25 Things You Should Do Before Establishing Your Tax Residency in Spain
25 Things You Should Do Before Establishing Your Tax Residency in Spain
February 09, 2023
25 things you should do before establishing your tax residency in Spain.
Everyone dreams of becoming an expat and enjoying an idyllic retirement in Spain but it’s essential you prepare before you move.
If you are moving to Spain then the planning process is key. Failing to plan is planning to fail. You need a timeline, a strategy and a trusted adviser by your side to ensure a smooth and seamless transition towards living in Spain.
Moving to another country will be one of the biggest decisions you will ever make. While the prospect of a new life in Spain is exciting, there’s a wealth of preparation, research and planning that you need to do first to ensure your move is successful. Here’s what you need to know.
1. Visit Spain
From glittering coastal resorts to cosmopolitan cities and tranquil countryside, Spain is a big, diverse country and it’s important you do your research before deciding where to live permanently. The internet and guidebooks will only take you so far, and it’s essential you make at least one trip to Spain, if not more, so you can explore different parts of the country to see where you might like to settle.
Secondly, living in Spain is not for everyone, and if you’ve not spent much time in the country then it’s essential you know whether it’s the right fit for you before you’ve made a permanent commitment.
2. Rent before buying
Securing accommodation will be a priority for most British expats in Spain but consider renting first before purchasing a home so you can get a feel for where you’re staying and whether you like the neighbourhood. If you don’t think it’s suitable then you can try living in other areas until you’re ready to buy.
During the planning stages of moving to Spain, speak to local estate agents to get a sense of rent prices, as well as how the renting process works (such as fees and deposits, negotiations with landlords and rental laws). You might even make a trip ahead of the move to view different properties.
A short-term rental of around six months is ideal (or a longer lease with a six-month break clause). Serviced apartments in particular are a good choice in those first few months if ease and convenience are a priority when living in Spain.
It’s also important you research how to eventually purchase a home in Spain, including looking at what house prices are like in different parts of the country and the process of getting a mortgage for an expat.
3. How to exit the UK
Moving to Spain also means you need to carefully plan your exit from the UK to ensure you don’t pay more UK tax than you need to. You can pick the date from which you become non-resident in the UK by using the 2013 UK Statutory Residency Test, which will also inform you how much time you can spend in the UK without triggering tax residency again. These will be based on your ties and connections to the UK, such as property, business interests or family. You will also need to tell HMRC when you plan to leave the UK by filling out form P85, available at hmrc.gov.uk.
Unless you leave the UK at the end of the financial year on 5 April, you will have to see if you can reduce your tax liability by checking if split year rules automatically apply. These include starting full time work overseas (or your partner/spouse doing so); or you ceasing to have a UK home.
Financial advisors will be able to guide you on the best way to exit the UK and minimise your tax liability.
4. Think about inheritance tax
If you’re planning on retiring in Spain then inheritance tax should be an integral part of your financial planning. In Britain, rates of 40% UK inheritance tax are payable on estates worth more than £325,000. In comparison, rates of Spain inheritance tax (or succession tax as it’s known) vary from region to region but Andalucia – an area hugely popular with UK expats – has extremely low rates of succession tax. If you pass your estate onto your spouse and/or children then the first million euros are tax free, and anything exceeding this threshold is subject to a tax of just 1%.
However, it is entirely possible that your estate would still be subject to UK inheritance tax despite residency in Spain because HMRC could still consider you UK domiciled (as most British citizens are if born in the UK). This could apply even if you have been living in Spain for several years before you die. Domicile is a complex topic and changing it is notoriously difficult as there are no fixed rules or requirements. If you attempt to shed your UK domicile for tax purposes then HMRC will rigorously investigate your personal and family circumstances, business interests, property ownership and intentions to return to the UK. They will challenge even the most seemingly insignificant links to the UK.
The safe choice is to consult a reputable financial advisor who will be able to advise on restructuring your financial assets to legitimately reduce your inheritance tax liability.
5. How to establish residency in Spain
While Brexit means that living and travelling in the EU is no longer as easy as it used to be – UK citizens can only spend 90 out of every 180 days in the EU – Spain still offers resident visas for British nationals that will let you establish a new life in the country and travel visa-free within the Schengen Area.
The Golden Visa in Spain offers a path to residency (or just visa-free access to the Schengen Area without becoming a Spanish tax resident) via investment. This typically takes the form of real estate worth €500,000 or more. You can then obtain the permanent right to live in Spain after five years and Spanish citizenship after 10 years.
For those expats retiring in Spain the Non-Lucrative Visa is a popular option. To qualify, you must receive passive income (such as pensions, investments, savings or rental income) at a minimum of €27,792.92 per annum (working is not permitted). After one year, it can be renewed for two successive two-year periods. You can then apply for permanent residency.
For those intending to work in Spain, the Highly Qualified Professional Visa is obtained by employers offering individual employment in Spain, while the Entrepreneurs Visa is designed for those who want to create a pioneering business that promotes the socio-economic development of Spain (usually in the technology sector).
If you are establishing a new life in another country it’s crucial that you have protections in place should the worst happen. Review your existing insurance plan to ensure your coverage continues once you leave the UK, and speak to a financial advisor and/or insurance specialist to see if your insurance plan needs to be adjusted. From life insurance to critical illness cover and income protection, there are many types of policies that will provide much-needed peace of mind for you and your family.
7. How will you access your money?
When living in Spain as an expat you will need to decide how you will access your money and pay for things.
Using your UK bank account will expose you to costly transfer rates and currency exchange rate fluctuations. Instead, consider opening an international bank account designed for cross-border payments and transfers in different currencies. You may still want to keep your original UK bank account if you still have financial links to the UK such as rental income payments if you’re keeping your original home.
It is also a good idea to open a local Spanish bank account for everyday spending as well as things like utility bills. Research banks in Spain and what steps you need to take to open a bank account. Banks that offer services in both Spanish and English would be especially useful.
A key element of moving to Spain is how you will access healthcare for you and your family.
If you are employed or self-employed in Spain and pay social security contributions you will eventually be eligible for basic state healthcare (although you will have to pay for things like prescriptions).
However, regardless of whether you’re working or retired, it’s likely you won’t be entitled to state healthcare straight away and will have to take out private health insurance for at least the first year of living in Spain. You may also need private healthcare cover as part of your visa requirements, such as the Golden Visa.
Many expats opt to continue with using private healthcare for ease and convenience, particularly if you’re moving with your family and want to ensure immediate, comprehensive coverage for all, or if you’re retiring, as old age brings with it the greater chance of illness.
Spain is considered one of the safest countries in the world, with low rates of crime and low risk of major violence and terrorist incidents. Beyond petty crime such as pick-pocketing in large cities or tourist areas, there’s very little to fear as an expat living in Spain.
10. Choice of goods
If you’ve come to rely on familiar UK brands, shops and supermarkets then prepare for the fact that moving to Spain means you will have to acclimatise to new and unfamiliar retail outlets and products that you might not have come across before. However, international supermarkets and online shops can still offer access to your favourite British products. For those living in Andalucia near Gibraltar, a day trip to the Rock and its array of British high street stores is always on offer.
11. Cost of living in Spain
While Spain does generally offer a lower cost of living than the UK, it’s essential you assess whether you can afford your new life in the country as an expat. Do your research. Large cities like Madrid and Barcelona, and major tourist areas like the Costa Del Dol, will be more expensive than other regions in Spain.
While still in the UK, create a budget for your new life in Spain to ensure your incomings will exceed your outgoings. Investigate what costs are like in the area of Spain that you’d like to settle in, from housing and transport to utility bills, food, leisure and more. Your budget should include a financial cushion to cover any unexpected costs during the moving and settling-in process.
If you have children of school age then their education will be an important factor when planning a move to Spain.
British expats in Spain have three options when it comes to schooling and education. Publicly funded state schools are generally well regarded in Spain. They can be a great way for children, particularly younger ones, to integrate quickly into Spanish life and learn the language. One thing to consider however is that depending on where you are settling children may be taught in the local regional language, such as Catalan or Galician, rather than Spanish.
Some private schools in Spain are partially funded through a combination of government subsidies, scholarships and family contributions and the standard of education is regarded by most to be high.
Other private schools are fully funded through tuition fees, (which tend to be high), with small class sizes, high-quality facilities and a wide range of extra-curricular activities.
International schools are a popular choice for expat families as most follow a British, French or American curriculum, taught in English (which includes the International Baccalaureat). Fully independent and fee-based, they’re a good option if your child is older, you want them to gain qualifications valid in the UK or you are only in Spain for a short period of time.
13. Your social life in Spain
When planning a major relocation many people naturally prioritise factors such as money, accommodation, education, transport and so on, but something to consider is how you will create a social life for yourself when living in Spain. Moving to a new country and making new friends as an adult can be very daunting so it’s worth thinking about what you might need when deciding where to live. If you prize access and variety when it comes to culture, entertainment, restaurants and bars, a large, bustling city may suit you best. If your Spanish skills are at beginner level and you want to meet other English people while you’re living in Spain, look at areas with vibrant expat communities, such as the Costa del Sol.
Spain is a great place for English-speaking expats as many speak the language, but even developing beginner skills will make your introduction to living in Spain much easier. Start self-study (apps such as Duolingo are very useful) and/or language classes in advance of your move. Simply learning basic greetings and common phrases will be extremely useful.
Bear in mind though that learning a new language can take some time, so make sure that any professionals you’re working with in Spain, such as a lawyer or financial advisor, speak both English and Spanish.
15. Tax residency
If you’re still planning on spending time in the UK then you need to be mindful of the rules that trigger tax residency. The UK Statutory Residency Test determines how much time you can spend in the UK without triggering UK tax residency. It’s something you need to check carefully if you plan on returning often to visit family, for example.
You should also educate yourself on the rules that automatically trigger Spanish tax residency. If you spend more than 183 days in a calendar year in Spain then you are considered a tax resident. Even if that is not the case, if your main home is in Spain; your centre of family or economic interests is in Spain; or your spouse and dependents live in Spain then you will have to pay income tax in Spain.
16. Expat financial advice in Spain
One of the biggest challenges of planning a move to Spain is how you will manage your finances and it’s something you should consider as early as possible.
You need to decide whether your current UK-based advisor is best suited for your new life in another country. Even if you have a productive relationship with them, it’s likely they won’t be authorised to service a client who is tax resident in Spain.
Consider seeking an independent financial and wealth management advisor experienced in advising expat clients and navigating both the UK and Spanish tax systems, who will be able to offer you bespoke solutions when it comes to managing your financial affairs.
17. Cashflow analysis
While living in Spain is usually cheaper than in the UK, you must still establish if you can sustain your lifestyle while you’re out there, and absorb any unexpected costs. A reputable wealth management and financial advisory firm can help you draw up a realistic budget by using sophisticated cashflow analysis tools. Using interchangeable variables such as size of investment, tax rates, future income requirements, investment returns, likely inflation rates and life expectancy, they can present you with a realistic picture of how long your savings, investments and pensions are likely to last (with best, base and worst-case scenarios).
18. Working in Spain
If you intend on working in Spain then you should be aware that the job market is much tougher than in the UK, with unemployment rates considerably higher. It’s a reality that competition for jobs will be fierce, and as a British expat in Spain you will be at a disadvantage, particularly if you don’t have a solid grasp of Spanish. Devote plenty of time to job searching, starting before your move to Spain. Ensure you budget extra funds to cover your outgoings should finding employment take longer than anticipated.
If you plan on living in Andalucia then it’s also worth searching for jobs in Gibraltar. The overseas territory has a vibrant, healthy economy with plenty of well-paid jobs on offer, particularly in the legal, accountancy, financial services, crypto and gaming industries.
If you do secure a job in Gibraltar, speak to a local financial advisor to ensure you avoid any costly issues that may arise from living and working in two different jurisdictions.
19. Opening a bank account in Spain
Life as a British expat in Spain will be considerably easier if you have a Spanish bank account. Luckily, opening an account in Spain is relatively straightforward.
If you’re comfortable using mobile phone banking then online bank N26 will let you set up a bank account with a Spanish IBAN in just a few minutes as long as you’re legally resident in Spain. No paperwork or knowledge of Spanish is needed, just a valid ID and smart phone.
If you’d prefer to open a more traditional bank account then the process will not be overly complicated but ensure you have the following with you when you apply (requirements may vary depending on the bank): ID; a Spanish residential address; proof of employment status; and your Número de Identificación de Extranjero (NIE) which proves you are officially registered in Spain.
20. Moving your possessions to Spain
This is something that you don’t want to leave until the last minute.
Moving house is almost always complicated and difficult, but the challenges multiply when the move is an international one. As soon as you can, get quotes from reputable removal firms with experience of international removals, and book as far in advance as possible.
You should also think long and hard about whether you will need to bring everything in your current home with you. You may not have secured a permanent residence when you first arrive in Spain and it’s possible that some of your possessions will not fit or be suitable wherever you do end up. Decide if anything can be sold or donated to family, friends or a charity shop to avoid lugging anything across Europe that you won’t need.
21. Restructure your financial assets to minimise your tax burden
In advance of your move, speak to a financial and wealth management advisor with knowledge of both the Spanish and UK tax systems, as well as cross-border financial planning. Establishing a new life as a British expat in Spain offers an opportunity to restructure your assets to minimise your tax burden when living in Spain. The right financial advisor will help ensure your savings, investments and pensions are as tax efficient as possible.
While there is a double taxation agreement between the UK and Spain, if you are planning on retaining links to the UK such business interests and property then speak to a financial advisor to ensure you don’t make any costly mistakes, as financial penalties can be severe.
Spain’s autonomous communities can vary widely when it comes to tax as each region has considerable leeway when it comes to setting rates and relief. A locally based advisor can guide you on where might be right for your needs – Andalucia, for example, has 100% relief on wealth tax in Spain. A good advisor will also keep abreast of developments that may affect you as an expat, such as the Spanish central government’s recent introduction of a new temporary solidarity tax on wealthy individuals.
22. Ensure your UK investments are suitable for living in Spain
It’s possible that some of your savings, investments or pensions will not have the same level of tax efficiency in Spain compared to when you lived in the UK. Speak to a financial advisor who can ensure your tax planning is optimised to make the most of the Spanish tax system.
Examine whether your current investment strategy needs to change once you move to Spain. If you will depend on pensions and/or investments for income when living in Spain then consult an expert with experience in giving financial advice to expats to reassess how much you are prepared to invest, your investment horizon, level of risk tolerance and accessibility to capital.
23. Review your UK pension
If you are retiring in Spain then your pension is likely to be one of your major sources of income as an expat.
Any UK pension you receive will be subject to Spanish tax. However, if you transfer your pensions to an overseas pensions scheme such as a QROPS (Qualifying Recognised Overseas Pension Scheme) or establishing a QNUPS (Qualifying Non-UK Pension Scheme) then it’s possible to significantly reduce your tax burden.
For example, take the UK lifetime allowance limit for pensions. If your pension exceeds the LTA of £1,073,000 then you must pay a penalty of up to 55%. However, transferring your pension to a QROPS before it reaches the LTA limit will ensure your pension can grow undisturbed as a QROPS is not subject to such penalty charges.
A QNUPS can reduce your tax liability for pension income in Spain. This is achieved by receiving 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 subject to income tax in Spain. In Spain this is dependent on the length of the annuity.
The benefits of reassessing your pension planning extend to inheritance tax. If you stay in a UK-based pension scheme then your beneficiaries will have to pay tax on any death benefit lump sum payments from your pension fund if you die after the age of 75 – this could be as much as 45%. However, death benefits from a QNUPS are treated more generously in Spain depending on the region in which you live. In Andalucia, for example, no tax is payable if your assets are under €1,000,000 and your beneficiaries are direct family members. If you exceed the threshold then just 1% tax is payable. If your beneficiaries live outside of Spain then no succession tax is due as a QNUPS is an overseas scheme.
Pensions are a complex and difficult topic and there are a variety of products available to you as a British expat in Spain. Speak to a qualified financial advisor when pension planning.
24. Review your estate planning
While there are options for reducing your liability to Spanish succession tax, as outlined earlier it is still very likely that HMRC will consider you UK domiciled for UK inheritance tax purposes even if you spend years or even decades living in Spain before you die. Changing your UK domicile, moreover, is very challenging.
A good financial and wealth management advisor will offer you choices when it comes to reducing your UK IHT exposure (if your estate is in excess of the nil rate band). Preparing ahead of your move to Spain when still a UK tax resident makes sense.
25. Selling your UK main home and capital gains tax
It’s possible you will have to sell your main residence in the UK in order to buy a new home in Spain. You are exempt from UK capital gains tax if you sell your home before exiting the UK, and this tax relief is still generally applicable if you sell your home within nine months of leaving the country. However, after this period you will potentially be exposed to CGT in both the UK and Spain on the sale of this property.
Spain offers relief from CGT if you are selling your main home and reinvesting the money into buying a new one. However, this is only for property located inside the EU/EEA. Post-Brexit, the exemption does not apply if you have yet to sell your UK home once you become a Spanish tax resident. It’s possible then that you will have to pay capital gains tax in Spain.
It is essential that you plan ahead as far as possible and engage an estate agent so you can sell your UK home and take advantage of CGT exemptions before moving to Spain.
The prospect of a move to a country like Spain is an exciting one full of possibility and opportunities. But the process of relocation can be a challenging one with many obstacles and it’s important that you speak to a reputable financial advisor and relocation expert to ensure your move is as trouble-free as possible.