Spanish taxation is still reasonably low, and may be less than you pay in the UK but for peace of mind it still needs to be taken seriously before you sign on the dotted line for your new property. Costs involved need to be understood
I am no expert, all I can do is point you in the right direction. the right Spanish Tax expert can save you money. He will ensure that you take optimum advantage of your current tax status and also ensure that you don't make mistakes that you may later regret. These days avoiding paying taxes in Spain is more difficult and penalties can be severe. However, despite the efforts of the authorities to curb tax dodgers, tax evasion is still in evidence and non-resident home owners are often among the worst offenders, paying or being paid cash in hand thereby avoiding value added tax (IVA) and income tax. It is also preferred by many Spaniards for payment, rather than cheque or credit card, even when large sums are involved. Much black money changed hands during the transfer of the peseta to euros.
The Spanish tax system is complicated , even experts have difficulty agreeing with the tax authorities. Taxes are levied by three tiers of government : the central government, autonomous regional governments and local municipalities. Government taxes are administered by the Ministry of Economy and Taxation which is based in Madrid: Assessment and tax collection centres in the capital towns of the provinces operate a five year assessment and tax collection service.
Unpaid back taxes can only be claimed for the current past five years as there is a five year statute of limitations on the collection of back taxes I am advised that there are around 15 different taxes for which individuals are liable. The important ones are listed below.
Income Tax: Payable on worldwide income if resident in Spain, or if non resident in Spain, on income arising in Spain
Business Tax: Paid by the self-employed once a year.
Capital Gains Tax: Payable on the profits made on the sale of property and other assets located in Spain.
Company Tax: Paid at a percentage of profits by partnerships and registered companies.
Wealth Tax: payable on the value of worldwide assets if resident in Spain, or if not resident in Spain, payable on the value of Spanish assets alone
Inheritance and Gift Tax: Payable on assets situated in Spain or assets passing to a beneficiary who is Spanish resident
Motor Vehicle Tax: Paid annually by all vehicle owners
Offshore Company Tax: Annual tax on offshore companies that don't declare the individual owner of property in Spain or the source of investment.
Property Tax: Paid by all property owners.
Rubbish Collection: Annual tax payable by all residents and non resident property owners
Social Security: Isn't strictly a tax but is payable by employees and the self employed.
Value Added Tax (IVA): Payable on a wide range of goods and services at varying rates.
My advice, it’s not as bad as it looks but do obtain the advice of your solicitor or a tax adviser.
Taxes on some income and on capital gains may be avoided in Spain by careful planning, but tax liabilities on wealth such as inheritance tax (IHT) are more difficult to leave behind.
Your expatriate status will therefore be an opportunity to perhaps avoid unnecessary tax. It is often preferable to make such planning arrangements prior to taking up residence in Spain, although those who have lived in Spain for many years can avoid most of the implications of both UK IHT and Spanish succession tax.
The reason potential IHT liabilities do not vanish when you leave the UK is because it is not based on residence in the UK but on domicile, which is a more permanent concept than residence.
Even if you do abandon your UK domicile for a Spanish domicile, beware IHT rules impose a UK tax burden on those deemed to be domiciled in the UK as well as on those actually domiciled there. You will be deemed to be domiciled in the UK if you have been resident there for 17 out of the 20 previous tax years.
You will also be deemed to be domiciled there for three years after ceasing to be domiciled under general law.
As well as the tax implications of leaving the UK, you will also have to consider the implications of arriving in Spain. These can include potential wealth and inheritance taxes that may apply from the day of arrival. At best therefore, you may be exposed to a three-year period in which tax liabilities on worldwide assets may arise in both jurisdictions.
There is NOT a double tax treaty that covers inheritance tax/succession tax between Spain and the UK. Making sure that you are not liable for tax in either jurisdiction is a matter for careful tax planning.
IHT planning before leaving the UK is important to protect your position if it is not accepted that a domicile of choice has been established in another jurisdiction. Even if you have not planned for the avoidance of death duties prior to leaving the UK it is essential that you consider what action can be taken to avoid succession tax in Spain. Succession tax in Spain can be exceptionally costly, tax is payable from very low tax-free thresholds and tax is payable on transfers between spouses at the death of the first spouse to die.
If you are buying a re-sale property you are obliged to pay Transfer Tax (ITP) which is usually 6% although it can be higher depending on the region. If you are buying a new property or a property in the course of construction from a promoter, developer or habitual trader, then you should pay VAT (IVA) at 7% plus Stamp Duty at 0.5%.
Plusvalía is a tax levied by the local Town Hall based on the particular area where the property is located, on the surface area of the land, on the catastral value and on the date of the previous title deed. This tax may range from under €100 to as much as several thousand euros on larger properties with a lot of land.
By law the vendor is obliged to pay this tax but it is common practise for the parties to negotiate on who is to assume this liability. The VAT (IVA) rate increases to 16% if you are purchasing plots of land, commercial premises or garage spaces.
Most of us are not particularly good or at best un-enthusiastic when it comes to the management of our Tax forms. Even more so when we are outside the UK. The simplest way is to find a Tax Consultant who fully understands Spanish Tax Law and knows the legitimate ways to reduce your tax commitment. He must also of course be totally conversant in both English and Spanish so that you also understand his advice.
Practical Spain offers to arrange introductions for two such respected tax consultants to contact you with a view to offering initial “No-obligation tax discussions”. It costs just £7.50 payable via PayPal towards the continuing maintenance of this website. Following your introduction and initial confidential discussion with the consultants explaining your tax situation; they will each advise of there charges for fully assessing and offering a report on how your taxes may best be managed. It is then up to you to decide if you wish to take the matter forward and with which consultant. If interested, click here to make a no-obligation request to talk to a Tax Consultant. If when you have been contacted, you like what you hear, go ahead. If not, please let me know.
For the enthusiast or more accounting minded there are many good books published by specialists in the tax field, although only very few are published in English.