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We all know how important location is when buying a home, but it’s also a vital issue to consider when going about your tax planning. This doesn’t mean you need to choose your country of residence based on its tax rules, so if you’d like to move to Spain the Spanish tax system should rarely be a deciding factor. However various location issues do come into play if you want to get your planning right and pay as little tax as possible, wherever you are resident.

You should always review your tax planning when you move to a new country because it should be specifically designed to be effective in the country you are tax resident in.

First of all you should make yourself familiar with the tax rules and rates of your country of residence and do everything necessary to be tax compliant in that country. Many British expatriates move to Spain but continue to pay tax in the UK rather than here in Spain. You cannot choose where to pay tax based on personal preferences or which country has the lowest rates. If you meet the Spanish residency regulations then you must pay tax here on your worldwide income, gains and wealth.

Pension income can be the exception – UK government services pensions remain taxable in the UK – so you will need to seek specific advice for your type of pension fund.

You then need to apply the local regulations for the taxation of savings, investments and wealth to establish which structures are most tax efficient in your country of residence.

For example, many British people had set up ISAs and PEPs when they were in the UK to benefit from their tax saving opportunities. However these benefits only apply to British residents and you will need to pay tax in Spain on the income and gains arising within such funds.

So once you are resident in Spain you need to use arrangements that are tax efficient in Spain. The obvious one is the offshore insurance bond which is taxed very beneficially and can significantly lower the tax bill on your savings and investments. You will probably need to sell your ISAs and PEPs to release the capital and then place it within the tax “wrapper” of the offshore investment bond.

With regards to Spanish succession tax, your specific location in Spain can make a difference. Each region applies its own rules and some regions have more favourable rates and allowances than others. However you need to be habitually resident in that region for the local rules to apply.

Whether you are tax resident in Spain, the UK or any other European country, you are likely to be liable to tax on your worldwide income and assets.

It’s important to note that such income is taxed even if you do not bring it into the country you are resident in. So if you live in Spain and have money earning interest in an offshore bank account, this income is liable for tax in Spain and should be declared in Spain, even if the interest is rolled up in the account and not used in Spain.

Likewise, if you are resident in the UK and earn rental income from a Spanish property, you need to declare this income in the UK even if you deposit the income in a Spanish bank account, spend it in Spain and even pay tax on it in Spain.

The option to have tax withheld on bank interest, which is offered by banks in the Isle of Man and the Channel Islands, among other jurisdictions, instead of automatically exchanging information with your local tax authority, can be misleading. It implies that since tax has already been deducted at source you don’t need to declare the interest in Spain. In fact, all income must be declared in Spain if you are resident there, even if you have already paid tax on it.

When selecting an investment structure, such as an offshore insurance bond, the location of the bond is important. In Spain, only ‘approved’ bonds receive beneficial tax treatments and to be approved the bond needs to be issued in an EU country. Jersey, Guernsey and the Isle of Man are not EU jurisdictions and so do not receive the same tax advantages.

Some jurisdictions offer other benefits as well, for example, for non-residents of Luxembourg, investments into Luxembourg based investments are exempt from capital gains tax and income is accumulated free of all taxes, except for dividends arising from underlying investments which may be subject to a small withholding tax in those countries which make this deduction.

You may also like to consider the likely location of your beneficiaries when they come to inherit your assets, to arrange in advance for their inheritance to be as tax efficient as possible.

Interestingly, when it comes to UK inheritance tax (IHT), neither your location at the time of death, nor your beneficiaries’ tax residence, necessarily matter. IHT is based on domicile rather than residence so it’s possible for IHT to be due even if both you and your beneficiaries are living outside the UK.

If you remain a UK domicile – and many expatriates living in Spain do – your worldwide estate will be liable for IHT in spite of the fact that you are tax resident in Spain.

However, if you intend to live in Spain permanently and you take specific steps to change your domicile status, you could then set up your financial planning so that you escape the IHT net for generations to come.

When it comes to Spanish succession tax, if your beneficiaries are resident in Spain they will be liable for this tax on all assets they inherit, wherever located. If they are not resident here, but the assets being passed to them are located in Spain, they will also be liable for succession tax in Spain.

Tax planning can be very complex for the expatriate. It is advisable to seek professional advice to make sure you have followed the rules correctly and are paying as little tax as possible for your circumstances.

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