Don’t get caught out by new Spain tax laws

British expats living in Spain will have to be on their toes to keep up with the new Spanish tax rules

There are a number of changes afoot which could trip you up faster than a flamenco dance. These include:

· A new double tax treaty

· New disclosure rules

· New tax allowance bands

Before becoming too entangled in the new rules, you need to clear whether you are a resident for tax purposes. This applies to expats and homeowners. You are a Spanish resident if you spend more than 183 days (roughly six months) in Spain in one calendar year , and they don’t have to be consecutive days.

But you will also be presumed to be a Spanish resident if your “centre of vital interests” is in Spain. For instance, if your husband or wife lives in Spain and you’re not legally separated.

“The centre of vital interests was introduced to prevent fraud where individuals maintained their whole life in Spain, but made sure they remained under the 183 day barrier,” explains Jason Porter, Business Development Director at tax and wealth management firm Blevins Franks.

Double taxation

The UK and Spain have had a Double Taxation Convention for some time, but the new treaty only came into force in June with further rules covering income tax and other taxes kicking in on January 1 and April 6, 2015.

“The new treaty is especially relevant to individuals and companies who are tax residents in Spain, but who draw income from the UK, as well as those who split their time between the two, perhaps paying tax in both,” says Richard Way, Editor of the Overseas Guides Company.

“For example, the new treaty could affect the amount of tax certain expat pensioners’ pay.”

Government service pensions paid to retired members of the fire service, police, civil servants, armed forces and local authorities are exempt from Spanish tax. Under the new treaty the amount of the pension is still exempt but must be included when calculating how much tax is due in Spain. This could have the effect of pushing any other income – perhaps from investments and rent – into a higher tax bracket meaning you’d have to pay more tax in Spain.

Disclosure rules

The new Spanish ‘disclosure’ rules mean that Spanish residents and expats living in Spain will have to declare all relevant overseas assets worth more than €50,000. This includes bank accounts, property and life assurance policies.

“Tax authorities are now openly sharing information about citizens’ taxable assets in order to claim unpaid tax,” says Rachael Griffin, head of technical marketing at Skandia.

“For Spanish residents who have been declaring their assets already, this should simply be an extra administrative burden. However, for those who have not been declaring assets up until this point there is a potential for a significant tax charge and fine. Individuals in this situation should seek professional advice as soon as possible”

And in a move that’s led to mutterings of a new Spanish Inquisition, the Spanish authorities have started automatically taking tax debts from people’s bank accounts.

Reduced tax bands

On the plus side, there are proposals to simplify and reduce the tax bands which will be introduced in 2015 and 2016 after consultation. Under the proposals, the seven income tax bands would reduce to five and the lowest tax band would fall to 19pc by 2016 from the current level of 24.75pc. The top rate for those earning more than €300,000 could fall from 52pc to 45pc by 2016.

“The average income tax burden is expected to reduce by 12.5pc – but taxpayers with earnings of less than €24,000 will pay 23.5pc less tax,” says Mr Porter.

Savings income rates and thresholds could also fall.

But it’s not all positive. The €1,500 annual exemption against dividend income could be removed and the 60pc deduction against net rental income for Spanish residents could fall to 50pc. In addition, indexation, which allows for the effect of inflation over time, would no longer apply when a property is sold.

“These proposed changes are not a foregone conclusion,” adds Mr Porter. “Even if they are passed, the different autonomous regions in Spain have the right to either not apply them or change the rates.”

The combination of all the tax rules in Spain means that tax freedom day – the day you finally stop paying tax to the state and start earning for yourself – is June 12, up from May 19.

“This really highlights the increased tax burden on the individual,” says Mr Porter.