Financial update from association members Blevins Franks, please do not hesitate to contact Paul should you have any questions related to this or other financial matters.
Spain’s budget and taxation in 2021
By Paul Montague, Partner, Blevins Franks
Taxpayers in the Canary Isles are affected by two annual government budgets: the state budget and the regional one. The autonomous communities in Spain can adjust the local half of the income tax rates and adapt rates and allowances for wealth tax and succession tax, usually to make them more beneficial.
The Spanish General Budget Law for 2021 was published in the official gazette on 31 December 2020 and applies from 1 January 2021. This was the first state budget to be approved since 2018.
It is forecast to raise an additional €5.5 billion in tax revenue for the state, which will be welcome after its collection shrank by 7.6% in 2020 due to the pandemic.
Personal income tax
Previously, the top rate of personal income tax applied to income over €120,000. Now the government has introduced a new income band for general earnings over €300,000. The state tax rate for this band is 24.5% for income received in 2021, compared to 22.5% previously.
This is only the state half of the income tax rates and around the same is applied again at regional level. The combined top rate in the Canary Isles is now 50.5%.
Tax on savings income
Savings income is taxed separately to general income and basically consists of interest income, dividend income, capital gains on the sale or transfer of assets, income derived from life assurance contracts and purchased annuity income.
A new 26% rate has been introduced for income over €200,000, so savings income in 2021 will be taxed as follows (there are no regional variations here):
|Taxable base €||Tax rate|
|Up to 6,000||19%|
|6,000 – 50,000||21%|
|50,000 – 200,000||23%|
26% is a still a relatively low rate – for example, the top UK rate is 45% for interest and 38.1% for dividends. However, if you expect to earn a high level of investment income, it is worth taking specialist, personalised advice to find out if you can use compliant arrangements to reduce your tax liability.
The state budget introduces a higher rate of taxation for those with substantial wealth.
Worldwide wealth up to €10,695,996 is taxed the same as last year, with rates rising progressively from 0.2% for wealth up to €167,129 to 2.1% for wealth between €5,347,998 and €10,695,996. But now the top state rate for wealth above this limit has increased from 2.5% to 3.5%.
This increase only applies where the local autonomous community does not apply its own rates. Where it does, these continue to apply (and may or may not change from 2020, depending on the regional 2021 budget). The Canary Islands have not approved their own rates so the above state rates apply.
Wealth tax will now be applied indefinitely. This tax was effectively abolished in 2008 but reinstated on a temporary basis during the financial crisis in 2011. It has been extended in successive budgets and will now be considered a permanent tax.
There are no changes to Spanish succession and gift tax at state level. Again, it pays to review your assets and take specialist advice to understand how the rates and allowances in your region will affect your heirs and establish how you can reduce this liability for them.
UK-residents earning income in Spain
There have not been any budget changes here, but UK residents should note that third-party nationals are taxed at a higher rate than EU/EEA nationals.
So following Brexit, UK residents earning rental income from a Spanish property will now pay Spanish income tax at 24% instead of 19%. Besides this, as a non-EU resident you can no longer offset the expenses involved in maintaining and renting out the property.
Tax regime for Inbound Assignees
Commonly known as ‘Beckham Law, a special tax regime available for individuals who become Spanish tax resident as a result of an assignment to Spain.
Whereas last year they paid income tax at a flat 24% rate, from 2021 income over €600,000 is taxed at 47%.
Reducing your tax liabilities
Ask your local Blevins Franks advisers to review your investment portfolio, pensions and other assets. They can also evaluate your current tax liabilities, consider your personal situation and objectives, and look at what Spanish compliant arrangements would work for you and how much tax you could save – you may be very pleasantly surprised!
The 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; an individual is advised to seek personalised advice.
Blevins Franks Wealth Management Limited (BFWML) is authorised and regulated by the Malta Financial Services Authority, registered number C 92917. Authorised to conduct investment services under the Investment Services Act and authorised to carry out insurance intermediary activities under the Insurance Distribution Act. Where advice is provided outside of Malta via the Insurance Distribution Directive or the Markets in Financial Instruments Directive II, the applicable regulatory system differs in some respects from that of Malta. BFWML also provides taxation advice; its tax advisers are fully qualified tax specialists. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts, retirement schemes and companies. This promotion has been approved and issued by BFWML.
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