Feeling confused about what tax you should pay, when and to whom?
It isn’t easy navigating a tax system that you are unfamiliar with, especially if you still have assets or an income from the UK, or other countries, and when you are dealing with a tax office in a foreign language it can hinder your ability to fight your corner! In this article I’m aiming to take some of that confusion and worry away.
I head this editorial mission impossible almost, but not totally, tongue in cheek. Anyone who has lived in Spain for any length of time will know that everyone you speak to for advice will give you a different answer … very different to the straight forward ways when talking about tax and finances in your home country!
I believe part of the confusion is down to interpretation of the guidelines on the part of gestors, and also a lack of familiarity with how to tax income not derived from Spain. There is also, of course, the advice we receive from our fellow expats in the local bar! All in all, it can make the whole situation feel very unnerving and the temptation is to bury your head in the sand.
Whilst most people don’t mind paying some tax to the Spanish authorities, others prefer to limit their liability in Spain and historically those people have lived ‘under the radar’ here in Spain, in some cases for many years. However, from 1 January 2021 this is going to be much more difficult, particularly as the time you can spend in Spain as a non-resident is now limited to 90 days in every 180 without a visa or residency.
PERSONAL TAX-FREE ALLOWANCE
I would first like to confirm what the Personal Allowance is in each country. For the tax year 2020 to 2021, the UK standard Personal Allowance is £12,500, which is the amount of income you do not have to pay tax on. In Spain for 2020 it is as follows:
€5,550 Under age 65
As you can see, the personal allowance in Spain is much less. The tax brackets are very similar, so the main difference is the lower personal allowance.
The other difference is the period the tax year covers. In the UK the tax year runs from 6 April to 5 April the following year, whereas in Spain the tax year runs 1 January to 31 December. This does not help when trying to navigate between the two systems!
Let’s run through a few issues that I come across regularly …
INCOME FROM UK RENTAL PROPERTY
HMRC stipulate that income from a UK rental property MUST be taxed in the UK. That does not mean, however, that there is no further tax liability in Spain. You should still complete a Spanish tax return, detailing the income from the UK property and a deduction will be made by the Hacienda for the tax you have already paid on that income in the UK.
UK STATE PENSION INCOME
UK State Pension income is paid gross in the UK. That does not mean that it is tax free. It is taxable whether you live in Spain or the UK. If you are resident in the UK this income should be declared on your UK tax return, and if you are resident in Spain it should be declared on your Spanish tax return (not both).
UK EMPLOYMENT INCOME
If you derive income from employment in the UK it will automatically be taxed under pay as you earn (PAYE) by HMRC. That does not mean that you have fulfilled your requirement to pay tax if you live in Spain. As with other income, your employment income should be detailed on your Spanish tax return, with a deduction by the Hacienda for the tax you have already paid on that income in the UK.
UK PRIVATE PENSION INCOME
This income (unless it’s a retirement annuity contract/Section 226) will automatically be taxed under pay as you earn (PAYE) by HMRC. That does not mean that you have fulfilled your requirement to pay tax if you live in Spain. As with other income, your private pension income should be detailed on your Spanish tax return, with a deduction by the Hacienda for the tax you have already paid on that income in the UK.
There is a way of reducing the tax due in Spain on private pension income to 3%, which is too detailed for this editorial. We can provide advice on this on an individual basis should you want to know more.
UK INDIVIDUAL SAVINGS ACCOUNTS (ISAs)
Growth on ISAs is tax free when UK resident, but NOT tax free when Spanish resident. ISAs benefit from special tax breaks for UK residents but the growth on ISAs should be declared on your Spanish tax return and tax paid.
There are investments available to Spanish residents that are very similar to ISAs, called Spanish Compliant Investments. That does NOT mean bringing money into Spain (we never recommend that), but it does mean that the investment qualifies for special tax breaks with the Hacienda, that results in tax free growth and tax efficient withdrawals. We can provide advice on this on an individual basis should you want to know more.
SHARING IS CARING!
You may have heard of the Common Reporting Standard. Anti-avoidance measures have now been introduced globally in respect of the automatic exchange of information from 2016, known as the Common Reporting Standard (CRS).
Information regarding investment, savings and bank account balances and withdrawals was collected automatically on 31 December 2016 and each year thereafter by each financial institution and passed to the tax office of your country of residence if the account is held in a country other than which you reside. Domicile, nationality or citizenship is not taken into consideration.
For instance, bank account details as at 31 December 2021 for an account held in the Isle of Man will be reported to HMRC in the UK on 30 September 2022 if you are a UK resident. The same information will be sent to the Hacienda in Spain if you are a Spanish resident.
To summarise, if you live in Spain and have monies deposited in another country using your Spanish address, information will be shared with Spanish tax authorities each year… so sharing is definitely not caring from the point of view of many expats!
The issues I have mentioned in this article are the tip of the iceberg. There are many other areas that we can assist with. I recommend that you speak to us sooner rather than later as we can help you organise your income and assets in a way designed to minimise the tax due wherever you are resident.
If you would like assistance from us contact firstname.lastname@example.org
Speed Financial Solutions are a highly qualified financial services provider looking after clients throughout Spain and the UK. 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 pension planning. We seek innovative solutions for our clients and employ our skills, based on many years of experience, to apply tax legislation to your advantage. Our relationships are built on trust and mutual respect. We are ready to answer your questions, giving you the confidence you want when dealing with a sensitive issue such as discussing your pensions, investments and savings.
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 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.
The contents published are not recommendations or decision aids for your investment decisions and they do not constitute any type of advice. We are not tax advisers and independent tax advice should always be sought.
Andrea J Speed FPFS (DM), M.A.
Principal, Fellow and Chartered Financial Planner
Speed Financial Solutions
21 December 2020