When thinking about buying property in Spain and perhaps eventually retiring there, you should be aware of all the different taxes you will be liable for. Most will be familiar, such as income tax, capital gains and succession (inheritance) tax, although the rates and rules will be different from those in the UK. However, there is one tax which will seem an enigma to Britons as there is no corresponding tax in the UK – and that is Spanish wealth tax.

Spanish wealth tax is charged on the value of your assets held at 31st December each year. It is paid by both residents and non-residents. Non-residents pay the tax on any property they own in Spain, whilst residents have to pay it on all their worldwide assets – in each case net of liabilities. Residents at least benefit from quite generous tax free allowances, but there are no such allowances for non-residents.

The Spanish wealth tax rates for 2007 returns applicable to the net tax base of wealth owned on 31st December 2007 are:

From €	To €	Tax Rate	Total Tax Payable at Top of Band
Nil	167,129	0.2%	334
167,129	334,253	0.3%	836
334,253	668,500	0.5%	2,507
668,500	1,337,000	0.9%	8,523
1,337,000	2,673,999	1.3%	25,904
2,673,999	5,347,998	1.7%	71,362
5,347,998	10,695,996	2.1%	183,670
Over	10,695,996	2.5%

For both non-residents and residents their main asset is probably the property that they own. Residents receive a deduction for their own home of €150,253 per person plus an individual deduction of €108,182. A married couple each receives the deductions, assuming in the case of the home it is owned in joint names. A married couple could therefore receive total deductions of €516,870.

You are only entitled to one ‘own home’ deduction. If you own more than one property, you do not receive a second deduction.

In calculating the value of your assets each year, property must be valued at whichever is the highest of the following values:

• the officially registered Valor Catastral
• the value taken into account for any other tax purposes
• the price in the purchase agreement (escritura)

If you are a Spanish resident you often cannot deduct your mortgage liability from your wealth tax bill. There is no deduction available for mortgages taken out to purchase (or improve) the main home where the amount is covered by the home exemption. In other words you can’t get mortgage relief on top of the main home allowance(s) unless the mortgage exceeds the allowance(s). Non-residents can however obtain relief for a Spanish mortgage on a Spanish property.

If a usufruct (the right to occupy a property) is in place on your property, wealth tax is payable by both the holder of the usufruct and the holder of the underlying freehold interest (nuda propriedad).

The value of the usufruct is calculated as 70% of the value of the property where the usufruct holder is less than 20 years old. As the age of the usufruct holder increases, the value of the usufruct reduces by 1% for each year over 20 to a minimum of 10% of the value of the property.

Purchased annuities (whole of life and temporary) are subject to wealth tax. If there is no redemption value, the assessable figure is determined by capitalising the annuity using the official Bank of Spain base interest rate for the year and then reducing it for the annuitant’s age based on the usufruct percentages mentioned above. Where the amount of income cannot be determined, the capitalised value is found by capitalising a notional amount that was €6,577.20 for 2006, for example.

When it comes to your bank balance, this is valued at the higher of the closing balance on 31st December or the average balance during the 4th quarter. Spanish banks automatically provide this information to the tax office, but you will need to declare any capital held in offshore accounts on your wealth tax return.

If you are resident in Spain, your combined wealth and income taxes cannot exceed 60% of your total “general and savings” taxable income (excluding any gains on assets held for more than one year, and the associated 18% income tax). If it does the wealth tax is reduced € for €, subject to paying a minimum of 20% of the full wealth tax calculation. Wealth tax on any asset that is non-income producing by nature/purpose is excluded, so the wealth tax on those assets remains payable in full and is unreduced. There is no such limit for non-residents.

If you and your husband/wife opt to file a joint income tax return, to calculate the wealth tax limitation you need to add together the total income tax due and each individual wealth tax calculation. If the 60% limit is exceeded, the reduction in wealth tax is pro-rated between each of you in proportion to the amount of your taxable wealth. Separate returns have to be made if you hold joint assets and liabilities in addition to any personal items.

Wealth tax returns have to be submitted and the tax paid between 2nd May and 1st July 2008 for the 31st December 2007 liability.

If you are resident in Spain, wealth tax is calculated on the total value of all the assets you own worldwide. A few assets are exempt and these are listed below. If you are retired with no business activities, only the first two could apply to you.

• Household contents (but excluding jewels, fur coats, vehicles, boats, art and antiques, which are taxable)
• Pension rights
• Owner managed small businesses
• Family companies meeting certain conditions
• Intellectual property rights in the author’s ownership
• Business assets – for the assets to qualify as business assets, the activity must be the taxpayer’s main source of income and the activity must be carried out by the taxpayer on his own account and on a habitual basis.
• Shareholdings are exempt from wealth tax provided that all the following apply:

1. the company is a trading company
2. you own at least 5% of the share capital (or at least 20% including shareholdings belonging to a spouse or other family members)
3. you carry out managerial duties for the company
4. you derive a salary for such activities which is at least 50% of your total net earnings.

If your business assets are let property, certain conditions must be fulfilled for the rental activity to qualify as a commercial activity and be exempt from wealth tax. Firstly, you must have a building or premises for the exclusive use of the rental activity and not use a shared office. Part of a building can qualify provided the part used is separate from any other activity and is used solely for the management of the property business. Secondly, you must employ someone as staff on a full-time basis. This could be a spouse but he/she would need to be registered as an employee for social security in Spain and social security contributions must be deducted from their salary each month.

Wealth tax can be mitigated through special life assurance bonds that act as a “tax wrapper” protecting you from other taxes as well as wealth tax. Only an independent financial adviser who is fully conversant with tax legislation in both Spain and the UK can give you comprehensive advice on you how to legitimately reduce your Spanish tax and only pay what is necessary.

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