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).
A married couple living in Spain using protection via a Spanish compliant life assurance bond.
1) Property value €2M ÷ 2 (as in joint names) = €1m each - €300K allowance = €700K WT exposure each.
2) QROPS pension with value €300K BUT as it's a pension, not subject to WT.
3) Bank deposit €4M - €1.4M joint allowance = 2.6M ÷ 2 = 1.3M WT exposure each.
So total potentially subject to wealth tax = €2.000,000 each or €4.000.000 total.
Multiplied by bands up to 2.06% = €58,636 ÷ 2 = €29,318 WT each per annum.
60% rule adjustment - including a presumed taxable income on your own property minus the allowance - yes, I know that doesn't seem fair but hey ho.
1) €700K X 1.1% (imputed or ´presumed´ income) = €7,700 'taxable income' each.
3) €4M transferred to a Spanish compliant bond (not seen as producing taxable income whilst in the bond) = €0 'taxable income' each.
Therefore taxable income base = €7,700 X 60% (cap rule) = €4,620.
So the €29,318 WT exceeds the above cap by €24,698 which we must deduct from the WT.
Therefore €29,318 - €24,698 = Wealth tax payable of €4,620 each. However this is lower than the minimum 20% payable so the calculation on this occasion must be €29,318 X 20% = €5,863 WT each. X 2 = Total of €11,726 P.A.
A reduction of approximately 80%.
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