If you are planning on making your home in Mallorca, or have recently done so, you have made an excellent choice. There are so many benefits to living here, and Spain can offer tax-efficient opportunities too.
Make the most of these opportunities and avoid costly mistakes by considering these seven questions.
1. Where will you need to pay tax?
You need to establish when you will become resident in Spain and liable to Spanish taxation on your worldwide income, gains and wealth, and subject to the Spanish succession and gift tax rules.
You will be tax resident in Spain if you are in the country for more than 183 days in a calendar year, but possibly also if your spouse and/or minor dependent children live here or your centre of economic interests is here.
UK nationals should also be wary of UK tax residence rules – in some cases, just 16 days back home could unintentionally trigger UK tax residency and bring you in line for British taxes.
2. How much tax will you pay?
Income tax rates for general income (i.e. pension, employment, rental income, etc.) range from 19% to 47.5% in the Balearic Islands. Savings income (interest, dividends, capital gains etc.) is taxed progressively at 19%, 21% and 23%.
Spain also currently imposes an annual wealth tax, which generally hits those with worldwide assets worth over €1 million. For Spanish residents, generally there is a personal allowance of €700,000 plus an extra allowance of up to €300,000 for your main home. So a married couple could have up to €2 million combined allowance.
However the good news is that tax-efficient investment wrappers offered through a Spanish-compliant bond could legitimately reduce tax on savings income and potentially on wealth tax. While some structures can seem similar, their tax benefits can vary significantly so take specialist advice.
3. How should you hold savings and investments?
A potentially costly mistake is assuming what was tax-efficient in your home country is the same in Spain. ISAs, for example, lose their tax-free status once you are no longer UK resident and the interest, dividends and gains may attract Spanish tax. Your situation and goals will change when you relocate too. It is crucial to take a fresh look at your financial planning to make sure you are suitably diversified and everything is set up in the best way for your new circumstances.
4. What is the right currency mix for you?
Once you are living in Mallorca and spending euros daily, keeping savings and investments in sterling makes your income vulnerable to exchange rate fluctuations. Look for structures that let you diversify by holding investments in multiple currencies, with flexibility to choose the currency of your withdrawals and convert when rates are favourable.
5. What are your property options?
Another important issue to consider early is the tax implications of buying and selling property. When is the best time to sell your UK property or buy a home in Mallorca to limit capital gains tax and stamp duty in both countries? How could owning a high value property affect your wealth tax bill and succession tax liabilities in Spain? Understanding the answers could save thousands, so take care to establish your best approach.
6. What should you do with your UK pensions?
If you are planning to retire in Spain, make sure you fully understand your pension options and the tax implications before making any decisions.
There are now many options for how you take your pension, including taking the whole fund as cash, but you need to weigh them up, looking at how they work for you and the tax consequences or benefits. Taking regulated, personalised pensions advice is crucial.
7. Is your estate planning suitable?
Spanish succession law restricts your freedom to leave your assets to anyone you please. It is designed to protect the family and provide for children, and requires a parent to leave two-thirds of their estate to their children, even by-passing their spouse. Only one third can be freely disposed.
European Succession Regulation EU650/2012, known as “Brussels IV”, enables you to bypass this Spanish law.
The default position is that the law of the state in which the deceased was “habitually resident” at the time of their death applies to succession of assets. However, an individual can elect, through their will, to apply the law of their nationality to all their assets across the zone. A UK national can therefore opt for the succession law of their respective UK jurisdiction (i.e. England, Wales, Scotland or Northern Ireland) to apply instead of Spanish law.
If you do not have a valid will which states that you have chosen the appropriate UK law to apply on your death, your estate may be distributed according to the restrictive Spanish law.
You also need to understand the Spanish succession and gift tax rules and how they will affect your heirs (note that you cannot use Brussels IV to opt out of Spanish tax). The applicable rules vary according to who the beneficiary is, where the deceased and beneficiary are resident, and where the assets are located. Rates and allowances vary across regions.
UK domiciles also remain liable for UK inheritance tax, so seek advice on how to reduce these taxes for your heirs.
Getting the answers to these key questions early can provide peace of mind that your financial affairs are in order so you can relax and fully enjoy your new life in Spain. Cross-border taxation is complicated, so take personalised, professional guidance to get the best results.
We have written the ‘Blevins Franks Guide to Living in Spain’, which is considered the definitive guide to the tax and wealth management issues for expatriates moving to or living in Spain. This 11th edition, 300-page book covers a range of topics to assist your move to Mallorca. It is based on Blevins Franks’ 40 years of expertise in cross-border financial planning. With a dedicated office in Mallorca for over 20 years and 22 offices in seven countries, our professional advisers are a valuable local resource to help you build a future in Spain.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.