Spanish Taxes and Administrative Matters (Facts and Tips)
General Tips
In the heat of the excitement about leaving grey old Great Britain or ice cold Canada or sunny South Africa, it is best to keep Mum at home. Bring Mother if you want, but do not make loud announcements that you are off to sunny Spain, even if it is only for a few months, the fewer who know the better. Until you are 100% sure that living in Spain is right for you, do not burn your boats but leave all your options open. Getting back into Britain might be physically easy but rejoining the British system is frankly far worse than joining the Spanish system. Even opening a Bank account back in the UK is a nightmare as nowadays you have to prove that you don't smuggle or wash anything before they will accept you as a customer.
VAT (Impuestos de Valor Adicional or IVA)
IVA is 16% on everything in Spain including Electricity Bills and Food and childrens clothing. It is also charged at 7% on new properties where the land and house were contracted at the same time. On books and press it is only 4%. There are also duties charged on petrol, alcohol and tobacco but at substantially less than UK.
Income Tax
The tax system in Spain is slowly emerging out of the middle ages into the modern world and in many respects it is now more sophisticated and people friendly than in the UK. If you can imagine that until recent years Spanish people have not earnt much money. They have bartered with their skill or the fish or meat they have caught or fattened themselves and the fruit and vegetable that they grow . A tax system based purely on Income Tax would not have raised a cent for central or local government. The majority of tax income is raised from property transactions, new building licences, corporate taxation, business licences, inheritance and capital gains tax. A punitive income tax rate on what are small earnings in comparison with the UK would hardly be a vote winner among the masses of low paid workers which represent the majority here in Spain. It is why every property transaction incurs an extra cost of some 10% or 11%.
Annual earnings of below €7.800 do not need a tax declaration. However, should more than €1500 of this be from investments then a tax declaration is needed. Should you earn less than this but all from investments a tax declaration is needed. Income Tax on the rest starts at 18% increasing in bands up to 48%. Deductions for residents include any social security payments, 75% of any plus valia paid as a result of a property sale. Each wage or pension earner can deduct €3.005 from incomes of up to €8.114. This deduction slides down to €2.254 on earnings of €12.000 or more. There are also varied deductions for income from annuities (Renta vitalica), Mortgage costs, children and Tax paid out of Spain.
It is possible in Spain to work directly with the Tax authorities (known as the Agencia Estatal de Administración Tributaria or Agencia Tributaria, but still referred to by most as Hacienda) to prepare your tax returns. They have a computer system known as PADRE (which stands for father, but really means Programa de Ayuda a la Declaración de la Renta) A worker earning a salary earning less than €21,035.42 annually does not have to complete a tax return. Hacienda do it all. Their computer system keeps an eye on everyone and this means you.
To ensure that foreigners prepare their tax returns correctly it is more sensible to pay a Gestor (An accountant with some legal training) to prepare it for you. Firstly, use a Spanish firm, in that whilst they might be more difficult to deal with from a language point of view, their returns will be more believeable by the tax man than you doing it your self or having another foreigner doing it for you. Frankly as we are here to lead a peaceful hassle free life why should we bother to start learning all about a new fiscal and legal system when we just want to enjoy the sunshine. Use a SPOG recommended Gestor or legal firm to handle your financial affairs. They are not expensive and their costs can be set off against the tax payable. If you are the sort to delve into these mattters more thoroughly, buy the book "You and the Law in Spain" by David Searl. It can be bought from the SPOG shop online and delivered to your door.
When you arrive here and have completed the property purchase and before you apply for a Residents Permit continue to have your pensions credited to your UK Bank Account. Transfer to Spain on a monthly basis one of the pensions that is about the level of the tax free allowance and have the slips of this pension available for your Spanish tax return. Use your credit card or debit card on your UK based Bank account for purchases over and above that level. Do not tell the UK tax authorities that you are going to live in Spain until you have applied for and been granted your Spanish Residents permit. Then inform the Tax Authorities at,
Whitley Road
Newcastle upon Tyne NE 98 1BA
Phone 0191 2030203
and
Lynwood Road
Thames Ditton Surrey KT7 0DP
Forms for reclaiming any double paid taxes and for British Tax exemption are available from this office.
You can then receive your pension payments and any other income nett of UK Tax. (Unless you are in receipt of a civil servants pension when tax will always be deducted at source). Continue however, to have your pension paid into your UK Bank account and continue transferring the same amount as before with other expenditure above this amount on your UK Credit or Debit Card. Your Spanish Bank statement will then show annual income of the Tax free allowance which is considered to be enough to live on in Spain and can be used for your Residents Aplication.
NB. All payments of over €3000 through a Bank Account between Spanish residents are subject to random inspections by Hacienda (Inland Revenue)
Assets (See Note below)
Do not transfer all of your assets to Spain, just enough to purchase your property and a car. Everyone in Spain has to pay an annual wealth tax based on your Spanish assets which include, house, car and cash in Bank, stocks and shares and other investments, some art and jewellery. Wealth Tax known as Patrimonio (Impuesto extraordinario sobre el patrimonio). Up to assets totalling €167.129 the annual tax is 0.002% after which it increases to 2.5% ffor assets of around €10m. Residents are supposed to declare their world wide assets for this calculation. but non residents use only their Spanish assets. Home furnishings are exempt and debts can be deducted. Residents receive a tax free allowance of €108.182 each but this is increased to €150.253 on the main home. Partners should declare separate tax returns using half the value of jointly held assets.
N.B As from Jan 1 2008 the Patrimonio Tax has been cancelled. However be wary of putting all your eggs in one basket or in one currency and do not transfer everything to Spain.
Capital and Investments
With your Spanish Residents permit you can now safely move your UK based assets to an offshore centre and earn your investments tax free. You should not however transfer any income or any funds from these offshore accounts directly into Spain. Transfer them to your UK Account and use your cards or apply for a card that can draw funds directly from the offshore centre. Gibraltar is a good location in that at least it is regulated, you can speak in English and can pop down and draw out up to €6000 and bring them legally back into Spain. If you do not have huge sums you do not need a Trust or a Private Bank their fees are simply too expensive and will eat a big hole in your earnings.
Will and Inheritance Tax
Do make a Spanish Will as soon as you can as intestacy in Spain, for assets in Spain, substantially favours the children and not the spouse. To minimise the affects of inheritance tax buy the property with as many names as possible on the deeds (escritura) or even miss you out and have the children buy it. The four key issues to remember about Spanish Wills are;
- A separate Spanish Will disposing of your Spanish Assets will make life a lot easier for your heirs at what is a very tragic time.
- You are free to distribute your assets according to your laws back home and not those of Spain. Where children are legally entitled to receive two thirds of your assets. However, the will must be seen to treat all offspring equally and fairly. Also you cannot nominate that a house must be sold first and then the cash divided. The house must be inherited and divided into the names of the inheritors and then if they all agree it can be sold. (The government get more tax that way)
- Your Spanish assets will be subject to Spanish Inheritance Tax of between 7.65% and 34%, which is applicable after an allowance of €16.000 to each inheritor. There are different scales of Tax depending on the family relationship of the inheritors to the deceased. Non family inheritors pay far more than direct lineage.
- Residents of Spain leaving assets to a spouse or a child who are also residents may qualify for a 95% reduction in the asset values up to €120.000. Non residents do not qualify for this.
The simple thing to remember is to keep assets in Spain to a minimum, especially if you are a non resident. Joint accounts should keep just a few funds, enough say to pay the funeral expenses and the monthly bills as these accounts are immediately frozen until probate is resolved. Until the day of the plastic card arrived, parents kept a blank unsigned check around the house so that a relative could pop down and empty the account before telling anyone that poor old Alberto had departed. Ask the Funeral Company to provide lots of copies of Death Certificates. There are 2 types. In Spain you will need notarised copies of the Spanish One and they also provide originals of an International One for changing Bank Accounts, Benefits and Assets into your name. It is better to have a joint account and an individual account. Queueing up for hours down at the Bank to open up a new account and to transfer all the standing orders is a real pain when you are recently bereaved. Especially if the old pins don't work as well as they used to.
Making a Will
Your Spanish Lawyer will help you make your will, but remember only tell him about your Spanish assets. They will not ask you about any others. Even though they actually should. You can choose between an open will, which is signed openly in front of the notario. It is best to leave the text as saying "all that I have" rather than specifying what that is. Then you do not have to keep updating it as your assets vary in type and value. The notary charges about €60 for making a will your lawyer as well. Complicated wills cost more. A closed will (or secret will) can also be formulated by your lawyer and sealed into an envelope which the notary signs as being your will. A Hand written will or one in English might be accepted as being valid but, at the cost of undergoing laborious administrative process and translation which you would not wish on your loved ones left behind.
NB If you are unhappy about the performance of your lawyer you can complain to the Ilustre Colegio de Abogados (The Illustrious College of Lawyers). It has branches in each Province. You will find it beneficial to appoint another lawyer to help you write a factual description of your complaint.The College publishes a book of Recommended Fee structures annually. Legal Aid is available to residents and in some cases non residents who earn 2.5 times less than the average annual earnings which are €6.000. (Asistencia Juridica Gratuita). Simply visit the offices of the Colegio de Abogados in the nearest Palacio de Justicia to make your application. You will need evidence of your financial situation and a list of your assets.
Inheritance Tax (Ley de Sucesiones)
Estates under the value of €16.000 (actually €15,956.87) are exempt from this Tax. This amount is applied to each inheritor. For example if you jointly own a property worth €125.000, your half would be valued at €62.500 which if equally divided between your partner and 3 children would fall under the the exempt amount and no tax would be due. Inheritors under 21 can expect an increased allowance up to €48.000 with an additional €4000 for each year until a maximum of 13 years old. For second wave relations such as nieces, aunts etc the €16.000 exemption is reduced by 50%.
Residents of Spain who leave assets to a direct descendant who is also a resident may qualify for a 95% reduction in tax for the first €120.000 of property value, providing that the following 4 terms are met;
- Over 65
- Resident for at least 3 years
- The asset must be your principal home in which you must have lived for 3 years.
- The property must not be sold for at lkeasat 10 years. Otherwise it would be taxed.
Non residents receive no tax allowances. The inheritance Tax is calculated as a percentage of between 7.65% and 34% depending on the total of their assets after the deduction of any allowances, debts, mortgages, costs of the final illness and the funeral. But if you are a resident, be careful how you pay the tax bill. Because if you conjure up money from outside of Spain, the Spanish will assume that you have more assets than just your declared pension income and may seek to reassess your tax position. You can always say that your children gave you the money.
Very wealthy people pay more and need to take advice on tax planning prior to aquiring any assets in Spain. Ask your Abogado about Family Trusts.
NB. Some regions of Spain have different Tax scales and take a different stance on unmarried couples. For accuracy and peace of mind these matters are best left to your Spanish Gestor or Abogado.
Gift Tax is treated the same as Inheritance Tax.
If you sell your property to your heirs more than 5 years before your death, no Inheritance Taxes are applied. By establishing a Usofructo agreement with your airs you can go on living in the property until your death.
Property Taxes
Capital Gains Tax (Incremento de patrimonio) and Plus Valia (arbitrio sobre el incremento del valor de los terranos commonly known as Plus Valia- a municipal tax)
Like all tax systems anywhere, none seem easy to understand and noone likes paying them. Spanish people are no different in this respect and in order to avoid paying Capital Gains and Inheritance Tax they have for years understated the value of their property on the actual deeds. These values originated from the practice of just putting the price of the land on the deeds and not including the value of any buildings on it. It is why the price on the escritura is about 60% of the actual sale price. But this practice is now becoming obsolete as not only are the government seeking to have the sale price as the actual value on the deeds but also buyers want the value to be as high as possible for them to minimise future taxes. The Town Halls now have a register of property values. It is used to calculate the plus valia tax (arbitrio sobre el incremento del valor de los terranos commonly known as Plus Valia- a municipal tax) based on the increase in the price of just the land. Country estates will pay large amounts of plus valia on a sale but townhouses and properties on urbanisations will only receive a small plus valia bill. Your lawyer can find this out before you buy or sell a property.
A Capital Gains Tax and a Plus Valia Tax is payable on the difference (after deducting allowances and sales costs) between the value on the old deeds and what is to be on the new deeds (large fines are imposed on any understated values). For residents selling to residents the Capital Gains Tax tax is between 2.5% and 18%. The sale details are declared on their subsequent Tax return and the Tax is calculated by the Tax authorities and paid accordingly. A 75% Tax allowance is granted for any Plus Valia payments for residents on their tax return.
Non residents when selling to residents or non residents payup to 18% Capital Gains Tax. A retention of 5% of the Price on the Deeds is retained by the Spanish Tax authorities (Your lawyer will arrange this) to pay for the Capital Gains and Plus Valia calculation on form 211. The non resident seller should pay the balance of the Capital Gains Tax within 30 days using Form 212. The same form can be used to claim back any unused portion of the 5% retention some 6 months after the completion of the sale.
There are some exceptions for residents only that can minimise capital gains tax. Over 65's are exempt. Under 65's should deduct all allowable expenses for the costs sale from the new value on the deeds. If you bought your property prior to 1986 there is no tax. If you bought it between 1987 and 1994 there are various allowances. If you bought after 1994 there is a scale of allowances for inflation only. If you use all the money to buy a new property at the same price there is no tax. If you use only some of the money you pay tax on the difference.
Here then is an important reason for becoming a resident. Some wags may take the view that when selling up to go back to the UK (As often happens after a business failure, loss of a partner or long term sickness) that you sell the property as a resident. Collect your money tell noone where you are going or what you are doing with the money and simply transfer it in small amounts back to the UK. Or sell it to an English buyer who pays in pounds in the UK or offshore. Then leave before completing your next tax return. But we feel confident that most will not do this !
IBI (Impuesto sobre Bienes Inmuebles) Local Rates
An annual property tax has to be paid for residents and non residents. This tax is calculated on the valor catastral (more or less like the UK Rateable Value). It varies quite a lot in accordance with the type and size of property. The average is about €250 a year but can be as low as €60 or as high as €3.500 on a large plot in a wealthy area.
Imputed Income Tax for Property Owners
It is assumed that for non residents only that as you have a property here it must be your second home. As such you must be earning something from it even if it is your own personal use. The tax is calculated on the basis of 2% of the valor catastral being assigned as an imaginary income, the tax is 25% of this. The average is €350 a year.
Residents do not pay this tax on their main home.
NB. Spain is slowly raising the Valor Catastral to be the actual market value
Community Fees
The total annual Community fee for urbanisations or apartment complexes will vary depending on the location and level of luxury of your apartment or villa and its size. The average annual fee is €350 but can be as high as €3.500 on a high quality golf complex.
Rental Income (Form 210)
Non residents pay tax on any rental income earnt on their Spanish Property of 25% of the nett earnings. The returns should be completed quarterley.
Offshore Companies Tax
Properties owned by Offshore companies are subject to an annual Tax of 3% of the Valor Catastral.
TAX Number (NIE Numero de identificacion de extranjero or Foreigners Number)
Before you can buy a property in Spain, or buy a car or get connected to mains or telephone everybody needs this number. Apply at the nearest Comisario de Policia. It is a simple form in 2 languages. But do not expect the staff to speak any English. You will need a sales contract for a Property or a work contract if you are working. Plus a copy of your Passport.
Fiscal Representation
Non resident owners of just one Spanish
property no longer need a fiscal representative. However, it is strongly
recommended that you have an official representative here who can act
on your behalf in your absence. It ensures that bills are paid and helps
solve problems quicker.