Taxes you need to know about when retiring to Spain

If you are among the fortunate people who manage to retire to Spain, you will most likely be required to pay taxes. Depending on multiple factors, this may be the case whether you are a resident or a non-resident. If you have stayed in Spain for 183 days you are considered a Spanish resident and hence subject to Spanish taxation on your worldwide assets and income.

However, as a retiree, if you stay in Spain for less than 183 days in a calendar year, you are considered a non-resident. You will only be subject to paying taxes if you generate income in Spain. If you own a property, you will also be liable to pay non-resident property tax, whether you rent it out or not, in addition to local property taxes.

Spanish tax rates can vary across the country as they are determined by national, regional, and local governments. You can encounter different rates for income tax, inheritance tax, capital gains tax, wealth tax and even property tax. For this reason, it is very important to engage the services of a tax expert before you make the move to retire in Spain and prepare accordingly.

For most retirees, the most important tax they will have to pay is their income tax. More than likely, this will be from their pension or additional income streams such as property rentals.

Let's look at the different types of taxes you may need to pay:

Spanish pension and income taxes

If you are planning on living in Spain for less than six months a year, you will not be liable to pay tax on your pension in Spain. However, if you live more than 183 days a year, you are subject to Spanish income tax on all your worldwide income. Pensions in Spain are considered income, and therefore the same tax rates as standard income tax would normally be applied. However, this isn’t always the case, as Spain does not treat all pensions alike.

The amount of tax you will pay on your pension will depend on how it is classified by the Spanish government. Generally, it will fall under either the standard income tax rates or the capital gains tax rates. The latter of the two is more favourable. Additionally, if you have any further revenue streams, such as rental property income, this will also be taxed under standard income tax rates. To better understand how much tax you will have to pay on your pension and other income, please read this article on pension and income taxation in Spain.

Spanish property taxes & IBI tax

As with many retirees in Spain, the big move involves the purchase of a property. Along with this purchase comes multiple tax obligations:

Property purchase tax (ITP) & VAT

If you are buying a second-hand property in Spain then you will be liable to pay a purchase tax. This is also the case when you purchase a new property however this will be a value-added tax. The amount of tax may vary from region to region and may also vary depending on the value of the property. You should expect to pay between 8% and 11.5% in taxes.

How much tax do you have to pay on a new property in Spain?

When you purchase a new property in Spain you are required to pay two taxes:

1. VAT (known as IVA in Spain): This is calculated at 10% of the purchase price.
2. Stamp Duty (known as AJD in Spain): This is calculated at 1.5% of the purchase price.

How much tax do you have to pay on a resale property in Spain?

There is only one tax applied to resale properties (properties which have been sold at least once). This is an asset transfer tax called the 'Impuesto de Transmisiones Patrimoniales' or ITP. The amount that has to be paid is determined by the value of the property and increases as the value of the property increases. As a guideline, the scale applied in Andalucia is:

1. Properties up to €400,000: 8%
2. Properties between €400,000 and €700,000: 9%
3. Properties over €700,000: 10%

If you are at the stage where you need more detailed information, please read this article on taxes related to buying property in Spain.

Property tax in Spain - IBI

In Spain, you will also need to pay property tax when you own a property. Unlike in other countries, such as the UK for example, you will not need to pay this tax when you rent a property. This tax is called 'Impuesto de Bienes Inmuebles' or IBI. This tax is payable to your local council.

Spanish IBI tax is paid annually by whoever owns the property on the 1st of January each year. If you happen to buy the property on the 2nd of January it is still the previous owner that must pay the tax for that coming year. The actual date you pay the tax differs from council to council. You, as the new owner would be liable from the following 1st of January.

This tax is payable by all owners whether they are tax residents or not. It is also payable even when no one is living in the property. IBI tax often includes rubbish collection tax, but not always, so make sure you check with your local council first.

The amount you pay will be determined by your property's 'cadastral' value. This is a value that the local council applies to your property and is officially registered. This value is normally much lower than the real market value of the property. The amount of tax you pay will be between 0.4% and 1.1% of your cadastral value.

If you do not pay your IBI tax it can have important consequences. Ultimately, it can lead to having your property seized by the local council. The local council does not send out reminders about outstanding IBI tax. It is the owner's responsibility to know when it needs to be paid. Not paying your IBI will also make it impossible to present your non-resident tax declaration, as the payment receipt is needed in order to present your tax return. It is also important to know that you cannot buy or sell a property with an IBI debt.

How to register to pay Spanish Tax

To register to pay tax in Spain you need to register with the Spanish Tax Office - Agencia Tributaria. In order to do this you will need a foreigner's identity number - Numero de Indentficación Extranjero - commonly known as NIE.

Within 30 days of arriving in Spain, you can get this number at the local police station or the local office for foreigners, - Oficina de Extranjeros. Large towns and cities normally have a dedicated foreigner's office, but the smaller, more rural towns will not, and you will need to apply through the police station.

If you are not familiar with the Spanish NIE please see our article 'What is a NIE, what do you need it for and how to apply for one'.

Once you have your NIE number, you will have to fill out and present this form: Modelo 30 in order to register your obligation to pay tax. During your first year of tax residency, it is mandatory to fill out a tax return. After your first year, it will only be necessary to fill out further tax returns if your worldwide income before tax is over €8,000 for the year, and if your investment income before tax or bank interest is over €1,600. This also applies to rental income when it is more than €1000 for the tax year.

How to file your tax return in Spain

To file a Spanish tax return, you will need to use the Modelo 100. All tax returns must be filed between the 6th of April and the 30th of June of the year following your tax year. The tax year in Spain runs from the 1st of January to the 31st of December. There is no way to ask for an extension on filing a tax return in Spain. We highly recommend contracting professional assistance the first time you do this.

Spanish taxation for married couples

In Spain, you can choose to file your tax return as a married couple or as two individuals. Depending on your situation, it can sometimes be more beneficial to file your tax returns separately than as a couple. Married couples do have a gross allowance of €5,500 for the first taxpayer and €3,300 for the second taxpayer.

Inheritance tax and gift tax in Spain

Spain's Inheritance and Gift Tax Act establishes a common framework for inheritance tax in the country. However, each autonomous region can establish its own tax rates and tax reliefs within its own territory. Aragon, Galicia, the Balearic Islands, the Basque Country, Navarre, and Catalonia have their own inheritance rules. To understand more about Spanish inheritance rules please read this article.

Unlike in other countries, in Spain all heirs pay tax on their inheritance and lifetime gifts. Inherited pension funds are also taxed under this law. Since 2015 both residents and non-residents have received the same treatment under the Inheritance and Gift Tax Act. The standard framework established by the central government oscillates between 7.65% and 34% depending on the value of the estate:

Inheritance tax reliefs

Spain's Inheritance and Gift Tax Act provides a range of tax reliefs for heirs. The amount is determined by the relationship the heir has with the deceased. These tax reliefs are normally only reserved for family members but can extend to non-married partners and those with disabilities. The heirs are classified into four different groups, and each group has the right, or not, to a certain tax relief. These amounts can be freely increased by each autonomous government.

The groups are as follows:

1. Children, natural or adopted, under the age of 21 receive a tax relief of €47,859.
2. Children, natural or adopted, over the age of 21, spouses, grandchildren, parents, and grandparents each get an allowance of €15,957.
3. Siblings, nephews, nieces, uncles, aunts, and in-laws each receive €7,993
4. Cousins, unmarried partners (depending on the region), all other relatives, and those who are unrelated get no allowance. However, if one of these heirs has a disability, they can receive an allowance of up to €50,253, depending on their degree of disability.

There are also tax reliefs for inherited properties. Heirs within Group 1 and Group 2 can receive up to €122,606.47 per heir against the main home of the deceased. There is also additional tax relief if the property is not sold within the first five years.

How Gift Tax is treated in Spain

In Spain, gift tax and inheritance are treated in the same manner and follow the same progressive taxation as described earlier. Gift tax is due when a living person gives a gift to another person and increases their wealth. Defining a gift can be complicated. For example, allowing someone to use your home may, in certain circumstances, constitute a taxable gift. Gift tax in Spain must be declared within 30 days of receiving the gift. If a property is gifted, you may also be liable for further local taxes related to the transfer of the property.

Spanish taxation, like most taxation systems around the world, is complex. But this can become more so due to the different rules in different regions. For this reason, we highly recommend you hire the services of a tax expert - known as a "gestor" in Spain. It is important to get a full understanding of your obligations and receive the necessary assistance when filing your returns. Hiring a tax advisor will always be cheaper than paying a fine for making a mistake. To find tax experts in your area please refer to our directory.