Law in Spain

Personal Income tax in Spain is known as IRPF (Impuesto sobre la Renta de Personas Físicas, often referred to in short as ‘La Renta’).  Since 2007, the responsibility for regulating and collecting personal income tax has been decentralized, with the autonomous regions being responsible for collecting 50% of tax revenues on behalf of the state. A single national rate applies for each tax band for the whole of the national portion of the income tax. Whereas tax rates on the regional portion vary between regions, Madrid having the lowest and Catalonia the highest.

As in other countries, income tax is payable by both residents and non-residents. Residence status must be established before filing a Spanish tax return to see which return is due and to calculate the relevant amount of tax payable. The rules governing this are complex but as a rule of thumb, Spain considers any person to be resident for tax purposes if they were living in Spain for more than 183 days in the tax year (which in Spain is a calendar year). We recommend that anyone who is unsure about their residency status seek advice – we at Abad would be happy to assist you.

Tax returns are currently being processed for the 2015 tax year and the deadline for submitting these is 30th June 2016.

Allowances and deductions

The way in which allowances are given and deductions are made in Spain differs greatly from the UK, making it very difficult (almost impossible at first glance!) to understand how the tax has been calculated.

In the UK we are used to seeing our personal allowances being deducted from our total income to arrive at our taxable income, to which the relevant tax rates and bandings are then applied.

In Spain, only certain allowances, such as the earned income allowance, are deducted from income in this way before calculating the tax payable in accordance with the bandings. This allowance changed dramatically in 2015 so that a standard allowance of 2,000 euros will be given against earned income across the board. Thereafter, anyone on ‘low earnings’ ( less than 14,450 euros) could receive an additional allowance, up to a total of 3,700 euros, depending on their income level and whether they have substantial unearned income or not .

Once tax payable is calculated any personal allowances will then be applied which in 2015 was 5,550 euros for the under 65’s (higher allowances being available for older people).

Allowances are adjusted annually and vary depending on whether the income is from earned income; the tax payer is single or lives with elderly relatives or dependants, and the number of children, amongst other factors. There is also an allowance for making a joint declaration with your spouse rather than individual returns.

To complicate matters further, some autonomous regions (like Cantabria, Castilla-La Mancha and Madrid) have different allowances for their own autonomous share of the income tax and also establish their own deductions.

Current Rates

Once the gross income has been reduced by the allowances, reductions and deductions, the rate has to be applied to find out the tax payable.

As of January 1st 2015, income tax has been reformed and simplified. It's important to note that these rates vary between each region. The rates shown below as an example are those that apply to the Community of Madrid.

From (euros)     Up to (euros)    Tax Rate

€0                        €12.450                20%

€12.450                €20.200                25 %

€20.200                €35.200                31 %

€35.200                €60.000                39 %

More than             €60.000                47 %

Please note that these rates only apply to general income. Some kinds of income, like interest on savings accounts, have different rates.

A worked example:

Let’s assume earnings of a 64 year old are 19,450 euros. Firstly, they would receive an automatic allowance of 2,000 euros, but wouldn’t qualify for any extra allowance as their earnings exceed 14,450 euros. This means that their taxable income is 17,450 euros.

The first 12,450 would be taxed at 20% and the balance (5,000 euros) at 25% making tax payable of 3,740. The personal tax allowance of 5,550 euros is then applied at the basic rate of tax, being 20%. I.e. a reduction of 1,110 euros is made. Tax payable in this case would therefore be 2,630 euros.

Conclusion:

As illustrated above, the tax system despite having been simplified of late is still incredibly complex to understand. For this reason, we highly recommend that you use a fiscal advisor to calculate your tax liability and submit your tax returns on a timely basis. Follow the link at the right of this blog if you would like our assistance in your tax affairs.

Generally speaking, if you live in Spain for 183 days or more in a calendar year (Spanish tax years run in calendar years, not from April to April), you will be considered as resident for tax purposes and will therefore be liable to pay taxes in Spain, just like any other Spanish citizen would.

Paying your taxes in Spain will benefit you and the area where you live, as tax revenues are used to improve local infrastructure and services that are all available to you.

You will be taxed on your worldwide income and double taxation treaties are in place to avoid paying tax twice – so if you are still paying taxes in the UK, do not worry, you will be able to reclaim these or offset them when completing your Spanish tax return.

The deadline for filing the return, known in Spanish as the ‘Declaración de la Renta’ is the 30^th June 2016, but if there is any tax payable and you wish to pay by direct debit rather than in person at the bank, the latest the return can be filed is the 25^th June 2016.

If you are a pensioner, and only receive state and/or private pensions from the UK, these will need to be declared on your Spanish tax return once you become a fiscal resident in Spain. Many people are under the impression that just because they continue to pay tax in the UK and receive correspondence from the UK tax office that they are exempt from filing Spanish tax returns – this is not the case (although there are exceptions, for example, if you only receive pensions from a public source for example a military, police or teacher’s pension. You should check your individual situation with your fiscal adviser).

 You should complete a Spanish tax return and pay any additional tax which may be payable and complete the UK Tax Office’s Form called a ‘Spain Individual’ which will inform them that you are now resident in Spain and filing your tax returns here and that they should therefore pay your pensions gross (without deducting any UK income tax).

In the first year, there is often a transition period, where you will have had tax deducted in the UK as well as being liable for tax here in Spain. With the double taxation treaty in place, you should be able to offset the tax paid in the UK – so in other words, you shouldn’t be taxed twice.

After the first year, once the ‘Spain Individual’ form is submitted, you should see that things will operate more smoothly.

The tax allowances and rates obviously vary from those in the UK. In Spain for 2015, the lowest rate of tax is generally 19.5% in total, but this can vary regionally. It also goes up relative to your taxable income. Your tax adviser should be able to calculate your liability based on your income as shown on your UK P60’s and other documentation.

So ask for advice now! Do not leave it to the last minute as fines are placed on late returns!!

Getting a mortgage in Spain

If you are thinking of getting a mortgage in Spain then you should be aware that the procedure is in some ways very different to that which you are accustomed to in the UK.

Firstly, in Spain, to obtain any kind of mortgage or even personal loan, everything must be signed for before a Notary.

A notary is a public official and an expert in Law,  who is required to ensure that certain transactions, such as property sales, wills and mortgages etc, are carried out correctly by validating all of the documentation presented and signed before them.

Secondly, the interest rates payable and the set up costs involved may differ greatly.  Whilst the interest rates may be compatible with the rest of Europe, the set up costs are usually higher and can be anywhere between 3.5%-4% of the amount borrowed. The main fees are as follows:

1. Spanish mortgage deed duty - 1.8% of the loan
2. Bank fees – approx. 1% to 1.5% of the loan
3. Notary fees - maximum 0.5% of the loan value
4. Valuation fee normally 0.10% of the value of the property
5. Mortgage broker fee – as agreed individually

Banks will not normally allow you to add the costs to the mortgage itself so it is important to bear these additional costs in mind when budgeting for your property purchase.

Spanish banks will lend to both residents and non-residents – but the offers available may be very different – for example, the amount loaned to non-residents would only be up to a maximum of 70% of the property value whereas residents can usually borrow up to 80%.

Types of Mortgages available

Spanish mortgages are usually at a variable rate (linked to EURIBOR) and on a repayment basis.

It is common for the rate to be fixed for periods of 12 months at a time at a set number of points above EURIBOR – the number of points having been agreed with the bank beforehand in the mortgage offer.

EURIBOR is the Euro Interbank Offered Rate and is determined by the average rates at which a panel of European banks can borrow money from each other at. It is updated daily.

Once a mortgage is in place in Spain it is unusual for borrowers to ‘shop around’ afterwards for better deals, as is often the case in the UK. This is due to the formalities required in setting it up initially along with the associated costs being prohibitive.

Terms

Spanish mortgage terms range from 5 to 40 years depending on age and the lender selected. Most Spanish banks will expect the mortgage to be repaid by age 70 but it is possible to obtain a mortgage up to age 80.

Mortgage Offer criteria

Your income net of tax will be assessed and the lending bank will want to see that the combined existing UK and new Spanish monthly liabilities do not exceed 1/3rd of your proven monthly net income. Rental incomes in Spain may be taken into account on a case by case basis.

Using a mortgage broker

Unless you already have a good relationship with a Spanish bank it is strongly recommend that you use a mortgage broker who will know the market and which banks are offering the best deals to suit you. Obviously this will incur a fee but you may save money in the long run by using their services.