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Many British people (understandably) dream of their anticipated new life overseas. Yet have you considered what might happen if you leave your country of destination? In Spain, an “Exit Tax” can apply to certain UK citizens when they formally move to another country.
In this article, our financial planners explain how this Exit Tax works, ways it can impact a financial plan and how to mitigate it. We hope these insights are useful. If you want to discuss your financial plan with a member of our team, please get in touch to arrange a no-obligation financial consultation, at our expense:
+34 966 460 407
info@scottsdale.eu
What is the Spanish Exit Tax?
The Exit Tax was introduced in 2015 by the Spanish government to try and discourage “capital flight” (e.g. giving second thoughts to wealthy expats if they were considering a move to a country with lower tax rates, taking their money with them). Its technical name is the Spanish Personal Income Tax Law, included in law under Article 95 bis.
The law primarily concerns capital gains tax arising from a change in tax residency. In previous articles, we have mentioned how “residency status” is typically the key variable determining where an expat pays tax (e.g. in the UK or Spain), when and how. So, if a British expat moves from Spain to another country, they may need to pay the Exit Tax if their investments fall within its scope (explained below).
The scope of the Exit Tax
Looking more closely at the fine print, most British expats in Spain do not need to worry. However, the rules are worth noting in case you do fall within the scope of the Exit Tax (or, perhaps in the future). Here are the key conditions that can trigger the tax:
- You have been resident in Spain for at least 10 out of the previous 15 tax years.
- You have unrealised capital gains from shares in an entity (or entities) with a total value over €4m; OR,
- You hold an interest of at least 25% in a single entity valued at over €1m.
- You move from Spain to another country.
Crucially, for British expats, the time scope in point one above (10 out of the last 15 tax years) applies to the entire gain since the date when shares were acquired. In other words, the countdown does not start from the date you moved to Spain, but from the date you first bought the shares. Any chargeable gains are taxed between 19% to 26%.
The impact of the Exit Tax
Advocates of the law might argue that, since 2015, it has helped retain wealth inside Spain. Detractors might claim that the “opportunity cost” has been too high – putting off potential foreign wealthy investors from moving to the country.
British nationals should take note that, since Brexit, the UK is no longer a member of the EEA (European Economic Area). Both EU and EEA countries (including Switzerland) are treated as special cases under the Exit Tax rules. If a Spanish resident relocates to one of these countries, the Exit Tax only applies if shares are sold or the individual later becomes a non-EU (or Non-EEA) resident. The UK is no longer an EU or EEA member, however, so these exemptions do not apply for British nationals.
Financial planning considerations
Many British expat readers will likely breathe a sigh of relief at this point. Yet certain cases do require careful financial planning. For instance, a wealthy British business owner or investor would likely want to consider the Exit Tax carefully before relocating to Spain.
Fortunately, there are legitimate strategies available to help mitigate the potential impact on your finances. If you plan on living in Spain for no longer than nine years, for instance, then the scope of Exit Tax (10 out of the past 15 tax years) does not apply.
For those who think they have a realistic chance of living in Spain for 10 years or more, restructuring certain investments could be beneficial. For example, instead of holding particular shares directly, they could be owned “indirectly” via a tax-efficient “wrapper” (e.g. a life insurance policy which complies with Spanish law).
It is worth noting that an individual who relocates from Spain can request a tax payment deferral in certain circumstances. This might include being placed on a temporary work assignment to a non-blacklisted jurisdiction. Or, perhaps the person moves to a country which has a double taxation agreement (DTA) with Spain and an information exchange clause. If the individual becomes a Spanish tax resident again within the next five tax years, the tax charge is cancelled.
Invitation
As you can see, tax planning is often a complex matter for UK expats! Fortunately, there are specialists who can help you navigate the UK-Spain tax landscapes confidently, helping you craft an effective cross-border financial plan.
If you are interested in discussing your own financial plan or inheritance tax strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
+34 966 460 407
info@scottsdale.eu