There is no doubt that the budget announcement of yesterday will cause many more UK residents to consider packing their bags in search of a more friendly tax regime.
The atmosphere in the UK, and we don’t just mean the famously ‘interesting’ UK weather, is becoming more miserable at the hands of the new labour Government. Its not just the higher taxation system, its the Government’s never ending talk about fiscal black holes and gloom and doom that is making people think about their future in the country.
These are the measures that seem to be catching so much negative attention:
- Complete elimination of the non-domiciled income tax regime that has for many years attracted the wealthy to the UK: Countries like the UAE, Malta, Italy, Portugal and Spain have tax regimes that will now attract these high spenders from the UK.
- 20% VAT on private education for children over 5 years old: This will affect not just the very wealthy but a large number of modestly well off. Many parents who can barely afford the relatively high costs of UK private education are now applying for state school places for their children. For families with children with special needs that the state system does not provide for, this is devastating. Most economists now believe that the transfer of so many children from the private to state system is actually going to require the state to add significant extra resources and education costs, negating the VAT income for the state. This makes it clear that charging VAT on private education is essentially politically motivated as it will not generate much, if any extra cash for the state.
- Capital gains tax rises: The lower rate is going up from 10% to 18% and the higher rate will go up from 20% to 24%. This is going to hit those whose income is partly or solely provided by investment portfolios.
- Inheritance tax: Pension fund assets passed to children on death will now be taxed like any other inherited asset. The tax free allowance of £325,000 for the estate will be frozen to 2030, as it has been since 2009. This is a sly way that all UK governments have been using to increase tax, year on year. Inheritance tax is now generating for the state almost £3 billion annually.
- Employment tax: Business will have to pay 2% more social security on their employment costs. In the UK there is no salary upper limit so this is going to generate a significant amount of extra cash for the state.
What about Spain and its taxation?
In addition to its warm climate, welcoming culture, and significantly lower cost of living compared to neighbouring countries, Spain also offers numerous attractive tax advantages. Life in Spain is year round vibrant experience, and not just in holiday seasons.
Expat families love living in Spain, with its outdoors living and relatively high security and low crime rates. What is attracting many is the availability of high quality and economically priced private education targetted at the needs of the foreign communities. The value of giving children a multilingual early life experience cannot be underestimated and being able to plan a BBQ, year round golf (70 courses near Marbella) and even skiing nearby (almost 120km of runs and 23 lifts), are just minor examples of how fabulous Spain can be for Expats.
Enough of the sales pitch!
A summary of the features of Spain’s attractive tax system
In the following sections, we outline the most important tax benefits to inspire the many who know and love Spain from their holidays to take the final step and choose Spain as their new place of residence.
This trend has already been apparent since Covid changed all our lives and all of Spain is benefitting from an influx of new residents. Just in the Marbella area, where we are based, we have heard that there are 30,000 new residents, which represents perhaps an increase of approximately 20-30% over recent years. Other expat areas of Spain are enjoying similar influxes. Partly as a result of this growth in population, there are no problems with Spain’s GDP growth, which is now at the top of EU countries.
Benefits for the retired – private pension arrangements
Many who come to live in Spain have a good chunk of their capital invested in pension schemes.
Spain has a very attractive tax treatment for those who plan to live off the income from their foreign private pension schemes, as these schemes are not treated as pensions in Spain.
These are usually taxed as investments and not earned income. In Spain, investment income has much lower tax rates that can be half of earned income tax rates.
Importantly, as the withdrawal of invetments in private pension schemes is regarded as non-taxable return of capital, only the income element (the growth) of the accumulated pension assets are taxed as savings income.
So, such pension income is not only taxed at much lower rates but only the growth element of withdrawals is treated as taxable income.
Optionally, private pensions can provide annuity income. In the case of annuities, like drawdowns, only a percentage of the amount received is considered taxable income, and this income is also taxed as savings income. The effective tax rate can be as low as 2,4%!!
Read more about the different treatment of pension income in Spain in the article below:
https://www.spenceclarke.com/articles/when-a-pension-is-not-a-pension/
Spanish compliant investment bonds
A popular choice for individuals moving to Spain is the transfer of UK investments into a Spanish-compliant investment scheme. Note that tax favourable investment arrangements like the UK’s ISAs (Individual Savings Account), are taxable in Spain as normal investments so Spanis Compliantg Bonds are a good alterntative arrangement.
These sbonds offer similar tax treatment to foreign private pensions, meaning that only the income or growth elements are taxed at the savings rate, and then only when amounts are withdrawn. In other words, these bonds act as a tax deferral scheme, avoiding income tax on annual growth, until withdrawn.
An additional benefit is that the bond provider handles all the tax calculations, deducting the tax at source and reporting it to the Spanish tax office, issuing the investor a suitable tax certificate. This eliminates the risk of declaration errors that can happen when Spanish tax advisors do not understand foreign investment structures.
Capital gains tax
Spain has the following tax rates for investment income and capital gains tax:
From | To | Tax rate |
0,00 € | 6.000,00 € | 19% |
6.000,00 € | 50.000,00 € | 21% |
50.000,00 € | 200.000,00 € | 23% |
200.000,00 € | 300.000,00 € | 27% |
300.000,00 € | and above | 28% |
Spain also grants a series of exemptions on capital gains tax. The sale of a main residence, for over 65s is entirely exempt from capital gains tax.
For under 65s the sale of a main residence will also be exempt from capital gains as long as the sale proceeds are reinvested in the new main residence, and if not entirely reinvested, the exemption would apply proportionally.
You may be wondering, what if I want to sell my second home, or I haven’t lived in it long enough for it to be considered my main residence, but I still want to move?
In this case, there is another option. If you are over 65, you can sell an asset—whether it’s a second home, a business, or any other asset—and qualify for an exemption. To benefit from this exemption, the proceeds must be reinvested into the purchase of a lifetime annuity, with a maximum eligible amount of €240,000. If the proceeds exceed this amount, the exemption will apply proportionally.
Buy to let – residential letting income
For individuals living in Spain who receive rental income—whether from existing properties or new buy-to-let investments—there are significant tax reductions available when these properties are rented long-term to individuals as their primary residence. The general reduction starts at 50% and can increase under certain conditions, particularly in specific areas, with the potential for a maximum reduction of up to 90%.
In practice, because the Spanish/UK tax treaty gives the UK the first tax bite on UK property income, buy to let rental income is usually completely tax free in Spain, as long as the tax declaration is correctly produced and tax relief is claimed for tax paid in the UK. Also essential is being able to provide proof that the rental is truly residential.
General reductions and allowances
On another note, Spain, being a decentralized government, has a divided tax system between the state and the different regions. Though the state sets the minimum rules for the entire system, many taxes are regulated entirely by the autonomous regions, in many cases offering much more favorable regimes.
Income tax for example is divided 50/50 between state and region, each with their own tax rates, allowances and deductions.
For income tax, there are a series of general allowances and deductions, such as a personal income tax allowance, which increases with age, allowances for each child, additional allowance for children under 3, allowances for working mothers and for childcare, for pension plan contributions, amongst others.
Additionally, there is a large array of regional deductions that vary depending on the region, including deductions for families with multiple children, the purchase of an electric vehicle, for the installation of solar panels or other energy efficiency upgrades and even deductions for the purchase of prescription eyewear and payments to sports facilities have recently been approved in some regions.
You can find a comprehensive guide to the deductions applicable in the recent income tax campaign in our printable section titled “2023 List of Spanish Income Tax Deductions.” Simply click on the link below to access it.
https://www.spenceclarke.com/guides/
Very low inheritance and gift tax
Gift tax and inheritance tax (IHT), on the other hand, are entirely managed by the autonomous regions, with some areas offering zero tax or very low rates. This can be an important factor to consider when deciding where to relocate to Spain.
In Madrid, Baleares and Valencia, there is a 99% reduction on inheritance tax payable for inheritance by direct family members. Andalucía, in addition to the 99% set by Madrid, has also established a total exemption on the first 1.000.000€ inherited.
Most other regions provide significant reductions on the inheritance or gifting of the main residence or family business, all together ensuring that wealth to be transferred to following generations with minimal tax consequences.
Benefits for workers
There are also tax attractive options for workers looking to relocate with their families to Spain, in addition to everything already detailed.
The 60,100€ working abroad exemption
The first of these options applies to those that intend to continue working outside of Spain for a foreign company. These workers can benefit from a tax exemption on the first 60.100€ of earned income. This exemption is often claimed by workers in the oil industry, merchant shipping, airlines but can apply to anyone who works outside of Spain but has their family base and tax residence in Spain.
Under this scheme, salaries under 60.100€ per year would result in no Spanish income tax. For a salary of 100.000€, income tax liability would be around 8.700€
You can read more about the 60.100€ income exemption and the necessary conditions for this to apply at https://www.spenceclarke.com/articles/income-tax-tax-free-allowance-for-those-working-outside-of-spain/
Beckham scheme and nomad visas
Another interesting option is the possibility of applying for the Beckham Scheme. This scheme applies to people that arrive to Spain with the purpose of taking up an employment or whose existing employment transfers to Spain, and from 2023, this scheme can also apply to remote workers or the self-employed that plan on working 100% remotely from home in Spain.
This scheme is particularly attractive for high income employees.
Those that benefit from this scheme will only be subject to income tax on the income received from Spanish sources, with a flat tax rate of 24% on the first 600.000€, with any excess at 47%.
Read more about this scheme here: https://www.spenceclarke.com/articles/spains-new-expatriate-workers-regime/
No VAT on private school education
All areas of Spain that are popular with expats now have a considerable range of competitive options for private education, attracting young families. There are private schools suitable for expats of many nationalities, some of which combine teaching the national syllabus of a particular country with the Spanish system. In a few minutes on the internet you can locate any number of national specialities, with many countries represented including English, German, French, Swedish, Danish, Norwegian, Finnish and even Chinese and US schools.
If you would like to read more about private schooling in Spain check this article: https://www.spenceclarke.com/articles/the-new-uk-labour-government-what-now-for-the-wealthy-and-those-who-just-want-to-provide-their-children-with-a-private-education/
Conclusion
To sum up, although press and internet articles do not really explain this adequately, the Spanish tax system offers serious advantages for those who plan well and can take advantage of Spain’s more favourable options.
Most people regard paying income tax acceptable as long as the system is reasonable and fair and, arguably, living in Spain compares very favourably compared to the lifestyle of most tax havens. Cultural familiarity and rich lifestyle options makes living in a foreign country much more accceptable and is important to the wellbeing of families in particular. For those originating from Europe, Spain’s proximity to expatriate home countries and relatively short flight times, also provide an important advantage
Thorough tax planning before moving to Spain is key to optimizing these benefits and, indeed, avoiding pitfalls that can easily arise when moving from one tax system to another.