New Year Tax Planning in Spain
December 22nd, 2008
The tax year in Spain is 1st January to 31st December, whereas the UK tax year runs 6th April to 5th April. If you are planning on moving to Spain in 2009 you could time your departure from the UK and your arrival in Spain to lessen your tax liabilities.
You will become a tax resident in Spain if you spend more that 183 days there in the tax year. Note that the days do not have to be consecutive. So, providing you leave the UK by 5th April and arrange your movements so that you spend less than 183 days in Spain between departure and 31st December 2009, you could have become non-UK resident and yet postpone becoming a Spanish tax resident until 2010. This ‘window’ of non-residence can offer some useful tax planning opportunities.
Even if you do spend less than 183 days in Spain in your first tax year, you could be caught out and still be considered a tax resident if your “centre of vital interests” is in Spain, i.e. the base for your economic or professional activities is in Spain or your spouse lives in Spain and you are not legally separated, and/or your dependent minor children live in Spain. In this case you can be presumed Spanish resident, unless proven otherwise, even though you may spend less than 183 days per year in Spain. For obvious reasons this only tends to affect those already to some extent established in Spain.
As a Spanish resident you will be liable for Spanish taxes on your worldwide income. Non-residents of Spain are liable for tax on Spanish income only.
Income (including capital gains) is split into general income (renta general) and savings income (renta del ahorro). After being calculated according to the rules for each particular type of income within each category, the total of ‘general’ and ‘savings’ income is termed the base imponibile (or taxable base). After any deductions and allowances it is then known as the base liquidable (net taxable base).
Savings income is taxed at a fixed rate of 18% and basically consists of dividend income, interest, income derived from life assurance contracts, purchased annuity income, and capital gains on sale/transfer of assets.
General income is taxed at progressive scale rates from 24% to 43%. Anything not categorised as savings income is treated as general income, including all earned income (i.e. salary, self-employment and pension income), rental income and any imputed income and gains not made on the sale/transfer of assets such as from gambling, for example. Non-residents pay tax on general income at a flat rate of 24%.
Tax returns are submitted and payment made in the year following the tax year i.e. for the tax year 2008 declarations are made in 2009. The returns should be submitted some time during May or June and by 1st July at the latest. Tax due must also be paid by this date.
There are tax-free allowances called the ‘Minimo Personal y Familiar’. Any allowance not used against the general income can be set against the savings income.
The basic personal allowance for 2008 is €5,151 per person. However, for 2008 joint returns the allowance given to the first spouse is only €5,050 plus €3,400 for the second spouse. There are additional deductions based on age, dependants and incapacity.
Earned income (including pension income – but not, say, rental income) attracts an extra deduction for 2008 of up to €4,080. The maximum deduction applies to those on low earned income of up to €9,180, with a minimum deduction for those who earn more than €13,260 of €2,652. If earning some figure between €9,180 and €13,260, then the deduction is on a sliding scale between €2,652 and €4,080.
Residents of Spain are taxed on only 50% of the net rental income at the normal scale rates except for short-term lets (por temporada). Lets of 12 months or more would usually be considered not short-term.
The net rental income is the amount of rent due after deducting usual day-to–day running costs for the period(s) in question, including local taxes; repairs and maintenance (but not additions or functional improvements/enhancements that add to the value of the property); managing agents’ fees and commissions; interest on loans for purchase or improvement; and depreciation of 3% per year of the cost of the property (excluding the land value).
A non-resident is taxed in Spain on income arising from Spanish property at the rate of 24% on the gross income without any deductions for expenses or interest costs. It is the tenant who is meant to withhold 24% from the rents and file a tax return to submit the tax to the Spanish tax authorities, although in the case of short holiday lets the owner or agent would in practice take responsibility.
From 1st January 2008, you can deduct 10.05% of the rent paid if renting your main home, provided your taxable income is less than €24,020 per year.
Wealth tax is in the process of being abolished in Spain from 1st January 2008. Although the measure went before the legislature in September 2008 with a deadline for amendments set at 16th October, at the time of writing confirmation of final approval by the Spanish parliament has yet to be made. Providing the abolition becomes law wealth tax returns for 2008 due in 2009 should not be necessary.
Otherwise, Spanish wealth tax is payable by residents and non-residents based on assets held at 31st December each year. The tax rate ranges from 0.2% to 2.5%. Residents are taxed on their worldwide assets and receive deductions. Non-residents are taxed on their Spanish assets only without allowances.
Property owners have to pay local property taxes. IBI (Impuesto sobre Bienes Inmuebles) is equivalent to the local ‘rates’. In some areas rubbish collection charges (basura) are raised separately.
IBI is paid if you own a residential property and use it yourself or have it available for your use. It is paid by the person who occupied the property on 1st January in any year and is not usually apportioned if they later move.
A demand for payment is sent each year and must be paid by the specified date. Failure to do so incurs a penalty of 20%. It is probably simplest to arrange for payment from your bank by direct debit.
If you are planning on moving to Spain, or even if you have already made that move, a professional tax adviser can help you to legitimately lower your tax liabilities.
Article by Blevins Franks