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Do UK pension funds now attract wealth tax in Spain?
By Paul Montague, Partner, Blevins Franks
Generally, Brexit has not affected the tax treatment for UK nationals settled in Spain, as the UK-Spain double tax treaty determines how Spanish residents are taxed on UK assets. However, there may be a change in the way UK pension funds are treated when it comes to Spanish wealth tax.
Pensions and wealth tax in Spain
UK pension plans (other than purchased annuities), have generally been exempt from Spanish wealth tax. But now that UK pensions have become ‘third country’ (non-EU/EEA) assets, they may no longer qualify for the exclusion. This means that UK personal pensions and SIPPs (Self-Invested Personal Pensions) may now fall into the Spanish wealth tax calculation.
Although pension plans are not usually captured by Spanish wealth tax, as with many tax matters in Spain, this is not clear-cut. The current law on wealth tax exemptions does not differentiate between Spanish and 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”.
Because there is no distinction between Spanish/non-Spanish pension plans in the actual wording of the law, lawyers could argue that UK pensions remain exempt. But this is not a given – as Brexit is such a new state of play, this is an untested position so it is unclear what the outcome would be.
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
While Spanish wealth tax was effectively abolished in 2008 and reinstated on a “temporary” basis during the financial crisis in 2011, it has been extended in successive budgets. The 2021 budget confirmed it is now considered a permanent tax.
Spanish residents face wealth tax on worldwide assets; for non-residents it affects Spanish assets only. It is payable each December on the total net value of most capital assets, including real estate, savings and investments, shareholdings, jewellery, art, antiques, cars and boats. General household contents, certain shareholdings in family companies, business assets – and usually pension rights – are not subject to wealth tax.
2021 wealth tax rates and allowances
There is a personal tax-free allowance of €700,000 per person, which can vary regionally. Spanish residents can get an additional allowance of up to €300,000 against the value of their main home (excluding properties owned through corporate structures). This means a married couple resident here and owning property in joint names could potentially have a total tax-free allowance of €2 million for wealth tax purposes.
The state wealth tax rules apply in the Canary Isles: 2021 rates start at 0.2% on assets up to €167,129 and rise up to 3.5% on assets over €10,695,996.
Reducing your exposure
Depending on your circumstances, there may be options to reduce your wealth tax liability. For example, there are some tax-efficient investment structures that can allow you to reduce both your income and wealth tax bill in Spain.
If you are worried about the impact of wealth tax – or that the value of your UK pensions may now push your worldwide assets into scope for wealth tax – make sure you review your arrangements. Your local Blevins Franks adviser can assess your situation to establish any wealth tax implications and recommend suitable Spanish-compliant options. With UK pensions, for example, you could transfer funds into a Spanish arrangement or an EU-based QROPS (Qualifying Recognised Overseas Pensions Scheme) that will qualify for the wealth tax exemption. Doing so could also unlock other benefits not usually available to UK pensions, such as currency and estate planning flexibility.
With Blevins Franks’ expert, cross-border advice, you can take advantage of suitable tax-efficient opportunities to prevent a higher tax bill than necessary and make the most out of living in the Canary Isles.
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; individuals should 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.