Having worked hard for our money it is often the case that we forget to look after it with the same dedication as we put into our professions or businesses. We spend 40 hours plus a week (plus, plus if you run a business) working, but how much time do we spend on looking after the money we have spent all that time earning? The answer for most of us is “very little”.
Working Life vs Life Savings When Living in Spain
Who’s this for?
This article is for all British people who live in Spain.
Work Life vs Life Savings. How we should apply our work life process to our life savings.
Why to read this article?
With a simple comparison between your work life and your “savings life” you will gain understanding on how to better look after your savings. The article even provides a solution at the end to help you implement these ideas.
Taking the time to read the article and requesting an initial telephone or Zoom meeting. if you want help for your specific situation.
The reasons are many fold from having a love of “things” instead of savings and security. Social and peer pressure adds to the need to buy the latest iPhone, for example. We might not understand investments so do not spend time exploring the options. We might think our savings are just put away for a rainy day and not realise that they can be used to provide us with a feeling of security because they can also provide us with lifelong income.
The reason for our lack of attention, in part, is that there is no structure in place to make sure we do give the right amount of time to our money and savings. When we are at work we have a structure, a place you go to, probably training for the job, a boss, a company mission, company values, a product line which is specific and customers who keep you on your toes. The better we get at the job the more likely we are to get a promotion.
Don’t worry. I am not suggesting you spend another 40 hours a week on top of working to look after your savings. What will make a difference, though, is if we apply these work elements to our savings.
Structure – perhaps as simple as saving regularly, or perhaps using savings type where tax is not paid whilst your money grows. Using a cashflow model to see what your financial future looks like.
A place to go – more difficult but if you have an adviser go to his/her office to discuss your situation and your requirements.
Training – there are many good books on looking after your savings. You will notice that the best concentrate on your approach to money and the process of making it grow. Not on an “investment product”. Always start with your plan and then fit the products into your plan. Do not buy a product and then wonder why you have it. This is not as easy as we might think because the adverts for financial services are mostly offering products.
A boss – if you have an adviser you become the boss and the adviser becomes your employee. If this is not the case, get a new adviser!
Mission and values – have a list of requirements for your savings, investments and pensions. It may be that you have chosen a set date to retire or how much to leave the children or many, many more objectives. Your values may include making your money grow without causing harm to the environment.
Product line – emotions guide what you want from your money but make your decisions on how to achieve that based on data. Recognise that you should build your planning on emotion and implement the plan based on data. Your work company has a limited number of products. In Europe alone we have 16,000 different possibilities in just one investment class. Even if you have a really good knowledge of how investments work you still need help with sorting the data on 16,000 options. Use an adviser with tools to analyse that data on your behalf and to give you guidance on what will best fit your plan.
Customers who keep you on your toes – the customers who will keep you on your toes for your savings are interest rates, markets, tax, rules and regulation. All of these “customers” change their minds. A very good recent example is in the markets, with the S&P 500 index of US shares from the start of Covid:
- 9th February 2020 – 3,380.16
- 15th March 2020 – 2304.92 (31.8% change)
- 12th April 2020 – 2874.56 (24.7% back up)
- 7th October 2021 – 4399.76%
*Source New York Stock Exchange
Of course this is an extreme example, but it does illustrate how you or your adviser needs to pay attention.
For those of us living in Spain we have to add in the additional issues of a tax system in the UK and a tax system in Spain. Exchange rates are another factor we need to consider.
If you would like to be the boss of your savings with an adviser who can guide you for building your plan and then use data to best work out how to implement your plan, myself and our team at the Spectrum IFA Group are here to help. With software systems for cashflow planning, an investment panel for reviewing investments, clear understanding of both UK and Spanish tax systems and ongoing support, all given in English by an adviser who lives in Spain.
For an initial call to find out more, choose a time for a phone call or Zoom meeting that is convenient for you with this link: initial telephone or Zoom meeting.
I look forward to converting our expertise and systems into easy to understand ways for you to make your plans become a reality.
The better we get at the job the more likely we are to get a promotion.
Vanguard, the $7 trillion dollar fund management company, has conducted extensive analysis of the benefit of using a financial adviser. Here are some of the key findings:
People with financial advisers average a 3% better investment return.
Advisers often find ways of saving clients tax on their investments.
Some of the best opportunities to add value occur during market duress or euphoria when clients are tempted to abandon their well thought out investment plans.
One of the most important benefits is to give clients peace of mind
Minimising exposure to tax in Spain
Probably the most burning issue here on the Costa del Sol for expatriates is minimising exposure to Spanish taxes. Everywhere I go to meet and discuss matters with both clients and prospective clients, this same subject always arises. Over the years I have noticed that this subject has caused so much unhappiness with some people. And it is mostly with men, rarely with women.
The unhappiness stems from the conflict between the heart and the pocket. The heart says I want to live here, revel in this micro climate, enjoy my golf, wine and dine with my friends and basically enjoy a healthy outdoor life. My pocket says I don’t want and will not pay these taxes – particularly wealth tax. Wealth tax is alien to North European nationals, whose countries by and large do not impose this tax.
The result for some is that they are sentenced to be constantly wandering the world, on the move from one jurisdiction to another throughout the tax year, always ensuring they are not there long enough to be caught in the tax net. This can also result in stress, instability, the feeling of not belonging anywhere and some cases the cause of divorce. Women on the other hand just want to live where they will be happy, where they have access to their social circle, to their children and grandchildren, either close by or at the end of an easy inexpensive short flight. For them, the tax issue is secondary.
One only has this life once and so why not take the course of most happiness for you and your family and accept the fact there are two sure things in life – death and taxes (to quote Benjamin Franklin)? You cannot take your money with you when you depart this orb, but you can certainly minimise your taxes whilst here and leave your money to your beneficiaries with either very little inheritance tax or none at all.
Thus, it is best to confront the tax implications head on to see what is entailed and what your potential liability is. Apart from wealth and inheritance tax, there are two other mainstream taxes in Spain – capital gains tax and income tax. These too can be mitigated and often eliminated with careful tax planning. Investment income can be sheltered from tax as well as capital gains if steps are taken early enough, particularly if you are coming to live here from another jurisdiction. Here in Andalucia, inheritance tax has for all intents and purposes been eliminated. Wealth tax carries generous allowances (particularly in the case of shared assets). There is even talk of once more eliminating wealth tax altogether but we will have to wait and see.
Of course, tax and investments are intertwined so it is important to have a good financial adviser on board. Spectrum has been advising thousands of their clients for many years with the assistance of locally qualified tax experts on the subject of taxation, which you can see in the many other articles on this website.
If you would like to talk to me more about this subject and the points raised, please contact me as per below and I would be happy to discuss this further.
UK tax rebates in Spain
The TT – Top Tips Newsletter
Hi everyone, I hope you are enjoying some well needed freedom and a good summer. This month’s TT covers the following Hot Topics:
- UK passports – VERY important news on travelling to Europe
- UK tax rebates for those moving abroad
- New working/retirement rules in Spain
The first news out this year, importantly for those travelling to and from Europe, was that you must have 6 months left on your UK passport to enter the country now that the UK has left the EU; this applies even if you are a resident. Those travelling may have noticed that as well as joining the ‘Non-EU passport queue’, your passport will more than likely have been stamped. The UK has issued a statement saying that if you present your TIE resident card at passport control, they will not need to stamp your passport. In my experience this is not the case so far, even though I have given them my TIE as well. This might be an issue for those people who travel regularly, as once your passport stamp pages are full a passport is not usable. You would then need to apply for a new passport on the basis of ‘exhaustion of pages’. What’s more is that some countries will not allow entry without two blank passport stamp pages. If you are renewing your passport, it might be worth requesting the larger version with more pages to cover for this eventuality. Which leads me nicely onto my next topic.
UK red passport expiry date
Those who have not renewed their UK passport in the last year probably will have the old red colour passport. An important announcement was made recently in respect of these and is as such: these passports are ONLY valid for 10 years exactly. What this means is, if when you last renewed your passport and had months added that were still valid from the previous passport, these do not count anymore. Thus, these passports are only valid from 10 years from their date of ISSUE.
This will not affect everyone, but for example, if your current red passport was issued in January 2012, but expires in May 2022, because there were 4 months remaining on the previous passport which were added to the new one, you will be affected. In this instance, Europe/Spain will have this passport expiring in January 2022 and to enter you must have 6 months remaining to this date.
It’s good to have things like this to worry about, because there just isn’t enough in life is there?!
UK tax rebate for those moving abroad
Anyone who has left the UK in the last four tax years is allowed to apply for a UK tax rebate. There is no way to trigger an automatic tax refund; the HMRC needs you to submit an official claim before they can refund your tax overspend.
UK tax is calculated on your projected annual income, so if you don’t complete a full UK tax year this could be wrong, and in many cases very much so.
The main reasons you should look at this are:
- Personal allowance – you have not used the entire amount in the year you emigrate/leave
- You continue to be a UK taxpayer but are employed in another country
The process to find out if you are due any monies is fairly straightforward:
Complete form P85, sending parts 2 & 3 of your P45 that you should have received from your employer, or a self assesment form if you were self employed.
You can read about how to do this on the official government website here:
New part time working/retirement rules in Spain
Until recently in Spain, you either had to be working or retired from a Spanish state pension perspective. That is to say, you could not work and receive your state pension. I know, I know, it just doesn’t incentivise people who arguably have the most experience in life to contribute to the economy, as if they continue working in any capacity they cannot receive their hard worked for state pension. However, recently this has changed.
You can now receive 50% of your Spanish state pension, pay a reduced autonomo payment (self-employed monthly payment) and continue to work. As a reminder, to receive a Spanish state pension you must have contributed for 15 years and two of those years must have been within the 15 years preceding actually retiring.
If you would like more information regarding any of the above, or to talk through your situation initially and receive expert, factual advice, don’t hesitate to get in touch with Chris.
Click here to read reviews on Chris and his advice
Don´t panic Mr Mainwaring!
We’re almost 2/3rds through 2021 and there seems to be a lot more optimism, in Spain at least. However, certain problems exist and are not likely to go away any time soon. One of these problems is with banks. My particular bank branch did not exactly cover itself in glory over the last 17 months or so, allowing long queues to form outside, allowing only one person in at a time (when there were three members of staff inside!?). We all understood why they were doing it, but opening for only 2¾ hours a day and then not being particularly helpful if you could get in during that short window of time, made us feel a little bit let down.
The days of the local bank manager who knew everything about you, from the details of your spending habits to what school the kids went to, have long gone. There is little or no familiarity with customers and the main aim for the bank staff these days is to sell products, often with questionable relevance to the customer and rarely explained sufficiently, in my experience.
Let us think about the future of high-street banking. My opinion is that there will be a lot less bank branches in 10 years’ time than there are today, maybe none. I avoid going to a bank as much as I can, other than to grab some cash outside (from the machine and my account, obviously). I do all of my banking online. I have no fear of it but I appreciate that there are those who do and do not trust the system. I also appreciate that there is the possibility of fraud and theft but, as long as I follow the instructions like “Don´t give your card and pin number to someone else!”, I am confident that any money stolen will be covered by the bank. There are people who keep their card and a note of the pin number in the same handbag/wallet. The bank will not be very sympathetic in these circumstances. Also, be wary of anyone taking your card where you cannot see them. Cloning cards is a popular pastime for some. The overall feeling here is that those who do not like or want online banking will not have the choice in the future.
Everything is pointing towards branchless banking. That means people having to do all of their banking online. For me, that is perfect. The internet connection permitting, I can go to my bank at any time of the day. I don’t have to wait for it to finish a chat about the weather or the health of their cat before being attended to. I don´t have to find a home for half an Amazon Rainforest worth of paper and, generally, on the homepage there is a smiley photo of a person who may, or may not, work for the bank but that doesn´t matter. In order to perform certain actions online, you need to have registered a mobile telephone. For those not yet in the world of smartphones, it might be time to arrive. A smartphone is not essential for internet banking but the functionality of a smartphone just makes the whole process so much neater and easier (eventually). Whether you use a phone, iPad, laptop, or PC for your internet use, you will need the phone to confirm certain transactions and instructions.
I mentioned some months ago about ways of getting around bank charges that have been applicable since Brexit. Although the withdrawal agreement stated that the UK would remain part of the Single Euro Payments Area (SEPA), certain banks decided to apply charges to UK transactions with the excuse that the UK was no longer part of the EU. They have not taken any notice of the agreement and customers have been paying exorbitant fees for banking. I have recently discovered that a client of mine has been charged €18 a month on a small private pension of around £170 per month. This is being paid to her Spanish bank and they are charging, because they can. She challenged them on this (10% fee a month) and they said that they didn’t realise that it is a pension. However, they still have not done anything about it. Therefore, I have helped the client sort out a new banking arrangement for these transfers, saving her hundreds of euros a year in bank charges, as well as providing her with an exceptional exchange rate.
Brexit has introduced new problems and highlighted existing ones. Undoubtedly, as we progress through the journey and consequences of Brexit, we will have to deal with new taxes, new charges, new barriers, and new paperwork. We at The Spectrum IFA Group can help to make that journey less painful and less complicated.
Contact me today to find out how I can help you make more from your money, protecting your income streams against inflation and low interest rates, or for any other financial and tax planning information, at email@example.com or call or WhatsApp (+34) 618 204 731.
Top three financial tips for expats living in Spain
This month we are covering the following Hot Topics:
- UK financial advisers are not legally able to advise EU based clients anymore
- The important ‘rule of 72’ for investing
- Spanish state pension inflation worry
UK investments & pension law changes
Many UK based financial advisers can no longer legally look after anyone resident in Spain or the EU due to Brexit legislation, most having already written to their clients informing them of this. However, it’s not all bad news; most UK based investments including ISAs are not tax efficient in Spain/EU, with many having to be declared annually and tax paid on any gains, EVEN if you don’t access the money. This does depend completely on your circumstances and I help people analyse their personal situation, managing their UK assets or arranging for them to become Spanish compliant moving forward.
For those with UK private pensions in drawdown, every few years to receive this money you must have a UK accountant rubber stamp this to continue. So again, you will need to find someone locally to do this for you, which we can help with.
If you have any questions or need help in respect of UK based assets, please get in touch for a free, no obligation chat/review of your situation.
The rule of 72 and poor performing investments
Implementing an investment strategy is not where your investment plan finishes; it is where it begins. Without regular reviews and maintenance there is a strong risk you will finish up with much less than you should have had. Many financial advisors here in Spain are mainly remunerated when taking on a new client, not on the performance of their investment. This is where I/Spectrum differ.
One of the many key aspects of investing is to keep a keen eye on the ‘rule of 72’, which is knowing how long before your money should double in its value. To work out the ‘rule of 72’ for your investment you use the following simple formula: divide the number 72 by the average annual interest you are receiving/likely to receive and it will tell you how many years it would take for you to double your money. So, for example, if you were averaging 4% interest per year it would take around 18 years (72/4 = 18 years), at 5% around 14 years and 6% around 12 years. To put that into a real-life scenario, if we use a starting point of €100,000 and invested over a 25 year period this amount of money would give you:
- 4% €266,583
- 5% €338,635
- 6% €429,187
To put that into context, historically inflation makes your costs double every 24 years, so if your money is not well ahead of that, in real terms your monies are just keeping their present value.
Therefore, it’s imperative you really are seeing your investments growing and working for you. If they are not, I suggest you seek a second opinion and find out how you can have these optimised, because it will make a big difference to you further down the line. The main reasons for investments failing are high maintenance costs and investments that give the financial adviser a ‘kickback’. Many people don’t always understand why their investment funds are growing but their portfolio isn’t as much, and this is usually a starting point to look at.
I work in a different way, making sure it also works for the client by not using this method, but on a transparent fee basis using the best investments & platforms for the clients; not using investment funds that give the adviser more commissions, in essence.
Spanish state pension inflation worry
Back in 2011, Spain used to have a surplus state pension fund of €66 billion. This could be looked at as ‘well, at least they had a surplus; most countries have never had one’. Just before Covid started in 2019, it was €16 billion in debt. Now the state pension system, like many others, works on the principle that current workers pay for those who are retired now. The key point here is, from a percentage perspective, Spain, compared to others in the EU, has one of the highest proportions of its GDP (total country income) contributed to its state pension, at around 12%. The average ‘replacement rate’, which is the percentage of workers final salary income that they receive in retirement, was at 72% in 2019*, whereas the average in Europe is 45%. They receive, as a percentage, much more on average for their state pension compared to their earnings than their European counterparts. This is great on one hand, however this really is a great burden on Spain to provide that level of state pension to the people.
The only way Spain can carry on providing state pensions is to “increase the retirement age even higher and decrease the amount people receive” says Concepcion Patxot Cardoner, a University of Barcelona professor, as quoted by Bloomberg. That and start to move people towards saving into their own private pensions. However, this last option and the main plan moving forward is going to be difficult to achieve in a culture where only around 26% currently save into a private pension. Compare that to the UK where the latest survey showed 65% of people contribute.
If you also take into account Spain’s tourist industry (before Covid), which is the second largest in the world employing about 2 million people and accounting for about 11 percent of the country’s GDP, you can see that things are going to need to change drastically to balance the books given the current crisis.
What does all this mean? Well, to you and I, it’s even more important that we have a plan in place, whatever that is, to make sure we have provision in retirement. I am here to talk through this with you, using professional analytics tools to help take one of the most important planning aspects of your life and break it down, step by step, making it:
- Specific to you
If you would like to talk through your situation with someone consultative and knowledgeable, don’t hesitate to get in touch.
Back at the races in Monza
Proudly sponsored by The Spectrum IFA Group
I was proud to finally make my Racing debut this year, carrying the Spectrum colours on the Ligier LMP4 I was racing at Monza in Italy in the European Ligier series.
We received a drive through penalty in the first half of the race when running up front, and I managed to battle back from 9th to an eventual podium place in 3rd.
Attached are a few pictures from the event, and for anyone who wants to watch the TV coverage, click here for the full race on video:
New Spanish tax rules for UK ISAs and investment funds
Brexit increases tax woes for UK nationals living in Spain
Slowly but surely, the impact of the United Kingdom’s exit from the European Union is taking shape. For those UK nationals living in Spain, this could mean higher, and possibly new, taxes. As I wrote last week in my Wealth Tax in Spain article, the Spanish government and regional governments are in desperate need of revenue to cover pensions and the consequences of Covid-19. One source of this revenue will be through applying taxes to people from the UK who hold investments that do not qualify for special treatment in Spain.
At The Spectrum IFA Group, trading as Baskerville Advisers S.L. in Spain, we encourage those who wish to invest to make more from their money in the bank, or those already invested, to use a “wrapper” that is tax compliant in Spain. The main benefit of this is that any tax on gains is deferred until the account holder receives benefits in the form of a withdrawal. There are also other tax advantages that Spanish compliant investments have over those that do not qualify for special tax treatment in Spain.
Part of the “compliant” nature of the products that we recommend is that the companies used to hold the investments report the values, and hence gains, to the Spanish tax authorities. They are also responsible for deducting tax from any withdrawals.
Other important factors to make an investment Spanish compliant are that the distributor (the company offering their products in Spain) must be officially registered with the Spanish authorities and that the funds invested in are based in the EU*.
We meet many people who have UK based investments such as Individual Savings Accounts (ISAs). Others invest in funds using platforms (Online investment facilities) or insurance bonds through UK based companies. Up until 31st December 2020, although gains on these investments may not have been reported to Spain annually by Spanish tax residents, they seem to have been largely ignored by accountants and gestors when completing the annual tax return in Spain. This is possibly due to the fact that the UK was part of the EU and at least part of the compliance stipulations were being satisfied. That is, the funds used were in the EU.
People think that completing the asset declaration using the Modelo 720 is some kind of tax return. It is not. Of course, it gives the Spanish tax office a snapshot of wealth, which in turn could possibly lead to wealth tax being charged, but it is not specifically designed to give the detail of the annual gains, or losses, that occurred in a particular tax year.
The picture has changed dramatically due to Brexit. If you hold investment funds in the UK, these will be some of your responsibilities moving forward:
- You will have to report any gains each year
- You have to itemise each element of the investment so that if, for example, you hold 20 different funds, you must detail each one
- In addition, if your portfolio is made up of income paying funds, any dividends/coupons have to be itemised. Even cash within a portfolio has to be shown separately
- You need to know exactly when you bought each fund
There is a lot more to consider but, as you can imagine, this is going to be a nightmare situation for many, especially for those who have bought, sold, and then bought funds again over the years.
We can simplify all of this.
For those who have yet to become Spanish tax resident, we can organise your investments so that you never have to experience this incredibly difficult situation. For those who are already tax resident in Spain, we can switch your non-compliant, and potentially painful, investments to compliant ones. If you wish, you can select the same types of fund that you currently hold but in a Spanish tax compliant manner. This is extremely important because it means that, if you move back to the UK without having withdrawn any money from the investment, you will have escaped Spanish taxation on gains made whilst resident in Spain. Added to that, through investment structures that we can guide you to, if you return to the UK, any gains made whilst you lived in Spain, are ignored for UK tax purposes (I will write more on this in another article).
If you would like to legally avoid annual Spanish taxation on your investments, as well as the headaches and additional accountancy costs, you need to act now. The problem is not going to go away unless you leave Spain, which might be an extreme measure. It might be that your investments are in poor shape or that your UK adviser can simply no longer deal with you since Brexit. There is a host of other ways that I might be able to help you so contact me today for a free and no obligation discussion.
*Source: JC&A Abogados
More Spanish residents to pay wealth tax
Valencia reduces allowance with more people having to pay
the Impuesto Sobre el Patrimonio
Further to my article from last week, and after consultation with our accountant associates, it appears that the main residence wealth tax allowance of up to €300,000 only applies after 3 years of living in the property (habitual residence). This has been questioned but, as is often the case in Spain, getting a response from the tax office can be tricky.
The tax office words that are relevant in terms of getting around this 3-year rule are “circumstances that necessarily require the change of housing”. Moving to Spain to retire or for a change of lifestyle would not generally tick that box. If there are justifiable health reasons or similar then that appears to be acceptable in terms of applying the allowance.
To emphasise the habitual residence aspect, from JC & A Abogados in Marbella: “Please note that you must live effectively and consecutively in the property for more than 3 years, so you cannot rent the house out even for one day. In addition, you have to impute a benefit in kind for the Spanish property during the same 3 years period.”
In the words of JC & A, “The 3 year period starts counting from the purchase date as long as the dwelling is inhabited effectively and permanently within 12 months as from the purchase date.”
“…..a taxpayer who bought his main home but could not live in it because it was not suitable and had to have some works that exceeded 12 months; the conclusion is that the 3-year period starts counting from the date he moved in and not the purchase date.”
Adding salt to this potential tax wound, whilst it is not treated as your main residence (even though you live there permanently), you have to pay tax on its value as if you were a non-resident.
This all seems rather inequitable but is the law as things stand.
Wealth Tax in Spain
The UK tends to rely on income and inheritance taxes to generate revenue, but countries such as Spain and France, also apply wealth tax (Impuesto sobre el patrimonio). This is an asset tax and can be on cash, real estate, pension funds, shares, investment bonds, ISAs, and even cars. Portugal also has a wealth tax but this relates solely to immoveable property.
Spain eliminated wealth tax in 2008 but then “temporarily” reintroduced it in 2011 and it has been here ever since.
Each autonomous region sets their own allowances and rates after initial direction by central government. The Spanish State’s allowance is €700,000 plus up to €300,000 for one’s main residence. This is per taxpayer. It is important to note here that a property only becomes a main residence after 3 years of continuous habitation. There are a number of exceptions to this rule.
The State’s rates of wealth tax are as follows:
|Lower Band Limit (€)||Upper Band Limit (€)||Tax rate (%)|
Wealth tax in Valencia has changed over the years. In 2019, it was announced that the tax-free allowance was being reduced to €600,000. With effect from 2021, the allowance is being reduced further to €500,000. This means that more and more people will become subject to wealth tax.
In addition to the reduction in allowances for 2021, Valencia has higher wealth tax rates than the State’s own rate, as follows:
|Lower Band Limit (€)||Upper Band Limit (€)||Tax rate (%)|
If a couple have assets totalling €2.5 million, including a main residence worth €600,000, the individual annual wealth tax bill based on the State allowance and rates could be around €600. Using the Valencia allowance and rates, the tax bill could be almost €1,800. To clarify, this is per person and payable each year.
Depending on one’s income, and if one is a resident in Spain, the amount due can be reduced. The wealth tax due cannot exceed 60% of one’s taxable base (e.g., annual pension income, savings, etc.) when adding the wealth tax to personal income tax liabilities with a minimum payment of 20% of the wealth tax due. It is important to make certain that all of one’s assets are eligible for this rule.
Property Rental Income in Spain
For a Spanish Resident, property rental income can be incredibly tax efficient
It is commonplace to overhear conversations or see comments on social media where people are talking about how high taxes are in Spain compared to the UK.
By my reckoning, for the average person income tax and other taxes aren’t that much different between the two countries.
What you very rarely hear people talk about though, are some of the quite frankly amazing tax breaks available here. I use the word ‘breaks’ a little tongue in cheek, but if you are a Spanish resident, the tax treatment of residential rental income is a good example of why I choose to use those words.
Many people move here from the UK keeping what was their main family home there, and deciding to rent it out on a long term basis. It is surprising how many people have no idea what a tax efficient source of income that can prove to be.
Many expenses, as well as mortgage interest, are allowable deductions. Furthermore a 60% reduction is then applied to the final taxable amount. Even lesser known is the fact there is a further annual depreciation allowance of 3% of the rebuild cost, but if this figure is not known, then this is reduced to 1.5% of the property value.
As examples are normally the best way to explain how this works in practice, let’s look at one:
A couple own a UK property, which they bought for £500,000 , still owing £150,000 on the mortgage. They rent this when they move to Spain for £2,500 per month.
So their overall situation will look like this:
- £30,000 gross annual rental income
- £500,000 original purchase cost
- £3,600 annual rental agent and property management fees
- £2,500 annual repairs and other property expenses, including legal and accountancy
- £2,250 mortgage interest for the year
- The property was let out throughout the year
SPANISH TAX CALCULATIONS
|Loan interest (1)||2,250|
|Repairs and other costs||2,500|
|Depreciation at 1.5% (3)||7,500|
|Net rental income||14,150|
|Deduction available for residential rental income at 60% (4)||8,490|
|Net taxable income subject to the general tax regime||5,660|
This therefore means the taxable income due is based on a figure of just £5,560 at the clients highest marginal rate of income tax.
So let’s assume the client’s tax rate is 30.9% (which would be typical for a couple with healthy pension income); they would be paying £1748.94 in total for the rental income they received.
So if property rental income is an important source of income for you, then Spain really is an attractive place to be living. The same allowances will apply if you have a portfolio of buy to let properties in the UK rented on a long term basis.
Investment income, if coming from an appropriate investment, can also be extremely tax efficient in Spain, so if you would like to know more about how your specific circumstances might benefit, then please contact me to discuss in more detail.
I would like to thank Spence Clarke and Co, Chartered Accountants in Marbella for providing the figures in the above example, and for their ongoing support to many of our clients.