mdavidfrost

Although I am normally resident in Spain, at present I am living in the USA, as my wife is working for the Spanish Consulate in Miami.

Because I own a property in Málaga (in my name only) I am filing tax returns in Spain as a non-resident and paying Hacienda a very small amount of tax on the property (less than €250 per year), which I think is 24% of 1% of the valor catastral.

My UK pensions (government and private) are being assessed for tax by the Revenue. However, the total of all my pensions is below the tax-free allowance of £9,490 for someone over 65, and therefore I pay no tax. These pensions are paid into the Isle of Man branch of a UK bank, as I have been unable to open a UK account because I am not resident there.

When I return to Spain, will I be liable for tax on my pensions in the UK or in Spain? I would prefer to be taxed in the UK, as I understand that tax-free allowances are lower in Spain.

Fred James

You government pension will always be taxed in the UK and UK allowances applied even if you are not UK resident.

Any other income, including the UK State pension and any other pensions or income will be taxed in Spain.

The Spanish allowances are not that far behind the UK allowances so you will get the best of both worlds - two sets of allowances!

Where you pay your tax is not optional - if you are tax resident in Spain you pay tax in Spain on your worldwide income (except a few things like UK Government pensions).

EsuriJohn

If you are retired and over 66 as I am I think that the allowances are better in Spain. However you are in just the same position as me and that means (with a few exceptions ie.NHS) that your GOVERNMENT pension has got to be taxed by HMRC in UK, this is then ignored completely in Spain and your STATE pension transferred tax free to Spain where it is assesed for tax but because the UK state pension is so low the Spanish allowance is more and you pay no tax in Spain.

In effect you get 2 age tax reliefs to set against each pension one in each jurisdiction. Both are higher than under 65 and if your state pension is just the full one of £97 + small additions you will not pay tax in Spain and you may get a refund! Your remaining Government pension will now be well below the tax threashold so you will pay no tax in UK

Next have your State pension transferred direct to your Spanish account and the exchange rate is the best (1.19 last week) you can get.

You ought to be resident in Spain for this to apply but I am not sure about your position since you will be travelling on diplomatic visas in the states and your tax position there

EsuriJohn

He does not appear to be tax resident in Spain and he only pays non- resident tax on his casa in Spain.

mdavidfrost

Thanks, Fred, for your quick reply.

So what you're saying is that I'll have to declare my UK pensions in Spain, but that my UK government pension won't be taxed and that my private pensions are below the Spanish tax-free allowance, so I probably won't pay tax on them either? Do you know the current tax-free allowance for Spain?

I also receive interest from bank accounts in Spain and Gibraltar so presumably these would be taxed in Spain, too.

mdavidfrost

Thanks, John & Kath. Up till now I've never been in contact with anyone in the same position as me.

Although I've been in the USA for several years, I previously lived in Málaga for years, and I still have an apartment there which I bought in 1998, so I'm used to all the paperwork. I didn't use a lawyer to buy the property and I file my own tax return at Hacienda.

I don't want to transfer my pensions to my Spanish bank account because transfers to my Isle of Man account are free, and also because my assets in Spain are already more than I'd like them to be because of high inheritance tax there compared with the UK.

For that reason, I was thinking of selling my apartment last year when my wife bought another one, but at Hacienda they told me that as a non-resident I'd have had to pay a tax which I think was about 20% of the capital gain and could have been as much as €30,000, so I've put that idea on hold. I was told that I had to file a tax return as a resident for three years and buy another property to avoid that tax.

EsuriJohn

Thats about right. Our transfers are free from UK end and the kind of account we have for pensioners does not make charges here in Spain also EU rules do not allow charges on pension transfers. The new property can be anywhere in the EU.

Mitzyboy

Im in the same situation as you with pensions and we dont even mention our Government pension in Spain, as it's already "taxed" in the UK. In effect we take advantage of the UK and Spanish allowances

Fred James

You are deemed tax resident in Spain if you spend more than 183 days there in one calendar year, not necessarily consecutively.

If you meet this criteria you will have to declare all your income, except for the UK Government pension, in Spain and potentially pay tax on it in Spain.

As Mitzy has said, the UK Government pension is completely disregarded as far as Spanish tax is concerned.

You get a personal allowance of €5151 plus an additional allowance of between €4080 and €2652 depending on your income.

If you are over 65 you get an additional allowance of €918. Over 75 you can add another €1122

If your wife has only a small income it may be advisable to make a joint declaration as she will also get an allowance.

If your other personal pensions are based on a money purchase annuity then you will also get considerable allowances against them.

As a resident, interest on Spanish bank accounts will be taxed at source but if your income is below the threshold then the deductions may be rebated.

mdavidfrost

Fred, and everyone, else, I'm really grateful for all this advice. I've asked for help in other forums, and got nowhere. If anyone is in Málaga next summer I'll be delighted to buy you a drink.

Everything is clear, except for "money purchase annuity." The pensions were bought in the UK using with-profits pension plans.

My wife and I make separate tax declarations, as she earns a good salary, will have a good pension and also owns a property in her name only.

Also, we were married in Gibraltar, as her divorce in Sweden wasn't registered by the Spanish Consulate there. We haven't been able to register our marriage in Spain, so she puts divorced on any legal papers. When I bought my property the notario gave my marital status on the escritura as "married in Gibraltar with separation of assets according to the law of Great Britain," or something like that. (I'm currently in Miami and the deeds are in Málaga.) However, this hasn't caused any problems up till now.

I don't think anyone in Hacienda is looking for problems. They're happy that you want to sort out your tax and even happier if you can communicate in Spanish.

Fred James

A "money purchase" annuity is one where you personally buy it from an insurance company - usually with the payout from a personal pension fund.

From your description it qualifies. In Spanish it is a "renta vitalicia immediata".

Spanish tax law treats this income as a mixture of interest (which is taxable) and repayment of your capital (which is not taxable).

To make the calculation simpler the amount of the annuity which is tax free depends on the age that you commenced payments from it.

For example, if you were aged between 60 and 65, 74% of the income is free of tax.

In addition to that very generous allowance, the payments are not treated as earned income (unlike other pensions) and are taxed at the lower savings rate which was 18% but has now increased to 19% on the first €6000 and 21% thereafter. This rate is not capped so if you had a high "normal" income and were paying the higher rate bands, the annuity income would still be taxed at the lower rate.

To put this in perspective, if the annuity was your sole income, it would have to exceed €25000pa before you had used up your personal allowance and had to pay any tax at all.

Sometimes thare are tax advantages of living in Spain

EsuriJohn

You are amazing how do you know all this?

Fred James

Since my income is from just that sort of pension it is in my interests to know that!

That's why I haven't paid any tax in Spain for 10 years!

Mitzyboy

Fred James is a computer really .... didnt you realise?

mdavidfrost

Fred, you should write a book. Or have you already ? I would buy it.

Since you know so much about tax, maybe you can answer another question.

I'm thinking of buying UK shares (if I can find a UK online broker willing to open an account for a non-resident of the UK, which I haven't up till now). I know that there is a UK tax-free allowance of £10,000 for capital gains in addition to the personal allowance for earned income, but would any capital gains be taxed in Spain when I was a resident there again, and how would the tax be calculated?

Alternatively, if I were to buy Spanish shares online through my Spanish bank, what tax would I pay as a resident or as a non-resident?

If you can answer this, you really are a tax genius.

I'd maybe buy Spanish shares online through La Caixa while I'm still living in Miami if I could sort out the tax issue.