There are myriad reasons to consider Spain as a relocation or retirement destination in terms of lifestyle, climate and culture, but it is also important to understand the tax environment, with opportunities to make your move not just successful but also tax efficient.
Many prospective expats delay their long-planned move until retirement or waver over whether to take the leap, primarily due to uncertainty and confusion about how their tax profile, residency status and long-term wealth will be affected.
Here, the global expat wealth management and expat financial advice specialists at Chase Buchanan set out some of the essential factors that, with a little advance planning, can make a fundamental difference to every expat's financial security.
The Benefit of Certainty and Long-Term Financial Stability
The UK tax system has been exposed to rapid change over recent years. With upcoming general elections, political disagreements about major tax reforms such as the removal of Lifetime Allowances (LTAs) and current freezes on income tax thresholds and allowances, it can be difficult for UK nationals intending to move to Spain to know how to decide on the right timing.
In a post-Brexit world, moving abroad to an EU country is indeed more complex, but the positive is that once you have settled, relocated and registered in a new location, you can leave some aspects of exposure to changeable tax policy behind.
An experienced adviser can recommend the right way to use planned changes to your advantage. Higher earners or expats with significant assets commonly find that becoming an overseas tax resident is favourable without ongoing prospective changes to pensions, income tax, capital gains and, notably, the inheritance tax regime.
Although wealth taxes do not currently exist in the UK, and inheritance tax has a scope outside of pension wealth, many anticipate this changing in the near future, so proceeding with a move as is convenient and practical may be an ideal option rather than waiting to see what further changes emerge.
Costs of Living in Spain vs the UK
One of the financial advantages of living in Spain is that living costs are generally lower. The latest Numbeo statistics show that:
- Consumer prices are 28.8% higher in the UK than in Spain.
- Property rental costs are 48% lower in Spain.
- Groceries cost roughly 19% more in the UK.
Of course, living in one of the larger cities, such as Madrid, Barcelona, or Valencia, is more costly than living in quiet rural regions. However, comparing the costs of living in London against Madrid shows that a typical household would require a budget of approximately €6,660 a month to enjoy the same standard of living in London as they would achieve with a €3,500 a month budget in the Spanish capital.
The quantifiable impact on your living costs may depend on whether you plan to move to Spain to retire, work, or launch a business and whether your earnings or pension income will remain stable.
In Spain, the average net monthly salary is €1,775 (£1,529), whereas the same figure in Britain is £2,295, so an analysis of your income sources and future earnings remains important.
Average Property Values in Spain
Just as property prices fluctuate considerably between different British cities and areas, the investment you might expect to make in a Spanish home will depend on where you choose to live.
Across Spain, the average property sells for €3,135 (£2,702) per square metre in a city centre and €1,987 (£1,713) elsewhere. The UK comparable values are £4,387 per square metre in a major city and £3,318 in other areas – making Spanish property prices between 38% and 48% lower.
That said, some areas of the Spanish property market command higher prices, with municipalities such as Benahavís in Málaga and Pozuelo de Alarcón in Madrid maintaining average property sale values of over €1 million.
Understanding Spanish Taxation
Income tax in Spain works differently from in the UK, where residents pay a national basic income tax plus a municipal income tax rate determined by each autonomous region.
In 2023, the income tax bands changed to introduce additional earnings brackets, with national income tax starting at 9.5% on income up to €12,450 and extending to 23.5%, charged progressively, for earnings over €300,000.
Regional tax rates are added to these tax burdens to arrive at the total income tax payable, with each municipal government setting its own rates, allowances and exemptions. Most taxpayers pay around double the national income tax rate, so 19% on incomes up to €12,450 and 47% in the highest bracket. However, evaluating the exact tax obligations before making any decisions is necessary.
For example, taxpayers in Madrid pay a higher 21.1% income tax rather than 19% on the first tax bracket but an advantageous 45.9% on the highest incomes.
The opposite applies in the Canary Islands, where income tax rates start at 18.5% and go up to 50.5%, so if you expect to become a permanent resident and taxpayer, these variances may make a considerable difference to your overall tax liabilities.
Contrasts in Spanish Taxes for Resident and Non-Resident Expats
The basics of tax residency are that anybody living legally in Spain for most of the year and with their primary home in the country will likely be treated as a tax resident.
Your residency position matters because if you are categorised as a tax resident, you must pay wealth tax, capital gains and income tax on all your worldwide income and assets. In addition, you will become subject to rules around inheritance and gift taxes, which may influence your plans or how you safeguard your wealth for future generations.
Expats living in Spain as non-residents or non-tax residents usually pay taxes solely on the income or gains originating within the country. This scenario then creates further areas for analysis whereby you may still need to submit tax returns and pay taxes in the UK and must apply for relevant tax credits through the dual tax treaty system to avoid paying taxes on Spanish income in both countries.
Tax residency depends not only on the number of days per year you live there since you could be treated and taxed as a non-tax resident where you have a business, employment or family living in the UK.
Therefore, we advise every expat to consult with an experienced financial adviser to ensure you have a complete understanding of your expected tax liabilities and can plan accordingly – working through each of these factors to evaluate how they affect your finances, and the arising pros and cons.
Read more about Chase Buchanan - Chase Buchanan Wealth Management Republishes Comprehensive Library of Expat Tax and Residency Guides for 2023
About Chase Buchanan Private Wealth Management
Chase Buchanan is a highly regulated wealth management company who specialises in providing global finance solutions for those with a global lifestyle. We are global financial advisers, supporting expatriates around the world from our regulated European headquarters, and local offices across Belgium, Canada, Canary Islands, Cyprus, Malta, Portugal, Spain, UK and the USA.
Chase Buchanan Ltd is authorised and regulated by the Cyprus Securities and Exchange Commission with CIF Licence 287/15
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