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Key takeaway – Shareholdings in non-Spanish companies are in principle excluded from WT, even if via those foreign companies the individual holds Spanish assets (basically, real estate). However, in certain circumstances a different view has been taken by the Spanish General Directorate of Taxes (Dirección General de Tributos – body in charge of construing the Spanish tax laws), based on the wording included in some conventions for the avoidance of double taxation entered into by Spain, such as the UK or the German tax treaties.
Who is liable for wealth tax in Spain?
- Wealth tax is based on your total net assets as of 31st December each year – less any charges, debts or obligations, which may reduce your wealth to below the applicable threshold.
- Individuals are only usually required to submit a wealth tax declaration if their net taxable wealth exceeds all available deductions and allowances or is above a net value of €2 million.
- Across Spain, those subject to wealth tax can claim an allowance of €300,000 for each owner against the value of their primary residence.
- Other allowances apply, with regional allowances of up to 100%, which are then replaced with the Solidarity Tax. In municipalities with no set allowance, the standard is €700,000 per taxpayer.
After allowances and deductions, the actual tax rates applied to your net wealth also depend on the remaining assessed value. The progressive tax tables start at 0.2% and rise to 3.5%, although the highest rates are payable by only those with a taxable base above €10.695 million.
WT is only levied on individuals’ and not on companies’ assets. The WT law does not include a specific list of assets which are subject to tax, but rather states that WT will be levied on the total net wealth of the individual. The net wealth of an individual comprises all the assets and economic rights owned by them (i.e. worldwide assets), with deduction of encumbrances that decrease their value as well as all personal debts or obligations. Non-Spanish tax residents are only subject to WT on their Spanish situated assets or rights and can only deduct debts which are taken out in relation to these Spanish assets (see Section 3 below). Generally speaking, all assets or rights with an economic value are subject to WT (e.g. real estate, financial assets (including treasury bonds), bank deposits, assets used in a business activity, shares in companies, luxury assets, insurances, etc). The WT law encompasses a personal allowance amounting to 700,000 euros per individual (and the same allowance is applicable to non-Spanish resident taxpayers). This allowance is individual, so each member of a family (including any minors) is able to individually take advantage of it (please see section 3 below with regard to regional differences).
Autonomous Communities (ACs) impose regional variations. However, non-residents are taxed at the national rate only. Tax-free allowances exist and are made up of a National exemption of €700,000 per person and an additional main residence uplift that depends on the individual’s AC. Andalucia, for example, exempts a further €300,000, or €600,000 for a married couple. This equates to allowances of around €2m for a couple.
Other aspects of the Spanish tax system
The Spanish tax system is based on ‘worldwide income’, which means fully resident taxpayers must declare all assets owned wherever they are situated. Assets with a value above €50,000 must be declared on Modelo 720 each year. This should be done by asset class. For example, all bank deposits should be aggregated, so there is no benefit in holding a series of accounts with €49,000 each. The same applies to investment funds, shares, and property.
Salary and/or pension taxation rates are slightly different from Investment Income rates, although both are based on a banded system. The higher your income, the higher the rate. A nil rate band applies to salary/pension income but not investment income.
Savings Income Tax applies to all investment growth, dividends, and interest received in a tax year, whether withdrawn as income or not. Tax is therefore payable on an ‘arising basis’, which as a concept, is unfamiliar to many foreign retirees.
Rates of wealth tax in Spain are calculated on a banded basis and rise according to the size of overall net wealth. The lowest rate in Andalucia is 0.20% on the first band above the allowance, rising to a maximum of 3.5% for estates valued above €10m.
An example of the calculation of wealth tax in Spain:
Mr and Mrs Brown have retired to Andalucia. Their property is worth €600,000, and they hold a variety of investments valued at €4,400,000, which are owned jointly. They both have taxable pensions of approximately €25,000 gross.
Each, therefore, has a wealth tax-free allowance of €1m (€700k National plus €300k in Andalusia). This leaves €3m potentially liable to Wealth Tax, or €1.5m each.
If we assume a wealth tax rate of 2% and investment growth of 5%, each will have a total tax liability of:
Estimated Income Tax on pension €8,340
Investment Income Tax: 21.50% of €75,000 (5% investment growth on €1.5m) = €16,130
Total General Income tax: €24,470
Wealth tax: €30,000 (2% of €1.5m)
Total tax = €54,470
Application of the 60% rule
In brief, the 60% rule states that Spanish wealth tax and personal income tax liability cannot exceed 60% of a person’s taxable income base. In this case, the total taxable base is €100,000 (pension income of €25,000 plus Investment Income of €75,000).
60% of €100,000 is €60,000. As this is higher than the total liability of €54,470, no further reduction applies, and the total payable will be as above.
The 60% rule also applies to non residents.
Restructure your tax position using a Spanish Compliant Investment Bond
Your tax position can be optimised by correctly structuring your investments. A Spanish Compliant Investment Bond (SCIB) is exempt from investment growth being taxed on an arising basis. This means we can discard all of the investment income above when calculating liability to wealth tax in Spain.
The figures then change dramatically:
- Income Tax on pension: €8,340
- Investment Income Tax: €0
- Wealth tax: €30,000 before applying the 60% rule
- Taxable base: €25,000 pension
If we then apply the 60% rule, the tax would be €15,000 as this would be the maximum payable, based on 60% of gross pension, and represents a 50% reduction in liability for wealth tax in Spain.
The total tax payable would be €23,340 (€8,340+€15,000): a saving of €31,130 for each partner.
Can we reduce wealth tax any further?
For those retiring on investment income only, the wealth tax position is even more beneficial.
If we assume Mr and Mrs Brown own the same house but don’t have taxable pensions and have recently sold their business for €4.4m, their position would be as follows:
- €2m wealth tax-free allowance
- €3m potentially liable: €60,000 (2%)
- Establish a SCIB for €1.5m each, meaning the taxable income base is: €0
- Wealth tax should therefore be zero. However, Spanish law states that a minimum of 20% of the wealth tax liability must be paid.
So, in this case, €6,000 (20% of €30,000) would be payable by each partner.
