If you are reading this, you may well be considering moving to Spain, are currently in the throes of arranging your move or are already there. Part of the moving process is considering all the areas of your life which will be impacted and what you might need to do to minimise or alleviate that impact.
One area you will need to consider is how you will cover the costs of your new life in the sun, particularly if you are not intending to work again. How much pension income you might receive and how it will be taxed in Spain is therefore very important to understand.
When it comes to UK pensions, you will need to make financial decisions both before you leave the UK and after you arrive in Spain and any advice should be taken in advance of crystallising any pension benefits.
Leaving your pension in the UK
If you are living in Spain and your pension scheme is in the UK then, without a specific agreement between the two jurisdictions, it may well have been taxable in both. The UK/Spain Double Tax Treaty is designed to prevent this in respect of pensions and most other forms of taxable income.
The Double Tax Treaty between the UK and Spain follows the OECD template, with both company and private pensions deemed taxable where you reside, not where the pension is located. The opposite of this is UK government and local authority pensions, which under the Double Tax Treaty remain taxable in the UK and not Spain.
UK Defined Contribution pensions schemes allow you to take 25% of the fund as a lump sum which is deemed tax-free in the UK.
Spain and UK pensions
Alternatively, if you were to delay taking the 25% lump sum until you were Spanish resident then it would be liable to Spanish taxation, as there is no tax-free, exempt amount in Spain.
Pension income in Spain is assessed to income tax. Where this arises from a company scheme or employer contributions to a private scheme, it would be taxed at the normal scale rates between 19% and 54%.
Where a pension is funded from private capital or receives its money from a transfer of benefits from a pension scheme not classified as an ‘occupational’ pension, any income is usually taxed as some form of annuity. The amount taxable is dependent upon the length of the annuity and this can result in significant tax savings but in turn, may well have Spanish wealth tax consequences.
Brexit and Spanish wealth tax
As we have already established, the UK/Spain Double Tax Treaty determines how Spanish residents are taxed on UK pensions, but Brexit may have changed the way UK pensions are treated when it comes to Spanish wealth tax.
UK pension plans have generally been exempt from Spanish wealth tax. But now, as the UK is regarded as a ‘third country’ (i.e. outside the EU/EEA), they may no longer qualify for this exclusion.
The current law on wealth tax exemptions does not differentiate between Spanish, foreign/EU and non-EU pension plans, so both should be treated the same. However, a binding ruling from the Directorate-General for Tax (DGT) in Spain in 2019 states that “pension plans established in non-EU member states may not benefit from the [wealth tax] exemption”.
Lawyers could still argue that UK pensions remain exempt. But this is not a given – as Brexit is such a new phenomenon and an untested position with no obvious outcome. So, if you are Spanish resident with a UK pension plan, you may have to potentially defend your position with the tax authorities to prevent a new wealth tax liability.
Spanish wealth tax rules
Spanish residents face wealth tax on worldwide assets. It is payable each December on the total net value of most capital assets, including real estate, investments, jewellery, art, antiques, cars and boats.
There is a personal tax-free allowance of €700,000 per person and an additional allowance of up to €300,000 against the value of your main home in Spain. A married couple resident in Spain and owning property in joint names might therefore have a tax-free allowance of €2 million for wealth tax purposes.
The 2021 state rates start at 0.2% on assets up to €167,129 and rise to 3.5% on assets over almost €10.7 million. Each of the 17 Autonomous Region can vary both rates and allowances, so you will need to establish what the rates are in your area.
There is a lot to take in and be aware of and these are really only examples. Good planning can ensure you minimise the tax that impacts you and it helps to do so with specialists in this area. Blevins Franks have advisors based in the UK and Spain so please complete the form to download our Guide to ‘Pensions and the implications for your retirement in Europe’. If you are seeking advice and guidance as you plan your move, please complete the enquiry form on this page or contact us via blevinsfranks.com.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.
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