With its close proximity to the UK making family visits easy, the lovely climate and the large expat community, have made Spain one of the most popular places in the world to retire. For many years, expats often spent time in Spain whilst keeping a foot back in the UK, especially when it came to tax residency. Brexit changed all that for most people, forcing expats to make a decision about tax residency, upgrading existing green residency forms to the new TIE card, and letting go of that final bit of ‘Britishness’ that even I had held onto … handing over a UK driving licence for a Spanish Licence!
Whether you’ve only just moved to Spain, or have lived in Spain for many years, one thing is for sure … paying too much tax unnecessarily, avoiding problems for you and your family in the event of your mental and/or physical health declining, and making sure that all is in order for your loved ones in the event of your death, are important factors to consider.
I started advising people in Spain in 2005, and have personal experience of seeing expats either organised, or blissfully unaware that they are storing up potential problems from either a tax perspective, or making life very complicated for immediate family should they have health problems, or in the event of death. Here are some of the things to think about to make sure you have every angle covered!
Tax Efficiency
This is a complex area that’s easy to get wrong if you don’t know how to navigate the Spanish tax system in a way that keeps your tax down as much as possible! Being aware of special tax breaks available to you as a Spanish resident is important. Looking at how your income is made up (rental income, private pension income, State pension income, investment income etc), where your savings are held, how your investments are set up (joint or in sole names, diversification). Working with a financial adviser who knows how to advise Spanish residents to keep tax down, is crucial when it comes to tax efficiency in Spain. I have written individual articles on many of these subjects. Remember, what’s tax efficient in one country isn’t necessarily tax efficient in another, ISAs, UK/Offshore investment Bonds, bank/building society savings and private pensions are prime examples of this.
Holding savings inside and/or outside Spain
Generally, people are untrusting of the Spanish tax system, and choose to leave their savings in a bank account or other investment vehicle outside Spain. Taking advice on tax efficient investments as a Spanish resident does not mean bringing your money into Spain. In fact, quite the opposite, I never recommend bringing money into Spain other than what is needed on a day to day basis. Spain have an unusual rule that allows the Hacienda to take money directly out of your account without permission should it be deemed that you owe money, whether it’s an unpaid parking or speeding fine, a dispute over a property sale price or unpaid income tax!
But, it’s important to understand that any savings or investments that are not in the correct vehicle for a Spanish resident will suffer a tax charge on your income tax return in Spain, even if you haven’t drawn the interest/growth … and that includes savings held in a Spanish bank!
Also, any savings with a value over €50,000 outside Spain should be reported on a return called the Modelo 720, which is typically used by the Hacienda when assessing assets for inheritance tax. There are tax efficient vehicles available, whether you have your savings in Spain or outside Spain, that protect you and your partner in the event of death, also offering the potential for tax free growth while invested. So give it some consideration if you haven’t already.
Worldwide automatic sharing of information
The Common Reporting Standard! The net is closing on those who prefer to squirrel their savings away and not tell anybody! If you hold savings or have income outside Spain, information is typically shared with the tax authorities by your bank once a year. Holding your savings in a Spanish Compliant Investment puts your savings on the radar in a tax efficient way, this can be a valuable tool when it comes to your tax planning.
Pensions held outside Spain
If you have a UK pension and are either in drawdown or have not yet taken the benefits, you may save a tremendous amount of income tax and avoid being taxed on death after age 75 by considering a QROPS. Are they right for everybody and every type of pension? No … but UK pension income is typically taxed under PAYE and also, on death after age 75, your beneficiary will be taxed on the proceeds … this cliff edge can be avoided if you move your pension to a QROPS.
Using rental property to provide an income
For many expats this is usually a head over heart issue … whilst rental income can offer a stable income if you have a good tenant, most people I have come across over the years find that they really do not want the hassle of maintaining the property, dealing with letting agents, coping with void periods, the inability to use the money tied up in the rental property … the list goes on! But aside from this, there are two main issues with using rental property for income when you live in Spain. The first is that the rental income is added to your other income and taxed accordingly. The second, is on the sale of the property in the future. Capital Gains tax is payable on the difference between the purchase price and the sale price. Even if you are renting out your previous family home in the UK, the Hacienda make no allowances for the time you lived in the property. Capital gains tax is payable on the full gain. There is also a sting in the tail for UK rental properties … there is no double tax treaty on capital gains tax. This means that should you sell the property in the future, you will pay capital gains tax on the profit in the UK AND in Spain. The monster is likely to get bigger over time as property prices rise! If you are looking for tax efficient regular income, consider a Spanish Compliant Investment rather than a rental property, you may find it offers you more financial freedom, less worry, and less tax!
Time allowed outside Spain without losing your residency
This is important, especially for those who have a TIE card and are considered residents by the Spanish authorities, but have chosen for various reasons not to declare Spanish tax residency. Ultimately, if you are not completing a tax return in Spain, ask yourself how likely is it that your residency will be renewed. Flipping between countries will work for a while, but post Brexit it will not work long term and you run the risk of losing your right to live in Spain. This will mean starting the whole residency process again, and satisfying any new requirements put in place since your first application.
Wills and leaving clear instructions
This is very straight forward. I recommend making a Will in your country of origin and a Will in Spain, but make sure that one does not cancel the other! You could choose to have your UK Will used for your Spanish assets, but the process is not easy. The simplest way for your loved ones to deal with the distribution of your assets is to make a Will in each country. If you die in Spain without a Will, your assets will be dealt with under Spanish intestacy rules, which involves forced heirship, where children receive the lions share on your death. This scenario may be particularly harmful if you wanted to leave your assets to your partner … MAKE A WILL!
In terms of leaving instructions for your loved ones, a Will tends to give a high level outline. Please leave a detailed letter/list with your Will explaining who to contact, where your bank accounts/savings/investments/pensions are held, with any other information that your beneficiaries/executors would need when dealing with the distribution of your assets and organising your funeral. Ultimately, assets not claimed after your death may be considered orphaned unclaimed assets, with ownership eventually passed to the authorities!
Power of Attorney
Power of attorney gives you the opportunity to choose the right people to care for your health and finances should you be unable to. If you're married or in a civil partnership, you may have assumed that your spouse or civil partner would automatically be able to make decisions about your finances or your health care if there comes a time when you can no longer do so. But without a Lasting Power of Attorney, your spouse or civil partner doesn't have this authority.
There are two types of Lasting Power of Attorney:
- health and welfare
- property and financial affairs
You can choose to make one type or both, but you need to put them in place while you have the mental capacity to make the decision. The health and welfare Power of Attorney kicks in on the decline of your mental capacity to make decisions about your health, and the property and financial affairs Power of Attorney can start immediately when it is registered, or you can choose to have it start if you lose mental capacity, the choice is yours. Please be aware that it is best to organise a Power of Attorney in Spain if you live in Spain. You may wish to set up a separate Power of Attorney in the UK to cover any UK assets.
Marriage/civil partnership
Spain calculates inheritance tax by considering how much existing wealth each beneficiary has, how much they are due to inherit, and how closely related they are to the deceased. Many expats choose to co-habit but not get married, unfortunately, this leaves your partner in a particularly difficult situation upon your death, because they are considered totally unrelated! This is ‘group 4’ in respect of Spanish inheritance tax. The outcome is that there is no inheritance tax allowance, and the tax due will be increased by between 100% and 140%. It is not unusual for new clients of Speed Financial Solutions to get married after a meeting with me!
Summary
I have written articles on most of the subjects mentioned above, so if you would like more information, please do contact us.
Our aim is to ensure that you are able to enjoy life while we take care of your finances, ensuring you’re set up in the most tax efficient way for your particular circumstances. If you are considering how best to set up your finances as a resident of Spain please contact us.
Speed Financial Solutions are a highly qualified and regulated financial services provider looking after clients throughout Spain and the UK. Established in 2010, we provide a discreet and comprehensive service to individuals, and our service is tailored to suit your needs taking advantage of tactical opportunities as they arise in respect of your financial planning.
Our Principal, Andrea Speed, is a qualified Discretionary Investment Manager specialising in Investment and Risk, Taxation and Trusts, and a qualified Pension Specialist. Andrea is also a Fellow of the Chartered Insurance Institute (CII), which is the world’s largest professional body for insurance and financial services in the world.
Fellowship is the highest qualification awarded by the CII (Level 7) and is universally regarded as the premier qualification. It is a major achievement in the financial industry and demonstrates the acquisition of skills and knowledge at the highest of levels. Along with a Fellowship, Andrea is a CII Chartered Financial Planner.
Please take a look at our website – www.speedfinancialsolutions.com
For further information contact us on Tel 951 315 271 or 951 318 529
We are happy to discuss your own situation in more detail. One of our advisers would be pleased to spend some time with you either in your home or at our office to review your current savings, investments and pensions, so do call to make an appointment. Our Financial Review is completely free of charge and without obligation. Follow us on Facebook for regular updates.
This communication is for information purposes only based on our understanding of current legislation and practices which is subject to change and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice form a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.
Andrea J Speed FPFS (DM), M.A.
Principal, Fellow and Chartered Financial Planner
Speed Financial Solutions
28 August 2024