Spanish wealth tax is payable by residents and non-residents alike on worldwide assets. One can plan around and mitigate this tax as there are certain holding structures and circumstances which remove certain assets from the Spanish wealth tax regime or 'impuesto de patrimonio'. But first.....
What is wealth tax?
A somewhat controversial tax, opposed by many, that places an extra liability on residents and non residents alike - over and above their normal tax obligations. For residents, this tax applies to the ownership of world wide assets less any allowable charges or debts. Therefore wealth tax is calculated on the net wealth of an individual. For non residents it is only applicable to assets held in Spain. Assets liable to the tax include immovable property, cars, cash, shares, jewelry etc. There is an allowance for mortgages, charges and loans. Below are the national rules. The autonomous regions have the power to amend allowances but only for residents. Non residents with assets in Spain are subject to the national rates.
The valuation of property for wealth tax purposes is based on the higher of; a) The cadastral value (ratable value) or b) The acquisition cost (as declared on the "escritura" title deed).
Official Valuation undertaken by the Tax authorities
There are special rules for valuing bank balances as well as other assets. Residency affects the scope of wealth tax. Residents and non residents are taxed as follows;
Spanish tax residents are liable to wealth tax on their worldwide assets. They also benefit from the following allowances:
General allowance €700,000 (€500,000 in Catalonia).
This allowance is available to reduce all net assets liable to wealth tax.
Habitual residence €300,000.
These allowances can effectively be doubled for a married couple - including the main residence allowance.
This allowance is available against your main residence in Spain and is in addition to the general allowance. If you have a business then there is an allowance which effectively excludes the value of the business subject to certain conditions such as the business being your main source of income. Wealth tax payable is capped subject to certain conditions the main one being wealth tax plus income tax cannot exceed 60% of taxable income. Read more about the 60% exemption rule here
Non Spanish Residents
Non Spanish residents are liable to wealth tax solely on assets located in Spain. They only benefit from the €700,000 allowance as their main residence will be outside Spain.
So that's the bad news - here is the good news - You can avoid wealth tax on your assets if in the following;
1. Life Assurance Bonds
With unit linked life assurance bonds it is possible to avoid Wealth Tax. Wealth Tax is regulated by Spanish Law 19/1991, which in article 17.1 states:
'Life insurance will be computed for its redemption value at the time of accrual of the tax.'
Therefore, under normal circumstances the redemption value of the bond at the time of tax liability is used to calculate wealth tax. This value is the sum of the assets within the policy, since at any time the policyholder(s) can exercise his/her/their right of redemption. However, according to the Spanish Law of Insurance Contracts, there is one case in which the policyholder cannot make a redemption, and that is if there are restrictive conditions written into the policy.
Take advantage of the 'restrictions'
a) The policyholder has waived his right to redemption. Or
b) An irrevocable beneficiary has been named.
In either scenario wealth tax is avoided on the assets held in the bond. According to recent cases taken through the Spanish courts (V2516-17, V3070-17, V0993-18) the minimum time period to waive rights to a policy is three years. Therefore if a person is able to assign assets to a life policy and not require access to them for three years or more they will avoid wealth tax on those assets for the time the restriction is in place. From the moment that restrictive period ends and the policy holder can access the assets held within the bond, wealth tax will again apply (but NOT retrospectively).
Finally, in cases where the beneficiary is irrevocable, and is different from the policyholder, wealth tax is avoided as the value to the policy holder is zero.
Pensions and the assets held within them are potentially exempt from wealth tax in Spain. So in this case it can make sense to use a QNUPS (qualifying none UK pension scheme) as these structures are able to hold a wide range of assets, are tax efficient in other ways as well as being exempt from UK inheritance tax (which high net worth individuals can still be liable to even if resident in Spain).
3. Other potentially exempt assets
Household contents (excluding jewels, fur coats, vehicles, boats, art, and antiques), owner managed small businesses, family companies meeting certain conditions, intellectual property rights, and business assets where the activity is the taxpayer's main source of income and the activity is carried out by the taxpayer on his own account and on a habitual basis.
Company shares held by an individual are also exempt from wealth tax provided:
1.the company is a currently trading company
2.you own at least 5% of the share capital (or at least 20% including share holdings belonging to a spouse or other family members)
3.you carry out managerial duties for the company
4.you receive a salary for such duties which is at least 50% of your total net earnings
Please feel free to contact us for more information and advice bespoke to your individual situation.
Patrick Macdonald ASCI
International Financial Adviser