The Good News for Those Living in Spain or Moving to Spain is that Andalucia’s Regional Government has Recently Abolished Spanish Wealth Tax

The good news for those living in Spain or moving to Spain is that Andalucia’s regional government has recently abolished Spanish wealth tax.

The bad news for individuals planning on moving to Spain and establishing their residency in Spain is that the central government in Madrid will reintroduce Spanish wealth tax at a national level in 2023.

High net worth British expats in Spain needs specialist expat tax advice more than ever to reduce their Spanish tax exposure.

Thousands of British expats are working and retiring in Spain, with many more planning to make the leap. Navigating Spanish tax and understanding how it affects you is part and parcel of the transition.

This means you must keep abreast of any new developments in tax in Spain for residents and how it may affect your future financial plans.

Important new changes in Spanish wealth tax could have significant ramifications for your tax planning. Here’s what you need to know, and how you can prepare for what comes next by consulting a wealth management advisor as soon as possible.

What is Spanish wealth tax?
Spanish wealth tax is an annual tax on assets, payable in addition to income and capital gains taxes. Though tax-free allowances are generous, it nevertheless represents an obstacle for any high-net-worth expat moving to Spain.

This brings us to Andalucia. Spain has 17 different autonomous communities, all of which have considerable freedom to adjust rates of tax, tax-relief and tax-free allowances.

In September 2022, the right-wing president of the Junta of Andalucía, Juan Manuel Moreno, announced 100% tax relief on wealth tax from 31 December 2022. For wealthy British expats in Spain, this reduced their tax liability to nil.

This welcome news was part of an initiative by the regional government to make Andalucia more attractive for high-net-worth individuals living in Spain or moving to Spain, tempting them away from countries like Portugal with its benign Non Habitual Resident (NHR) tax regime.

The Spanish wealth tax, it was argued, barely justified the cost of collection – comprising just 0.6% of total tax revenue for Andalucia. In contrast, it was calculated that introducing 100% relief on wealth tax would attract an estimated 7,000 affluent new residents to the region.

It was a move that had exciting potential to attract new capital, talent and employment to Andalucia. Furthermore, it looked as if other regions would follow suit, with the likes of Murcia and Galicia indicating they might do something similar. Residency in Spain, particularly in these regions, looked more attractive than ever.

Introduction of a new national wealth tax
Before there was much time for celebration, this good news was quickly overshadowed in October by the announcement that Spain’s ruling Socialist PSOE party and its junior partner, Podemos, wanted to impose a new Spanish wealth tax at a national level. Described as ‘temporary solidarity tax on large fortunes’, the new tax, which has now been published as an amendment to a non-government bill on temporary taxes in the energy and finance industries, is supposedly aimed at alleviating economic hardship caused by soaring inflation and energy prices. Another key aim is to standardise the rules on wealth tax across the country’s autonomous communities.

In reality this is a clash in ideologies between Spain’s political parties at a national and regional level, with Spain’s socialist government fundamentally opposed to any cuts in Spanish wealth tax. This is likely driven by a fear that the introduction of 100% relief on wealth tax in Andalucia would cause a domino effect in other autonomous communities.

The tax, a temporary one likely to be applicable in 2023 and 2024 (unless legislation is passed by 31 December, in which case it would apply for the 2022 and 2023 tax years), will tax those with net wealth above €3 million. The bands are as follows:

€3M - €5M:     1.7%

€5M - €10M:   2.1%

Over €10M:     3.5%

In regions where taxpayers would be liable to pay both the wealth tax and the new solidarity tax, any amount that an individual pays in wealth tax may be deducted from their solidarity tax liability. This, however, is of little comfort to wealthy residents and expats in Andalucia given that relief on the current Spanish wealth tax stands at 100% – the new solidarity tax will be fully payable in this region.

The new Spanish wealth tax raises a minimal amount of tax, and is more likely to drive high net worth individuals out of the country – along with their wealth. This is what happened when a similar tax was introduced to France in 2016, triggering an exodus of wealthy citizens to other countries in Europe such as the UK and Portugal. The tax was eventually repealed in 2018 because it caused a drop in tax revenues.

What does the solidarity tax mean for wealthy individuals with residency in Spain?
As mentioned earlier, autonomous communities in Spain have sizeable leeway in adjusting tax rates and allowances for their region. Consequently, those living in Spain or moving to Spain could have hoped that tax relief for the new solidarity tax was possible.

Unfortunately, this new tax will be controlled centrally by the national government and not ceded to the autonomous communities, who will be unable to adjust any tax relief themselves.

This is a temporary tax effective for the two tax years following the passing of the bill – likely to be 2023 and 2024. However, there is a clause that allows for the solidarity tax to be evaluated at the end of this two-year period and either abolished or maintained, so the solidarity tax could become permanent.

British expats in Spain should not panic
While the announcement of the solidarity tax is dismaying news following so quickly on the heels of Andalucia’s 100% relief on Spanish wealth tax, British expats with residency in Spain should not panic.

At the time of writing, the tax has not been approved by the Spanish parliament and there are a number of reasons why it will either not happen or be significantly changed during the approval process.

Legally, it could be argued that there cannot be two Spanish wealth taxes existing simultaneously and that the existing Impuesto sobre el patrimonio will need to be expunged from the statute books before moving forward – which will again take time.

Instability in the central government
Because the new solidarity tax would have ramifications for how autonomous communities are financed, it’s likely that passing any such legislation would require a significant majority in Congress and the Senate

This would be hindered by the fragility of Spain’s PSOE/ Podemos coalition, which is riven by infighting – who knows if they will be able to work well enough together to turn the proposed solidarity tax into law? The parliamentary processes required to pass such a law, moreover, could take months to complete.

How the central government will introduce the tax is also uncertain. Historically, it has been near impossible to introduce a completely new Spanish tax law in the annual budget, whichmakes it unlikely that the tax will appear in 2023’s national budget legislation. What’s more likely to happen is that the government will introduce the tax by decree. This can only happen in certain scenarios, typically an emergency, and would allow the government to push through the new law much more quickly, so it can apply the changes in the 2023 tax year.

However, political parties who oppose this measure will challenge this in constitutional court, as they have done in the past with ‘emergency’ laws. The government often loses in these cases.

Finally, the next set of national elections in Spain are due to take place no later than December 2023, and potentially before if the current coalition government collapses. A new, more centrist and/or right-wing government is likely to abandon plans for the solidarity tax, and wealthy expats living in Spain can breathe more easily.

What can you do as a British expat in Spain?
Amidst such uncertainty, adopting a ‘wait-and-see’ approach is simply not realistic.

Anticipating future developments in this matter is a complex task given the unpredictability of Spanish politics, and it’s important to prepare for all eventualities.

This is especially urgent for wealthy expats – whether working or retiring with a pension in Spain – who will need to plan accordingly. If the solidarity tax is approved then you will need to submit your first tax return in 2024, covering the 2023 tax year (or 2023, if the legislation is passed by the end of December). Given this looming deadline, it’s essential you consult a qualified, expert financial advisor you trust will be able to guide you and plot a plan forward.

Meet now with a wealth management expert and they will be able to examine and review your tax planning and financial assets – including any pensions in Spain that you may have. They can offer advice on how you can minimise your tax exposure, and offer tailored, tax-compliant solutions for restructuring your assets and income in a way that leaves you best prepared for whatever is to come.

As a British expat, make sure you seek advice from local wealth management experts who are experienced in delivering cross-border financial advice and have a detailed understanding of Spain’s tax regime. This is the best way UK expats living in Spain can protect themselves from future changes in Spanish tax.