Some Spanish tax inspectors seek to add the UK Government service pension to your other income in order to determine the tax rate on that additional income. So the UK pension remains tax-free, but you end up paying a higher rate of tax on your other income. This is wrong. The Spanish tax inspector should be referred to their head office as the UK Government pension simply does not exist for any Spanish tax purpose.

Note that the UK state pension does not count as a government service pension and is therefore tax-free in the UK, but taxable in Spain. It will be paid to you in Sterling but you can have it transferred into your Euro bank account in Spain if you wish.

Private pensions

The taxation of private pensions in Spain can give rise to some interesting anomalies. This arises because of the confusion over the meaning “purchased annuity” in Spain.

A purchased annuity, strictly speaking, means that you pay a lump sum to an insurance company in return for an income for life (and on your death, usually a reduced income for the rest of your spouse’s life). A purchased annuity is taxed very favourably in Spain. For example, if it commences between the ages of 60 to 69, only 25% of it is liable to tax; ie 75% is tax-free. The full rates are shown in the Annuities section.

But how is a “pension” taxed? Well often in a private scheme the trustees have purchased an annuity in your behalf. And if the pension is recorded on your self-assessment tax return in Spain as an annuity, it is normally accepted as such. This means that up to 80% of the annuity will be tax-free in Spain.

Different tax accountants and tax offices seem to take different approaches. Our advice is that if you trustees have bought an annuity on your behalf, even though you did not purchase it directly, you should claim the annuity treatment.

You do not have to include the value of the annuity on your Wealth Tax return as it has no redemption value.

Source: BlevinsFranks