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A Guide to Wealth Tax in Spain Image

A Guide to Wealth Tax in Spain

January 31, 2022

Contents

 

1. Introduction and regional scope of the tax. 

2. Net assets that are treated as taxable wealth and how they are valued. 

3. Exempt assets. 

4. Tax rates. 

5. Limiting factors to tax payable. 

6. Potential tax mitigation steps. 

 

Introduction to the tax in Spain

 

Spain is now one of the very few countries that has a pure tax on wealth. Those retiring in Spain or moving to Spain for other reasons would do well to know how this tax works, as well as understanding income tax and inheritance tax, the other significant personal taxes in Spain, covered in other articles.

 

Wealth tax is an annual tax on the net wealth of an individual. In the case of a couple each is separately taxed. A resident of Spain is subject to this tax on their worldwide wealth. A non-resident is only subject to the tax on assets located in Spain or subject to Spanish legislation, e.g. Spanish real estate, registered cars, boats, planes, company shares, bank accounts, investments, etc.

 

Wealth tax was established in 1978, shortly after the democratic state of Spain was created after the death of Franco in 1975. It was meant to be an emergency measure needed to support the finances of the fledgling state but, as we all know, once a country has introduced a tax it is very hard to get rid of it.

 

Wealth tax was substantially reformed in 1991 and since then has remained almost the same. The tax tables and rates have hardly changed, despite inflation over 30 years having devalued assets by well over 50%. Indeed, tax rates have increased in most parts of Spain. There was a happy period between 2008 and 2011 when the tax was suppressed with a 100% exemption. The stated intention at the time was to eliminate the tax definitively but the recession that followed the 2007-2008 financial crisis put paid to this. Its elimination remains the objective of the centre-right Partido Popular.

 

When the tax returned in 2011, substantial exemptions were introduced that keep the vast majority of the population out of the system.

 

Wealth tax generates tax revenues of approximately 1.2 billion Euros each year, about 0,25% of the total tax take of the country. Only 180.000 file the wealth tax declaration compared to 21.000.000 Income tax filings. It is evident from these statistics that the tax is motivated purely by political dogma.

 

Regional variations in wealth tax

 

In 1980, the financing system of the 17 Autonomous Communities was created which included the devolution of the right to receive various taxes, including wealth tax. About 15 years ago the power to modify the rules of the tax were also devolved. Inevitably, politicians have enjoyed playing with the rules and we now have very substantial regional differences reflecting the political interests of the Autonomous governments, as illustrated by the summary below:

 

                              Tax on net wealth of

 

800.000€

4.000.000€

15.000.000€

Andalucia

220€

40.300€

302.300€

Aragón

1.160€

41.600€

320.300€

Asturias

220€

41.700€

322.800€

Baleares

280€

50.000€

375.800€

Canaries

200€

36.500€

309.800€

Cantabria

240€

44.200€

331.400€

Castilla y Léon

200€

36.500€

309.800€

Castilla-La Mancha

200€

36.500€

309.800€

Cataluña

770€

41.900€

297.500€

Comunidad de Madrid

0€

0€

0€

Comunitat Valenciana

900€

47.600€

362.200€

Extremadura

1.100€

59.900€

418.160€

Galicia

200€

36.500€

273.800€

Región de Murcia

240€

43.900€

328.500€

Navarra

475€

32.400€

237.700€

La Rioja

200€

36.500€

309.810€

País Vasco (1)

0-200€

22.500€ - 35.000€

210.000€ - 261.000€

 

  • Within the Pais Vasco there are three regions that have tax raising powers, Vizcaya, Álvala and Guipuzcoa.

It will surprise no one that most wealthy Spaniards now live in Madrid and only sheep live in Extremadura!

 

https://www.businessinsider.es/impuesto-patrimonio-son-diferencias-autonomias-388179

 

The central State has its own tax rates, exemptions and allowances, which apply by default if a region does not exercise its right to modify the tax. In practice the state system now only applies to non-residents of Spain who may choose between the state system and the regional system in which they have property, whichever produces the lowest tax amount.

 

Assets treated as taxable wealth and how they are valued

 

In general, taxable assets are those owned on 31 December of the year, less the value of any debts. For residents of Spain, assets located anywhere in the world are taxable. To arrive at net wealth assets and liabilities are valued as follows:

 

Type of asset or liability

Valuation rule (2)

Real estate

at the higher of cost or officially assessed value

Bank accounts

at the higher of balances as at 31 December or the average balances during the last quarter of the year

Investments, UCITS, SICAVs, unit trusts, publicly quoted shares

Cryptocurrencies

At their average value during the last quarter of the year

Insurance bonds

Loan assets

Non-Spanish personal pension scheme funds, QROPS, SIPPS (1)

At their Euro market value on 31 December

Private Company Shares

If subject to a favourable audit report, the company’s balance sheet value is used. Otherwise, the value is the higher of:

  1. the nominal value of the shares

  2. 5 times post tax profits, averaged over last 3 years

Net asset value per balance sheet

Insurance policies (not investment bonds) and lifetime and temporary annuities

Capital value of the fund or the capitalised value of the income stream, capitalised according to official interest rates

­Works of art

Jewellery, precious metals, stones and other assets

At their Euro market value on 31 December

Cars and boats and planes

According to official tax office value schedules

Debts including income tax, personal and property loans, unsecured or secured

At their Euro value on 31 December

 

  1. In the case that the beneficiary does not have access to the scheme assets (typically if below 55 years of age) the pension scheme assets are not regarded as taxable wealth.

  2. In the case of foreign assets, the value is translated into Euros at the rate applicable on the date(s) specified in the valuation rule.

 

Allowances and exempt assets

 

  • A general allowance of 700.000€

  • An additional allowance of up to 300.000€ of the persons home value.

  • Household equipment, furnishings and fittings are exempt.

  • Pension funds that are explicitly set up and qualify under Spanish rules.

  • Pension arrangements contracted by previous employers, regardless of country of origin.

  • Personal pension arrangements of any country where the beneficiary is below the age when benefits may be taken.

  • Assets that are registered in the official lists of assets of historical patrimony and cultural interest

  • Works of art or antiques with a market value of less than between 2.400€ and 90.000€ depending on the type. Works of art that have been ceded for display in public museums or galleries.

  • Business assets, as long as the activity is not pure investment and provides the majority of the taxpayers earned income. For a property business to qualify under this exemption it must employ at least one full time person and have a fixed place of business.

 

Tax rates

 

The tax rate table of the State system is provided for general guidance. Most of the tax tables for all the Autonomous Communities have similar tax bands and rates.

 

Cumulative tax base

Cumulative tax payable on cumulative base

Additional base
up to

Tax rate on additional tax base %

0,00

0,00

167.129,45

0,2%

167.129,45

334,26

167.123,43

0,3%

668.499,75

2.506,86

668.499,76

0,9%

1.336.999,51

8.523,36

1.336.999,50

1,3%

2.673.999,01

25.904,35

2.673.999,02

1,7%

5.347.998,03

71.362,33

5.347.998,03

2,1%

10.695.996,06

183.670,29

Thereafter

3,5%

 

 

Limiting factors to tax payable

 

Having calculated the amount of wealth tax payable, there is a limit to the combined total income and wealth tax that a person must pay in a tax year. The limits operate according to complex conditions but, essentially, they are as follows:

  1. The first limit is that the combined cost of Spanish income tax and wealth tax should not exceed a rate of 60% of income. Income for this purpose excludes capital gains on assets owned more than one year.

  2. The second limit is that the reduction in 1. above is itself limited, such that the total wealth tax payable cannot be less than 20% of the amount originally calculated.

 

Tax optimisation

 

As with all complex tax systems it is easy to make the mistake of not organising your affairs to use the exemptions and allowances that the law provides. Wealth tax is particularly complex in this respect and special care is needed in the following areas:

  1. In the case that you have business assets, ensuring that you qualify for the exemption by complying with the statutory conditions.

  2. For those considering retirement to Spain, ensuring that pensions are treated correctly.

  3. Organising investments to make the best use of wealth tax limiting factors.

 

Article by Alistair Spence Clarke, 31st January 2022

 

Alistair Spence Clarke is a founding partner of Spence Clarke, Chartered Accountants. The firm was established in Marbella Spain in 1985 and specialises in providing Spanish tax and accountancy consultancy and related services to expatriate individuals and businesses throughout the Spanish mainland and islands. Whether you are thinking of moving to Spain or already living in Spain please get in touch about our tax consultancy services. Phone: +34 95 282 2943; www.spenceclarke.com