, i.e. a final salary defined benefits scheme into a flexible drawdown personal pension scheme would be deemed by the Spanish tax office to be taking an income payment and income tax would apply to the full amount transferred.

Similarly, a transfer from a flexible drawdown personal pension scheme, to for example, an overseas pension scheme, (QROPS or ROPS), would be viewed as a crystallisation of the fund and liable for capital gains tax on all the growth, (or the full amount if the capital/growth split cannot be evidenced).

As already mentioned, UK pension tax free lumps, in many cases, or if not planned carefully, will be liable for tax in Spain. Basic guidance is to make any changes and to take lumpsums before taking up residency in Spain. Our advice to anyone with pensions planning to move to Spain is to take advice from professionals who fully understand taxation of UK pensions in Spain.

UK Pensions and Wealth tax in Spain

We highlighted at the start that sizable personal pension pots may present Spanish wealth tax issues. To generalise, if the personal pension is not accessible, e.g. you are under UK pension age (currently 55), then the scheme should be exempt from wealth tax. However if it is accessible, e.g. you are age 55 with funds in a SIPP, then the funds won’t be exempt.

Taxation of UK Pensions in Spain and Planning for Spanish Residency.

It is clear that the taxation of UK pensions in Spain is not straightforward. There are huge pitfalls and mistakes that can be made as well as significant tax advantages that can be achieved with well advised planning.

Financial Advisers in the UK do not know and understand the Spanish tax system and the many variations in taxation that apply to the different types of UK pensions. Similarly most gestors and accountants in Spain who complete tax returns for clients who have UK pensions, don’t know and understand the different ways in which tax applies in Spain to the different types of UK pensions.

As a result without the correct guidance and advice, many individuals end up with incorrect tax declaration, pay more tax than they should have, or worse still expose themselves unwittingly to huge tax liabilities.

To avoid potentially life changing costly mistakes, we cannot emphasize strongly enough the importance of getting the correct guidance and advice.

OLS Legal Financial Tax specialise in UK to Spain change of tax residency planning. Our Financial & Tax Consultants are UK trained and qualified financial advisers and have decades of experience helping individuals from the UK to plan this very important part of their transition to Spain. Supported by our Spanish tax adviser professional partners, they are able to guide and advise you whatever your situation.

Fill in the brief form below to provide us with details about your situation and get a free no obligation initial review.

Free No Obligation Spanish Tax Review

<br />

Spanish Residency

Financial & Tax Consultation

The initial review of the information and feedback is free of charge. If following the review if you would like a full consultation, fees start at £249 / €295+IVA.

Posts in category: Personal Tax Returns

Tax in Spain for Residents and Non-Residents