So what is this 60% rule you've no doubt heard about when it comes to Spanish wealth tax?
If you want the basics on wealth tax you can go to this page.
In optimal circumstances you can (in theory at least) reduce wealth tax by up to 80% using this ruling. Why not 100%? Well, if your world wide assets fall into the wealth tax bracket and are not
protected - you must always pay a minimum of 20%. This can get somewhat complicated, so here I aim to keep it as straight forward as possible.
What is the rule?
Your Wealth Tax (WT) and personal income tax liability cannot be more than 60% of your taxable income base. Remember there is a €300,000 allowance for your main residence and a €700,000 allowance for all other assets (excluding some personal property as detailed here).
Example of how the 60% rule can work.
Mr Smith, a resident of Spain, holds a direct portfolio of stocks and shares worth €4M via various brokers in various jurisdictions
So, minus the €700K allowance, the total subject to wealth tax = €3.300,000.
Average wealth tax rate 2% = €66,000 WT per annum.
WITHOUT making changes the 60% rule would be applied thus:
Let's presume the €4M directly held portfolio of stocks and shares makes an average gain of 5% per annum (€200K) which would generate a savings tax liability of €45,000 PA whether or not Mr Smith actually took it as income.
So, wealth tax ( €66,000) plus savings income tax (€45,000) = €111,000 PA.
Remember your Wealth Tax and personal income tax liability cannot be more than 60% of your taxable income base.
The taxable income base in this example is €200,000 (€4M X 5% gain).
€200,000 X 60% = €120,000. So because the €111,000 joint tax lability is less than €120,000 there is no tax reduction.
HOWEVER if Mr Smith made some changes and wrapped his investments in a Spanish compliant portfolio bond the 60% rule would work thus:
Spanish compliant investments of €4M X 5% gain = Zero tax liability whilst assets remain in the bond (tax deferral).
Therefore a taxable base of €0. In theory that should lead to zero wealth tax but the law stipulates that a minimum of 20% must always be paid. So the result would be a wealth tax liability of €13,200.
A saving of €52,800 or 80% on wealth tax per annum.
Take advantage of the 60% rule.
a) Take as little income as possible.
b) Open a Spanish compliant bond to ring fence as many of your liquid assets as possible from Wealth tax in Spain.
c) You could also consider downsizing if you have a large, high value residence.
Although our example here is very straight forward it's a good illustration of how the rule can work in your favour. Of course it's not always possible to reduce the liability by 80%. That largely depends on how much 'tax generating' assets are exposed.
Please feel free to contact us for more information and advice bespoke to your individual situation.
Patrick Macdonald ASCI
International Financial Adviser