Financial Implications of Relocating to Spain
Relocating from the Middle East to Europe is an appealing prospect for many expatriates, especially those seeking a warmer climate, vibrant culture, and proximity to family in northern Europe. Among the available destinations, Spain stands out for its exceptional climate, diverse landscapes, cosmopolitan communities, and rich history. However, a successful move requires careful financial and tax planning to ensure a smooth transition.
Spanish Residency & Taxation
- Residency in Spain is not established solely by obtaining a visa, but by the number of days spent in the country within a calendar year.
- The threshold is 183 days: exceeding this in a calendar year typically results in being classified as a Spanish tax resident.
- Even if you spend fewer than 183 days, you may still be considered a resident if Spain is deemed your “centre of vital interests” (e.g., your main home, family, or children’s schooling is in Spain).
Fiscal Year and Tax Implications
- The Spanish fiscal year runs from January 1 to December 31.
- Arrival in the first half of the year (before July 1) generally results in tax residency from January 1 of that year.
- Arrival in the second half of the year may defer tax residency to the following calendar year, which can be advantageous for tax planning, especially if you intend to sell assets prior to becoming a resident.
Pre-Arrival Financial Planning
- Spain is not considered a tax haven; it is advisable to sell assets (such as property or investments) before establishing Spanish fiscal residency to avoid potential capital gains tax exposure.
- UK nationals over 55 (or over 57 from April 2028) should consider taking the 25% Pension Commencement Lump Sum (PCLS) while it remains tax-free in the UK, as Spain does not recognize this exemption and may tax it as income.
Overseas Asset Reporting: Modelo 720
- All Spanish residents must declare overseas assets exceeding €50,000, including property, bank accounts, pensions (if accessible), and investments.
- The declaration is based on asset values as of December 31 in the year you become a tax resident, and must be submitted by March 31 of the following year.
- Arriving in the second half of the year can delay the requirement to file the Modelo 720 until the next reporting cycle.
Estate Planning: The Importance of a Spanish Will
- It is essential to draft a Spanish will for assets located in Spain, as local forced heirship rules may otherwise apply.
- Including a clause that assets should be distributed according to the laws of your country of birth can help ensure your wishes are respected.
Invest using a Spanish Compliant Investment Bond (SCIB)
- Using a standard investment platform may result in unfavorable tax treatment and complex reporting, particularly if the provider is based in a jurisdiction considered a tax haven by Spanish authorities.
- A Spanish Compliant Investment Bond (SCIB) offers a tax-efficient, streamlined solution. It is a unit-linked life assurance policy with the following benefits:
- Deferral of capital gains tax while assets remain in the bond, allowing for compounded growth.
- Taxation only on the gain portion of each withdrawal.
- Exemption from reporting underlying assets on the Modelo 720, as the provider reports policy values directly to Spanish authorities.
- Simplified tax payment, as any liability from withdrawals is calculated and paid directly to the tax authority.
Inheritance Tax Considerations
- Inheritance tax between spouses is determined by national law, but regional authorities may choose not to impose it.
- Political changes at the local level can affect inheritance tax policies.
- SCIBs can be set up in joint names, ensuring that upon the death of one policyholder, full ownership passes to the surviving policyholder without exposure to Spanish inheritance tax or probate. Upon the death of the last policyholder, assets are paid to beneficiaries, who may also avoid Spanish inheritance tax if they are not residents.
Investor Protection
- SCIB providers, typically based in Ireland or Luxembourg, are required by EU law to segregate client assets from their own balance sheets, offering protection in the event of company insolvency.
- Providers must comply with Solvency Capital Requirement rules, maintaining assets in excess of 100% of customer holdings to ensure obligations are met.
Conclusion
Relocating to Spain offers numerous lifestyle and cultural benefits, but requires careful financial and tax planning. Utilising structures such as the Spanish Compliant Investment Bond
and seeking professional advice can help ensure a smooth transition and long-term financial security. For personalised guidance, please give me call or drop a line.I am a licensed advisor experienced
in both the Middle East and Spain.
