General Base

The general base includes salary and other benefits from employment, income from economic activities and property rental income (see below). The liability to income tax at this rate can be reduced by applying deductions and allowances. The rate of tax is on a sliding scale and is between 24% to 45% for 2011. For 2011 two additional tax bands were created taking the top rate for income in excess of €175,000 to 45%.

Savings Base

The savings base (investment income) includes interest, dividends and capital gains together with life and disability insurance proceeds paid to residents in Spain. Again there are deductions and allowances applicable. For combined income under €6,000 the rate is 19%, for income over this amount, the rate is 21%.

Tax on Rental Income

Property rental income on Spanish properties, after the deduction of certain expenses, forms part of the taxable income and is subject to tax at the rates applicable to the general base (ie rates between 24% - 45%). Property which is not used for rental or economic activity (ie is unoccupied) and is not the taxpayer’s permanent residence will be subject to tax on the deemed rental income each year. The taxpayer’s permanent residence, however, is exempt from taxation under personal income tax. This deemed rental income also applies to non Spanish Residents.

Wealth Tax

Wealth tax was reduced to zero on 1 January 2008. However, it has not been abolished and could be reintroduced.

Capital Gains

Capital gains are included in the savings base (see Income Tax above). There are some capital gains exemptions, eg the sale of the primary residence of a taxpayer is granted full or partial rollover relief. Capital gains from investment funds are subject to a flat rate withholding tax of 19%. However, a transfer from a UCITs fund to a UCITs fund will benefit from reinvestment relief. This includes the realised gains from compliant Investment Bonds issued by foreign issuers. Non-compliant Investment Bonds are subject to the same rate of tax, however, a tax liability arises annually on gains achieved rather than received. Collective investments from jurisdictions included in the list of tax havens1 issued by the Spanish tax authorities are deemed to have a minimum net annual capital gain of 15% of the acquisition value.

Inheritance and Gift Tax

Inheritance and gift tax is taxed on a different basis to the UK. In the UK it is the deceased who is liable to the tax. In Spain, it is the recipient. Spanish Inheritance and Gift Tax is based on a variety of factors including:

• location of asset

• type of asset

• relationship between the donor and the recipient and

• whether the individual has been resident in a region of Spain for more than 5 years

As a general rule, inheritance and gift tax is payable by the recipient of the assets at rates of between 7.65% and 34%. Spanish resident recipients are taxed on worldwide assets whereas non-resident recipients are taxed only on inherited assets and/or rights located in Spain.

The amount of tax paid depends upon the value of assets received. The resulting tax liability is subject to a further multiplication factor (ranging from 1 to 2.4) based on the relationship of the recipient to the donor or deceased, and the prior wealth of the recipient. Furthermore, different tax rates apply in each Autonomous Community.

Various reductions to the tax rate on inheritances apply and are dependent on the relationship between the recipient and the deceased, and the age of the recipient. For example, where a recipient is a dependent child over the age of 13 but under 21, the taxable base is reduced by €15,956.87 and further €3,990.72 for each year under 21, with a maximum reduction of €47,858.59. No reduction is available for more distant relatives or unrelated parties. However, additional reductions or allowances apply in each Autonomous Community.

Regional & Municipal Taxes

Inheritance and gift tax, capital and property transfer tax, as well as a proportion of income tax, are raised by the Autonomous Community/Region in which the taxpayer is resident. In some cases the region in which property is located may also seek to tax the asset. Consequently the peculiarities of each region’s tax regime must be considered and local advice taken.

Property Taxes

An annual real estate tax is payable to the local municipality. The tax is based upon a percentage of the value of the property. The rate varies from 0.4% to 1.1% on urban properties and 0.3% to 0.9% on rural properties. It should be noted that different municipalities may increase or decrease these rates. This is not based on the actual value of the property rather the recorded value which is decided by the municipality.

Stamp Duty/Transfer Tax

The general rate for Transfer tax is 6%-7% (depending upon the Autonomous Community) on “second hand” property transactions. Lower rates apply to the acquisition of other assets. Stamp duty on documents ranges from 0.5% to 1%. If Spanish Value Added Tax applies then there is no liability to Stamp duty or Transfer Tax. For example, VAT will be payable on a newly built property.

Taxation of Expatriates living in Spain

Expatriates living in Spain will be classified as either resident or non-resident. An individual is considered resident if:

• they spend more than 183 days in Spain in a calendar year, or

• their principal place of business, professional or economic interest is based in Spain, or

• their spouse and/or dependent children are habitually resident in Spain (unless the individual is separated from their family, or can prove tax residence elsewhere)

In Spain there is no concept of a part tax-year. An individual will be considered to be resident or non-resident for the whole tax year according to the above rules and will be taxed accordingly.

Income tax is raised in two parts: the majority is raised by the central government, with a smaller percentage being raised at a regional level by the “Autonomous Community” in which the individual is living. The “Autonomous Communities” also control Inheritance/Gift Tax rates. If the “Autonomous Community” does not establish its own tax scales then a default tax scale is applied as set out by Central Government in the Inheritance and Gift Tax Act.

Income generated from employment for services rendered in a foreign country is tax exempt up to a limit of €60,100 (2009), provided that the work is performed for a company or entity non-resident in Spain, or for a permanent establishment located in a foreign country and provided that a tax similar to the Spanish Personal Income Tax has been or will be applied. In addition, the territory must not be considered a “Tax Haven” by the Spanish tax authorities.

If you are an expatriate currently living in Spain, you should review your finances with a suitably qualified financial adviser who is either authorised directly by the Spanish regulator or, as with St. James’s Place Partners, based in another EU market and authorised by the Spanish regulator. Even if you are planning a move to Spain or simply own property or assets in Spain you should review your finances with a suitably qualified and experienced financial adviser and/or tax adviser who is familiar with both UK and Spanish tax matters.