UK Tax Planning For Expats Moving To Spain

UK tax planning in Spain

If you’re a UK national thinking about moving to Spain or if you are already residing in Spain, it’s important to review your UK tax position.

You’ll need to understand how the UK tax system works upon relocating abroad including the steps you can take to optimise your UK affairs through taking advantage of expat tax rules.

Generally, it is best practice to organise your UK tax affairs in good time, to avoid unnecessary complexities in the UK and Spain, in the present, future of when you return to the UK.

Global Tax Consulting specialise in tax planning solutions for expatriates residing in Spain. Below we will go through the steps you can take to optimise UK taxes while you are living in Spain.

How you’re taxed in the UK

The UK tax system follows a residence based approach meaning that if you are resident, you will be liable to UK taxation on worldwide incomes & gains, regardless of where it is generated whereas if you are non-resident, you will be liable to UK taxation on UK sourced incomes and UK property gains only.

What is UK sourced income?

UK sourced income includes:

Employment income generated through workdays physically exercised in the UK.

Self-employment income generated through business carried on in the UK.

Pension income from schemes established in the UK including state pension.

Investment income from assets situated in the UK.

Note that British citizens are entitled to the personal allowance (0% tax band) irrespective of their resident status and thus, providing that your UK sourced income is no more than the personal allowance, no tax will be payable to HMRC.

What if you sell your family home?

What do you need to know?

If you are considering selling your UK home, there are special reporting and tax payment rules for disposals of UK residential property. The sale will always be within the scope of UK capital gains tax, irrespective of your resident status, nationality status or citizenship status at the date of disposal.

What tax rate will you pay?

The tax rate levied will be 18% or 24% depending on your level of incomes and gains.

Can you claim private residence relief?

Yes you can claim relief for the period(s) the property was your main residence and physically occupied and the final 9 months of ownership.

Do you need to tell HMRC?

Yes, non-residents must report the disposal to HMRC within 60 days of the completion date via completing a capital gains property return.

Will you pay double tax?

If the disposal is taxed in the UK and Spain, the double taxation agreement will require Spain to give a credit for UK tax suffered which will reduce your tax liability in Spain.

How to become non-resident

Your resident status is determined by the Statutory Resident Test (‘SRT’) which provides a series of tests to work through. Once your personal circumstances and travel pattern satisfy a test, this will conclude your resident status for the tax year in question.

You’ll be considered non-resident in the UK, if you satisfy either of the following criteria:

1. Physical presence if you spend no more than 15 midnights during a tax year.

2. Work overseas if you are full time and minimise physical and working presence in the UK during a tax year.

3. Ties and presence in you cut connections to the UK and minimise physical presence during a tax year,

Note that UK law recognises the concept of split year and as such, you can become non-resident within a tax year period upon leaving the UK.

Ultimately, if your intention is to reduce your exposure to UK taxation while you are living in Spain, it is essential that you achieve a non-resident status.

UK/Spain double taxation agreement

From a non-resident UK tax perspective, you can use the double taxation agreement (‘DTA’) to a) restrict the UK tax rate levied on income or c) completely remove HMRCs right to tax income as follows:

You may receive certain incomes tax free as it is exempt from UK taxation under the DTA and exempt from Spanish taxation under Beckhams law such as UK pension income.

You can also use the DTA to mitigate double taxation whereby both the UK and Spain seek to tax the same income or gain. To mitigate double taxation, the DTA will require one country to credit tax paid in the other country. For example, for UK homeowners, Spain are required to credit UK tax paid on the sale of a UK property under the DTA.

Non-resident special tax regime

Providing that you are non-resident for the entire year, you can use the UK’s special tax regime ‘disregarded income’ which enables you to receive certain incomes free of UK taxation.

Incomes that are disregarded are as follows:

Dividend income from UK companies.

Bank interest income from UK banks and building societies.

State pension from the UK government.

Leaving the UK can be extremely tax efficient, especially if you have a large investment portfolio that you wish to draw upon and as such, Global Tax Consulting recommends seeking personalised tax planning advice to understand how you can take advantage of the special tax regime.