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Our previous article provided the basics of income tax in Spain, and how savings and employment income is taxed. Read the article here. Part 2 looks at pensions and rental income.

According to the UK/Spain double tax treaty, for residents of Spain, UK occupational and state pensions are taxed only in Spain. The UK state retirement pension is always paid gross but any other taxable pension will be taxed in the UK until you confirm to the UK authorities that you are registered and paying tax in Spain. Pensions are taxed in Spain at the progressive scale rates under general income, which will depend on the Autonomous Region where the individual is resident. Each taxpayer can apply €2,000 as deductible expenses on earned income that includes most types of pension.

In order to notify the UK tax authority that you are registered for tax purposes and paying tax in Spain you should obtain a Certificado de residencia fiscal en España (tax residency certificate in Spain) from your local tax office. Please bear in mind that you can only obtain this after you submit your first personal income tax return in Spain. This certificate should be sent together with the relevant HMRC application form to:

HMRC PAYE
PO Box 1970
Liverpool
L75 1WX
Tel: +44 135 535 9022 (if calling from outside the UK)
 Tel: 0300 200 3300 (if calling from the UK)

As explained above, the Spanish tax authorities (Agencia Tributaria or Hacienda) will generally want the tax due on your UK pension to actually be paid for the first time (in May/June of the following year) before they will issue a Certificado de residencia fiscal. This might not be until almost 18 months after you have taken up Spanish residence. If this is the case, you will ultimately be repaid any PAYE tax deducted at source in the UK while you were actually resident in Spain.

Government service pensions (for example, civil service, local authority, fire service, police, most teachers) remain liable only to UK tax and are not directly taxable in Spain. However, under the UK/Spain double tax treaty, this income is taken into account when determining the effective tax rate on your other taxable income. This means that generally your progressive tax rate will increase for the rest of your general income. This mechanism is called ‘exemption with progression’.

Depending on how they are administered, NHS pensions may or may not belong to this category. For example, they can be classed as a government service pension if paid by a local authority.

If you transfer your government service pension to a private scheme, the pension will be taxable in Spain. You may be able to transfer out as long as you have not reached the age of 59 nor commenced receipt of the pension.

Annuities

Annuities are taxed favourably in Spain as a proportion of the income is treated as non-taxable capital, and only the balance is subject to income tax.

The taxable income element of a whole of life annuity is determined by applying a fixed percentage (between 40% and 8%) to the amount received, depending on the age of the beneficiary at the time the annuity vests. For example, a man under 40 years of age would have 40% of his annuity income taxed leaving the remaining 60% tax-free. For a man aged 70 or over, 8% of his annuity income is taxable with the remaining 92% tax-free. Annuity income is taxed as savings income, so at 19% on the first €6,000; 21% on income between €6,000 and €50,000 and then 23% on anything over €50,000 (for 2017).

The above tax treatment normally applies to annuities which have not been acquired as a result of inheritance, legacy or other means of succession, and where an employer has not contributed to the savings phase.

For temporary annuities (an annuity paid over a set period of time) the relevant percentage applied to the income depends on the duration of the annuity i.e. for an annuity up to five years 12% is liable to Spanish tax leaving 88% exempt; for an annuity over 15 years 25% is taxed and 75% exempt.

Lump sums

Pension lump sums are fully taxable in Spain if received while you are a Spanish tax resident (unless it arises from a UK government service pension which are only taxed in the UK). However, in certain cases, it is possible to apply a 40% reduction for the proportion of the contributions made until 31st December 2006 to the pension plan. Any element of the lump sum to which contributions were made from 1st January 2007 are fully taxable in Spain.

So if you wish to protect a lump sum from Spanish income tax, you should receive it before you become a resident of Spain. Alternatively, if you believe you will qualify for the much reduced annuity taxation system, you may be better off not taking a lump sum at all and having a larger pension.

Rental income

For Spanish residents, a reduction of 60% is available against the net rental income before tax is payable, and includes any lettings income from outside Spain but not short-term holiday lets.

The net rental income is the amount of rent due after deducting usual day-to-day running costs for the period in question, including amongst others, local municipal taxes such as IBI tax (Impuesto sobre Bienes Inmuebles), repairs and maintenance, managing agents’ fees and commissions, house insurance, interest on loans for purchase or improvement, and depreciation of 3% per year of the cost of the property (excluding the land value).

If you are a non-resident, you are taxed on the net rental income from your Spanish property after expenses at the flat rate of 19%. This is only applicable if you are an EU/EEA resident. For other non-residents outside the EU/EEA, the flat tax rate is 24% on gross income without any deductions for expenses or interest costs.

If you own a property in Spain that is not your main home – which will be deemed the case if you are a non-resident – a purely notional or theoretical rental income is deemed to arise for periods where the property is not actually let to a third party. This is called Imputación de rentas inmobiliarias and it is generally based on 1.1% of the official value (valor catastral) of the property as shown in the IBI notice for that year, whether you are resident in Spain or not. This rate goes up to 2% of the valor catastral if it has not been revised within the previous ten years. Where such a property is empty for part of the year and rented for part of the year, you calculate the notional income for the part of the year the property is empty. For Spanish residents this income will be added to their general income and taxed at the corresponding progressive rates whereas for non-residents it will be taxed at 19% or 24% depending on where are they residents (EU/EEA or not).

Any questions? Ask our advisers for help.

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 must take personalised advice.