In some instances, a UK non-resident may pay taxes in the UK on their UK based pension, wages, savings interest or rental income. In Spain though, a UK tax resident must always pay taxes under the non-resident income tax rules.
Non-residents in Spain pay taxes on income and capital gains obtained from Spanish sources. Owning Spanish property is deemed to produce a non-resident taxable income based on the town council rateables values. Non-residents are also subject to wealth tax, which is charged annually on the net value of any assets located in Spain as at 31 December, the value of which is determined by the Spanish tax agency.
However, an important factor to consider is the territory that a client is spending their time in. In some communities, such as Madrid, exemptions of up to 100% can be applied on wealth tax, and up to 99% on inheritance tax. While dual residency is no issue according to the SRT rules in the UK and the Spanish rules, they may have to submit a tax return in both countries. This doesn’t mean that tax is paid twice on the same income, as tax relief will appy on any tax paid on the same income.
For expats employed in Spain, a special tax regime is available, known as the ‘Beckham tax rule’. This is aimed at attracting highly skilled professionals from abroad through tax benefits. This is akin to the non-domicile regime in the UK. The person’s worldwide income, gains and wealth won’t be taxed in Spain and they will be treated as non-resident taxpayers for up to six years. The tax rate on their income is reduced from 47% to 24%, chargeable only on Spanish-based income.
Separately, an important point for owners of UK companies who are residents in Spain to consider is that if they spend a ‘substantial’ amount (typically around 25%) of their time working remotely from Spain, they may be liable to pay income and corporation tax, as well as National Insurance contributions. If a permanent establishment is determined in Spain, the UK company will need to register for corporation tax, VAT and PAYE..
Despite Brexit, there is no doubt that Spain is still one of the top destinations for HNW expats and foreigners who are choosing to divide their time between the UK and Spain. A country full of potential when it comes to financial and lifestyle improvements, one must be alive to clients’ tax residency status so that the full benefits can be enjoyed.
Given that Google currently yields over 400 million results in response to ‘Spanish tax’ due to the complex (but worthwhile) nature of navigating the tax-related requirements, it is more important than ever that financial advisers understand how best to advise clients who are looking to operate from or invest in Spain.
