10 Most Common Mistakes British Expats Make Before Moving to Spain

Many British expats are tempted by what Spain has to offer and are making plans for a retirement in Spain. However, not everything is going to go to plan. You need to set some time aside for research to ensure there are no surprises or problems once you have established your residency in Spain.

1. There’s no need to worry about UK inheritance tax and Spanish succession tax

If you’re planning on retirement in Spain, it would be foolish to neglect the topic of UK inheritance tax and Spanish succession tax when organising your relocation.

One important point is that rates of succession tax in Spain can vary considerably across the country’s autonomous regions, so it’s worth researching and speaking to a financial advisor in Spain to establish where will best suit you.

For example, many British expats flock to Andalucia for its sunny weather, world class beaches and vibrant culture. But this province also has succession tax rates that are incredibly beneficial for high-net-worth individuals. If you pass your estate to your spouse and/or children then no succession tax is payable on the first €1,000,000. If your estate exceeds this threshold a tax of just 1% is payable on the excess.

However, don’t assume your inheritance tax worries are over once you move to Andalucia. Unfortunately, exposure to UK inheritance tax can still be a problem after you move abroad, even if you spend decades living in Spain.

This is because the UK links inheritance tax to the legal concept of domicile, rather than residency. Most people born in the UK will have UK domicile (domicile of origin). The difficulty lies in the fact that changing one’s domicile (to a domicile of choice) is a process without any set regulations or requirements, which can make it very difficult to achieve.

Furthermore, even if you are successful this will not prevent HMRC from examining your personal circumstances – covering everything from family and social connections to business interests – and using any link to the UK, however small, to make your estate liable for UK inheritance tax.

If this happens then 40% UK inheritance tax will be payable on estates worth more than £325,000, or £650,000 as part of a shared allowance if you are married or in a civil partnership. Should your spouse die and you are their sole beneficiary you can inherit their personal IHT allowance. Assuming you both use the main residence exemption – £175,000 – it’s possible to have a tax-free allowance of up to £1 million.

However, this level of tax relief does not compare to its equivalent in Andalucia. You should reduce your exposure to UK IHT by legitimately restructuring your financial assets with the help of an experienced financial advisor in Spain who services British expats in Spain.

2. I can use my existing UK life insurance policies when living in Spain

Another mistake that British expats make is assuming their current life insurance coverage can continue once they move to Spain. The reality is that the majority of UK-written life insurance policies will provide limited or no cover outside of the UK. This could be the case for any insurance you take out prior to your relocation.

When moving to a new country you should ensure you and your loved ones are protected should the worst happen – whether that’s unemployment, serious injury or illness or even death. Insurance such as term assurance (life cover), critical illness, serious accident, family income benefit and private medical insurance can provide much-needed financial protections and invaluable peace of mind.

Consult an insurance specialist knowledgeable in helping British expats to ensure continuity of coverage once you achieve residency in Spain.

3. It doesn’t matter when or how I exit the UK

One of the biggest errors you can make is failing to properly plan your exit from the UK. Not informing HMRC of your non-UK status can mean you end up liable for tax both in the UK and Spain. Luckily, this is easily avoidable by filling out Form P85 (available at hmrc.co.uk) before you leave the UK.

When to leave the UK also requires thought if you want to avoid paying more tax than you need to. The best way to do this is to exit the UK at the end of the tax year on 5 April. However, if this does not align with your plans for moving to Spain then familiarise yourself with the split year rules that automatically apply for the following scenarios:

• Starting full-time work overseas

• Your partner or spouse starting full-time work overseas

• You ceasing to have a UK home.

The 2013 UK Statutory Residency Test is also key when organising your relocation. It lets you plan the date from which you become non-resident in the UK and will also inform you how much time you can spend in the UK without retriggering tax residency, based on your existing ties and connections (such as business interests, familial relationships and friendships, etc).

How and when you exit the UK should be a key part of your financial planning. A financial advisor with experience in British expat relocations will be able to guide you through the process.

4. I don’t need to worry about Spanish wealth tax

Wealthy British expats should familiarise themselves with recent developments in wealth tax in Spain and how it could affect their financial planning.

Spanish wealth tax is an annual tax on assets that must be paid in addition to income and capital gains tax. However, Spain’s autonomous communities have considerable leeway when it comes to adjusting rates of tax and tax relief. One example of this is Andalucia, which introduced 100% relief on wealth tax from 31 December 2022 in an effort to make the region more attractive for affluent individuals moving to Spain.

However, this was swiftly followed by the announcement of a new national wealth tax (described as a ‘temporary solidarity tax on large fortunes’) by Spain’s ruling Socialist PSOE party and its junior partner, Unidas Podemos. Designed to harmonise rules on wealth tax across Spain’s autonomous communities, the temporary tax is applicable for the 2022 and 2023 tax years. It is aimed at those with a net wealth above €3 million, with the following rates.

€3M - €5M: 1.7%

€5M - €10M: 2.1%

Over €10M: 3.5%

Unfortunately, as the new solidarity tax is controlled centrally by the national government autonomous communities will be unable to introduce any tax relief. And while this is a temporary tax at present, there is a possibility that it could be made permanent at the end of the initial two-year period.

While this seems bad news for wealthy British expats in Andalucia, it’s important not to panic. The next round of national elections in Spain must take place no later than December 2023, and it may happen sooner if Spain’s ruling PSOE/Unidas Podemos coalition, fragile and riven by infighting, collapses. A new government, likely to be more centrist and/or right wing, could abandon the solidarity tax.

However, when it comes to sensible tax planning it would not be realistic to adopt a policy of ‘wait and see’. Prepare for all eventualities by speaking to a wealth management advisor with in-depth knowledge of tax in Spain who can offer bespoke, tax-compliant solutions for minimising your Spanish wealth tax exposure.

5. I can keep my UK-based financial advisor, savings, pensions and investments.

Reviewing your current financial and investment strategy before moving is essential, especially if you are retiring in Spain and will be relying on your investments and savings for income.

This is because any UK pensions, savings and investments will not have the same level of tax-efficiency in Spain as they do in the UK. Speak to a financial advisor with experience servicing expats in Spain to establish what steps you need to take.

In addition, if you will retain any property or business interests in the UK it’s worth speaking to an advisor to protect against any double taxation liabilities. Although there is a double taxation agreement between Spain and the UK, it’s best to be cautious to avoid paying more tax than you need to.

Just as important is reassessing whether your current financial advisor will best serve your needs once you obtain residency in Spain. Even if you have a successful and fruitful relationship with your current advisor, there’s a strong chance they will not be authorised to advise clients based in Spain and the EU. Instead, find a financial advisor in Spain with a lengthy track record in working with British expats in Spain, with extensive knowledge of both UK and Spanish tax. They will be able to offer you bespoke solutions tailored to your needs, covering factors such as appetite for risk, investment horizon, how much you can invest and your access to capital.

6. I can buy a home as soon as I move to Spain

There are benefits to buying a property straightaway in Spain.

However, there are risks associated with buying quickly, particularly in an area you might be unfamiliar with. Spain is a hugely diverse country – from the greener, cooler north to the sun-drenched south – and big differences exist socially and culturally depending on where you live. City life, for example, will differ considerably if you’re living in laidback Malaga versus faster-paced Madrid or cosmopolitan Barcelona.

The best way to discover where in Spain is best for you is to rent a house or apartment first so you can get to know your neighbourhood and area and establish if it’s suitable for your needs and lifestyle. If you don’t like your choice you can easily move to another region and rent again, and continue the search until you feel ready to buy. This will be considerably less expensive than buying a home somewhere you come to really dislike.

Do your homework when looking for a place to rent. Local estate and letting agents will be valuable sources of information on the state of the housing market and prices, and you should also investigate the renting process itself (such as deposits, rental laws, etc). Consider making some trips to Spain ahead of your final move to view accommodation in person or book an Airbnb or holiday home for the first weeks of living in Spain to tide you over while you search for a home you can stay in for longer.

7. I can sell my UK home after moving to Spain

Many expats will sell their home in the UK so they can purchase a new one in Spain. However, if you don’t educate yourself on the rules concerning capital gains tax in the UK and Spain you could end up paying more than you anticipated once you sell your UK main home.

Relief from capital gains tax in the UK is available if you are selling your main home (private residence relief). However, this exemption from CGT is only available if you sell your main home before exiting the UK, or within nine months of leaving the country. If you sell after this window then you could be liable for capital gains tax in both the UK and Spain on the sale of the property.

There is also tax relief in respect of capital gains tax in Spain if you sell your home which has been your primary residence for at least 3 years and you invest the proceeds into a new primary residence. The amount which is reinvested into the purchase of a new main home is exempt of capital gains tax in Spain. However if you are over 65 years of age and sell your primary residence you are fully exempt of capital gains tax in Spain.

Avoid paying capital gains tax in Spain by planning ahead so you can sell your UK primary home and obtain tax relief on CGT before moving to Spain.

8. Budgets aren’t important

If you live beyond your financial means in Spain the possibility of running out of money and being forced to return to the UK is a real one.

While the cost of living in Spain is generally lower than the UK (although this will vary, depending on where you are based in the country), the temptation to treat your first few months of residency in Spain as one long holiday will be strong. Particularly as you will be eager to explore your new home, socialise and make new connections.

It's why creating a budget before you move is important. It should be able to comfortably sustain your lifestyle and provide a buffer for any emergencies, such as illness or unemployment. You should also factor in plans for passing on your estate to your children, as well as expenses such as end-of-life care.

Creating a comprehensive and realistic budget can be complex, which is why it’s best to engage the services of a financial advisor or wealth management firm in Spain. They will employ sophisticated cashflow analysis tools to create a bespoke budget just for you, factoring in interchangeable variables such as future income requirements, size of investment, tax rates, expected returns, life expectancy and anticipated inflation rates.

9. I don’t need to understand how Spanish tax works

If you don’t take the time to understand how tax in Spain works you will miss out on significant tax-planning opportunities.

For example, as mentioned earlier Andalucia offers very low rates of succession tax on your estate after you die – just 1% on anything over €1,000,000. The much higher rates of UK inheritance tax – 40% on estates worth more than £325,000 for a single person – simply cannot compare.

High-net-worth individuals can also benefit from more favourable approaches to wealth tax in Andalucia. As outlined previously, the autonomous community has introduced 100% tax relief on Spanish wealth tax. Yes, a new national wealth tax has been introduced, but its future is uncertain given the instability of Spain’s ruling government so Andalucia’s wealth tax relief should still be taken seriously by those looking to move there.

Those retiring in Spain should explore overseas pension schemes such as a QNUPS (Qualifying Non-UK Pension Scheme). It’s possible to reduce your liability for tax on a pension in Spain if you receive income from a QNUPS in the form of a temporary annuity where a fixed sum of income is specified for a fixed period. Only a proportion of that income is liable for income tax in Spain (dependent on the length of the annuity)

You should also acquaint yourself with other financial products suitable for British expats in Spain. For example, the Spanish Collective Investment Bond is a lump sum investment written as a life assurance contract to gain major tax benefits.

The bond (established for amounts in excess of £100,000) allows you to retain investments in a currency denomination of your choice (as long as the investments are held in UCITS-compliant funds). A major benefit is that there is no investment limit, and withdrawals are very tax-efficient as tax is due just on the growth element. There is also no requirement to report this on a Model 720 annual declaration.

The policy can also be written based on UK law so that no tax is triggered on the first death between spouses, thus avoiding Spanish succession tax. If your ultimate beneficiaries live outside of Spain then no succession tax is due on the second death, as the investments themselves are also located outside of Spain (typically in Ireland).

There are a wealth of tax-planning benefits available when it comes to tax in Spain. Speak to a British financial advisor in Spain with detailed knowledge of Spanish tax to ensure you are in the best financial position possible.

10. Moving to Spain without your Spain visa

If you don’t do your research when it comes to residency visas you could scupper your relocation before it even begins. Though some Spain visas can be applied for once you are in the country – this is not the case with all residency permits.

Some, including the non-lucrative visa (suitable for those retiring in Spain), must be applied for while you are still in the UK. If you relocate without doing this first it’s possible you will need to return to the UK and complete the application from there.

Plan in advance and speak to a relocation expert who can guide you through the necessary steps to successfully obtain a Spain visa.

Moving to Spain is undoubtedly exciting, but without enough research and preparation you could jeopardize your plans. Speak to a relocation and British financial advisor in Spain now to avoid making any mistakes.