If you’ve moved to Spain as a foreign national, or are considering relocating to the Mediterranean shores, having a budget and a plan is even more vital than packing your sunscreen.
The issue for so many UK expats is that the world of investments, tax regimes, and domiciliary statuses can be complex. So, we strongly recommend seeking professional advice from a financial adviser before making any decisions.
All too often, British expats might assume that their investment products remain unchanged, or won’t consider that their pension fund might not be worth quite as much when the time comes to retire.
Critical factors to think about include:
- What sort of investments you hold and whether they are recognised internationally.
- The taxation liabilities arising overseas from foreign investment income.
- Your tax-residency status, and whether that’s likely to impact your financial security.
- Implications of Brexit, and changes to tax exemptions for non-EU citizens.
In this guide, we’ll run through how your residency and tax status impacts the value of your revenue streams, and where it’s worth considering the Spanish regulations before deciding whether to hang on to an investment, account or property in the UK.
Please get in touch with the Chase Buchanan teams at our UK Administration Centre or our Marbella offices for personalised advice specific to your circumstances.
Investing in the UK as a Non-Resident
First, we’ll consider how the UK regards overseas investors. If you become a permanent resident of Spain and live, pay taxes, work and bank in the country, you’re likely to be considered a Spanish tax resident.
Unfortunately, that does not mean that you become exempt from paying UK taxes. Non-residents do not have to pay UK tax on bank interest or dividends issued from UK holdings. However, they are taxed on any rental income up to 45% depending on which income tax band they fall into.
Anybody who owns a UK rental property and lives abroad for half of the year or longer is treated as a non-resident landlord for British tax purposes. You can hold rental investment properties through an overseas company, which reduces that rate to 19% – but there remains a tax to pay.
Inheritance tax (IHT) is also another important matter. If you hold British assets, including savings or property, these are taxable at UK rates.
Even if you are a Spanish tax resident, you are still considered a UK domicile if you have lived in Britain for 15 of the last 20 years, and therefore must reside in Spain for a minimum of five years to change that status. It’s worth noting that this can also be a complicated area, and domiciliary status isn’t always automatically awarded, so again professional advice is crucial.
IHT tax rates can be as high as 40% on the standard rate, although:
- If you leave 10% or more of your estate to charity, that rate reduces to 36%.
- You only pay UK IHT on British assets.
- There is a threshold of £325,000, so if your estate falls under this value, there is usually no tax to pay.
All of these factors mean that:
- Living in Spain does not mean that you won’t still be liable to UK tax on British investments.
- Your tax residency and domiciliary status will determine what taxes you are charged.
- Income from UK assets will often still be taxable; depending on how much time you spend in each respective country.
While tax is only one of the crucial considerations, it is important to seek guidance to balance these obligations with your anticipated returns to ensure it is still viable to keep hold of your UK investments.
Likewise, there may be more tax-efficient options available, such as ownership through a company, and exploring these alternatives could make a significant difference to your finances.
Owning Foreign Investments as a Spanish Resident
Now we’ve looked a little at UK taxes on foreign-owned assets; it’s also necessary to think about whether you are also liable on tax in Spain for those same income streams.
Double taxation treaties come into play if you are being taxed in two countries with a bilateral agreement. You can usually offset one tax against the other, to avoid needing to pay both rates – although, you need to apply for double taxation exemption, and cannot simply choose which country to pay taxes in!
If you pay any tax in either country in error, you are highly unlikely to be able to claim that back, so it’s essential to establish your taxation status and which income and assets need to be declared.
Here are a few of the most popular investments, and how the Spanish tax office is likely to treat them:
- UK rental income is taxable in Spain according to your income tax band – although you can claim a 60% reduction against the net revenue for long-term rentals where your tenant is living in your property as a primary residence.
- Income from standard savings and investment products such as ISAs and Premium Bonds are not treated in the same way. You can only contribute to an ISA, for example, if you are a UK resident and can no longer make payments if you relocate permanently to Spain. The income is taxable at standard Spanish tax rates.
- Premium Bond winnings are treated as income, taxable at regular income rates. These vary between provinces but could be as high as 48% in Valencia and Catalonia with rates of above 45% in most other regions.
- Interest earnings on all bank accounts are taxed in Spain as savings income – no matter where those accounts are held. That means if you keep a UK savings account, you will pay between 19% and 23% tax depending on how much income you receive.
Therefore, we know that as well as HMRC tax obligations, you will likely be required to pay Spanish tax as well, including on many overseas investments or assets. Not reporting such income is never an option.
The Common Reporting Standard means that opted in countries, including the UK and Spain, share information about overseas investments held within their jurisdiction. Therefore, tax authorities can cross-reference declarations and returns to ensure that no tax resident is omitting to declare international income that is taxable within their country.
The Tax-Efficiencies of Overseas Investments for Expats in Spain
The answer is that there isn’t any uniform solution. The right investment option for you will depend on multiple criteria, including your living arrangements, income streams, what types of investment you hold, and how much your retirement plans or lifestyle aspirations rely on that revenue.
- International investments often remain taxable.
- Double taxation treaties apply, but must be claimed for correctly.
- Non-declarations can be treated as attempted tax evasion.
- Rates depend primarily on your residency status.
It’s also worth thinking about currency exchange rates, and international transfer fees, as post-Brexit if either the Euro or Sterling changes in value; this could have an immediate impact on your finances.
Spanish taxes don’t work quite the same as in the UK. Some federal taxes are universal throughout Spain, but different regions have autonomy over exemptions or thresholds, so a UK investment product that remains tax-efficient in one province might be the opposite in another.
The key is always to seek professional advice from a financial adviser with up to date knowledge about regulations, rates and eligibility for exemptions both in the UK and Spain.
If you would like to schedule a consultation to assess the value of your investment holdings on relocating to Spain, or to explore tax-efficient alternatives to safeguard your future finances, contact your nearest Chase Buchanan office to arrange a good time to talk.