Spain and the UK have had a double tax treaty since 1976. A double tax treaty affects you if you become tax resident in both countries at the same time, or you are tax resident in one country but have income from the other. Each country has different rules to determine residency and it is quite possible to be deemed resident by both countries at the same time. However, the treaty says that if there is a conflict the person is tax resident in the country where they have a permanent residence available and, if they have one in both countries, where their “centre of economic interests” lies. More details can be found at:
All income (personal pension, company pension, interest on ISAs and savings accounts, investment and rental income), whichever country it arises in, should be declared where you are fiscally resident. If you are tax resident in Spain and have income from the UK it should be declared. Even when it has already been taxed in the UK it should still be declared gross on your Spanish tax return and a deduction made in the appropriate section for the tax already paid in the UK on that income. In Spain this is called a deduction for “doble imposicion” and the deduction cannot exceed the amount of tax due on the income in Spain.
If you are living in Spain and have a state pension from the UK the income should be declared in Spain and there is no deduction for tax paid in the UK because it is received gross of tax.
There is one exception – government pensions. The treaty says that pensions paid to civil service employees should be taxed in their home country regardless of where the individual lives. Up until 2014, civil service pensions did not have to be declared if the receiver is tax resident in another country. This means that historically civil service pensions have not been required to be included in a Spanish tax return.
However, I want to confirm a change to the way that this type of income should now be reported in Spain.
An update to the double tax agreement between Spain and the UK came into force on 1 January 2015. One of the changes has closed the loophole whereby a resident in Spain receiving a UK government pension may obtain the benefit of personal allowances in both countries.
Civil service pensions (with the exception of NHS pensions) will always be taxed at source in the UK, because they are funded by UK taxpayers; if they were paid gross and taxed in Spain it would mean that effectively the UK public are subsidising the Spanish Government’s collection of taxes. The change is that although not taxed, a civil service pension should now be included as income when calculating the rate of tax payable in Spain on other income. So effectively, when calculating the tax due, it may have the effect of pushing any other income into a higher rate tax bracket.
Spanish tax returns for 2015 (filed in 2016) should include UK civil service pensions as the first form of income, using up the Spanish Personal Allowance. As mentioned above, the pension income itself will continue to be taxed only in the UK, but other income such as a UK state pension may now be pushed into a higher tax bracket in Spain. This is likely to mean that those receiving this type of pension will pay a little more tax than in previous years.
This change makes it even more important that you take advantage of the tax breaks available to you as a Spanish tax resident. We can assist with this, for instance, you may be paying tax on ISA interest/growth each year in Spain when in fact you could be taking advantage of the Spanish equivalent and pay no tax on the interest/growth whilst invested and a Spanish Compliant investment is not normally included in your Spanish tax return at all. Similarly, many expats we come across are fearful of becoming Spanish tax resident because they don’t understand the system. We can help guide you through the process, so please do contact us for a free consultation with no obligation.
Speed Financial Solutions are the highest qualified financial services provider on the Costa del Sol. We believe in offering the best possible service to our clients and are able to offer the expert knowledge of a qualified Chartered Financial Planner and Discretionary Investment Manager specialising in Taxation and Trusts, who has satisfied the requirements of the Chartered Insurance Institute in the UK.
Please take a look at our website – www.speedfinancialsolutions.com for further information and contact us (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.
Andrea J Speed (DM), M.A.
Principal and Chartered Financial Planner
Speed Financial Solutions
31 March 2016