Moving to a different country may be expensive from a logistics point of view but it need not cost the earth in tax if you follow these tips to pay less tax:
1. Consider selling your home before moving
Assuming that your home has gone up in value since you bought it, you could save a lot of money in tax if you sell it before becoming a Spanish tax resident.
Consider the following scenario:
Peter bought his home for £200,000 ten years ago and it's now worth £300,000, so he's made £100,000 profit (let's ignore costs, for simplicity).
If he sells it while still a UK tax resident, assuming that it's his main residence, he won't pay any capital gains tax because of private residence relief.
However, if he sells the property after becoming a Spanish tax resident, it's no longer considered to be his primary residence (after all, how can it be when he's moved to a different country?) and he'll pay progressive tax rates of between 19% and 26% on the £100,000 gain, i.e. between £19,000 and £26,000 depending on his other gains for the year. Quite a difference!
Note that there are exceptions for the over-65s and for those who reinvest in a new main residence. Obviously it's not always practical to sell your home before moving so it's worth getting professional advice if your circumstances are complicated.
2. Cash in your ISA to pay less tax
In the UK, each adult can invest up to £20,000 each year in an ISA and pay no tax on the interest or gains that their money has made when they cash it in.
Although you don't need to close your ISA when you leave the UK (note that you won't be able to add any funds to it), as ISAs are not recognised by Spain, any interest you earn or investment gains that you make will be taxable.
This includes interest and gains made before moving to Spain as we'll see in the following example:
Let's say Peter has been putting £10,000 into his ISA every year for 10 years and it's now worth £200,000. Again, he's made £100,000 profit.
If he cashes in his ISA before leaving the UK, he'd pay no tax on this profit.
But if he cashes it in after becoming a Spanish resident, he'd pay capital gains tax on the entire £100,000 profit of between 19% and 26% (i.e. £19,000 - £26,000).
If you know for sure that you'll return to the UK someday and that you definetely won't need the funds in the meantime, it might be worth considering hanging on to your ISA so you can take the interest and gains tax-free in the future.
3. If your net worth is greater than €400,000, be aware of Spain's Wealth Tax
Spain is one of the few countries in the world which taxes its well-off residents on their wealth. This means that, as well as paying an annual tax on your income and capital gains, as a Spanish resident you may also have to pay a yearly tax on everything you own.
Although regions such as Madrid, Andalusia and Murcia have effectively abolished wealth tax for those with less than €3.7m, those with property, investments, savings or any other assets worth more than £700,000 (with some exceptions, e.g. the limit in Aragon is €400,000) must pay a 0.2% to 2.5% annual tax. Note that Spain taxes its residents on worldwide assets, so everything you have in the UK and other countries will be included.
Spain's wealth tax is controversial and highly political. For the tax year 2022, the right-wing regional governments of Andalusia and Murcia joined Madrid in introducing an 100% allowance (which means, in practice, that if you have assets over the limit, you need to do the return but will pay no tax). However, in response, the national government (ruled by a left-wing coalition) introduced a second wealth tax which affects those with assets worth over €3 million.
There are some (limited) ways in which you can avoid or reduce wealth tax so it's an area where professional advice will pay for itself.
4. Take pensions advice before moving
Pensions and advice regarding pensions are highly regulated in the UK. For example, if your safeguarded benefits through a defined benefit pension are valued at over £30,000, you cannot transfer it to another provider without taking advice from a financial advisor regulated by the FCA (Financial Conduct Authority). This gives a high degree of protection, as regulated financial advisors are barred from taking undeclared commissions and, if you are unhappy with their advice, you can make a complaint and the advisor could be fined or struck off.
Unfortunately, as soon as you leave the UK you lose this protection. Although financial services are regulated in Spain and throughout the EU, the level of protection for investors and pensioners isn't as strong. For example, the EU has been trying for years to ban commissions and other incentives which can mean that the advice you get from a financial advisor is not impartial, but as the financial markets in all 27 countries are so different, it hasn't yet succeeded.
There have been numerous stories of financial sharks who pray upon new expats and, sadly, expats aren't the highest priority of governments and politicians who are keen to protect their voters, i.e. their own countrymen and women.
For this reason, if you are anywhere near retirement, it's best to take advice on whether you should leave or transfer your pension BEFORE leaving the UK from a regulated pension specialist.
If you are not yet near retirement, note that you can still contribute up to 100% of your UK earnings or £3,600 per year (if greater) to a UK pension and get tax relief for up to 5 years after leaving the UK.
Conclusion
With careful planning, moving to Spain need not cost you money in paying unnecessary taxes. Here we've given you some general guidance of what to think about but it's crucial to take proper advice.
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