Spanish Wealth Tax (Patrimonio)

Raymundo LarraĆ­n Nesbitt, November, 8. 2011

The Spanish wealth tax, known as patrimonio, might catch you buy surprise. It has been reintroduced during Spain’s financial crisis, but with a much higher tax-free allowance of €700,000 per person that also applies to non-residents.

The information for this article was provided by Blevins Franks, an international tax advisory service, and updated by Raymundo Larraín Nesbitt, a lawyer qualified to practise in Spain. This information is provided to help you do your background research, but not as a substitute for qualified legal advice.

 

 

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of November 2011

Spanish Wealth Tax History

1977: Introduced as a temporary tax, still going strong more than thirty years later.
2008: Suspended (set to zero) as of 01/01/2008
2011: Restored for tax year 2011 & 2012 (with important changes to the taxable base)
2013: Extended for the year 2013 & 2014

Never believe claims that a new tax is just a temporary measure!

The Wealth Tax (Patrimonio) in Spain

Most foreigners moving to Spain or buying property there understand that they will have to pay Spanish taxes like income tax, capital gains tax and inheritance tax. Not everyone, however, is aware that Spain imposes an extra tax, one with no equivalent in the UK and which is payable on top of the other Spanish taxes: The Wealth Tax in Spain.

Spanish Wealth Tax is payable by both residents and non-residents (if they own property in Spain), although the rules are different. Residents pay wealth tax on their worldwide assets but have quite generous tax-free allowances, whereas non-residents are only liable on net assets within Spain but miss out on some of the allowances.

Spanish Wealth Tax Legal Background

Wealth tax legislation is devolved to the autonomous governments, who can either use the national law, or pass their own laws on the following:

1. Tax-free allowances
2. Deductions and tax rebates
3. Levied tax rate

Some regions, like Catalonia, Valencia, The Balearics, and Andalucia, have passed their own laws. Others just use the national law. Now that the wealth tax has been re-introduced (September 2011), some regions are expected to review their laws.

Residents are subject to the laws of the autonomous regions where they live. Non-residents are always subject to the national law, regardless of where the property they own is located.

For residents, some regions apply a tax rebate of 100pc; meaning no wealth tax to be paid, whilst other regions apply no rebate, meaning the wealth tax must be paid in full. This disparity in laws leaves the door ajar for tax mitigation strategies for residents should the tax outlive its foreseen two-year period.

This guide only deals with the national law. If you live in Spain, and fullfil the conditions of residency, you need to consult a local tax specialist for more information.

Under this law, non-residents are also obliged to appoint a fiscal representative living in Spain, for example a lawyer or gestor. That will be an extra cost to bear in mind.

Timeframe

Its reintroduction, following the published law, will only be for a two-year period, 2012 and 2013, which corresponds to tax periods 2011 and 2012, respectively.

The reason, following the law’s own wording, is to “weather the financial storm which afflicts Spain at a time where those who own more have the moral obligation to contribute more to society following the legal principle enshrined by art 31 of Spain’s Constitution”. As from 2014 this tax will be abolished, in theory, again. Don’t hold your breath.

Wealth Tax in Spain – Deductions

Residents and non-residents are entitled to the following deductions per person:


– Individual deduction: €700,000 (previously €108,182.18 for residents, €0 for non-residents). Note that in Catalonia the deduction is €500,000.

 

Residents are also entitled per person to:


– Main home / permanent dwelling deduction: €300,000 (previously €150,253.03 for residents, €0 for non-residents)

 

Non-residents, by definition, cannot benefit from a permanent dwelling deduction

A married couple would each be entitled to the individual deduction as well as the deduction on their share of the main home owned in joint names (residents only).

So, for example, a married couple, resident and non-resident alike, has a combined tax-free allowance of €1,400,000 on their net estate. Taking into account a main home, a resident married couple has a total tax free allowance of €2,000,000.

Also note that this tax is on net assets, which means you can deduct mortgage debts (residents and non-residents alike)

Spanish Wealth Tax Rates

The wealth tax follows a progressive sliding scale, the larger the estate, the more you are taxed, with a cap set at 2,5pc for estates in excess of €10,7mn.

As stated above, the first €700,000 is the national tax-free allowance (for residents and non-residents alike).

The current rates under the national law for 2011 and 2012, applicable to net wealth on 31st December of each year, after all relevant deductions, are as follows:

Excess as from € 700,000 To € Tax rate % Total 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

 

In Madrid, the tax rate for Patrimonio is currently set at 0%, so residents of Madrid do not have to pay any Patrimonio wealth-tax.

What’s Included in Your Estate

This tax is accrued on all your net assets held on the 31st of December of each year:

1. Real estate
2. Professional activities
3. Bank deposits
4. Insurances and temporary income sources
5. Luxury assets such as: jewellery, fur coats, racing cars, yachts, aeroplanes
6. Works of art and antiquities
7. Royal rights, administrative concessions and intellectual property rights
8. Contractual options and the remainder of economic rights

Assets Exempt From The Wealth Tax

Some assets are exempt from wealth tax. These include:

  • Household contents (but excluding jewels, fur coats, vehicles, boats, art, and antiques)
  • Owner managed small businesses
  • Family companies meeting certain conditions (shares in property investment companies are not exempt unless the company carries on a commercial activity – see below)
  • Pension rights
  • 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 (i.e. the income from the business must constitute at least 50% of his taxable income) and the activity must be carried out by the taxpayer on his own account and on a habitual basis.

 

Where a rental/property development business is carried out, the following conditions must be fulfilled for the activity to qualify as a commercial activity. Provided these conditions are fulfilled, the properties used in a rental/development business can be exempt from wealth tax in Spain.

1.There must be premises used exclusively for the management of the business activity. Part of a building can qualify provided the part used is separate from any other activity and is used exclusively for the management of the property business. A shared office will not qualify.

2.There must be at least one member of staff employed on a full-time contract. This could be your spouse but he or she would need to be registered as an employee for social security in Spain and contributions would be deducted from their salary each month.

Shareholdings are also exempt from wealth tax provided:

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

Spanish Property values and the wealth tax

When working out the value of all your eligible assets each year, you must value your property at whichever is highest of the following values:

1. Catastral value (this value is included in your IBI receipt, akin to the UK’s Council tax)
2. Assessed value by Tax Authorities on filing other taxes
3. Price paid in your Title deed

Liabilities in general reduce taxable wealth, but not where it is a loan used to buy an asset that is specifically exempt or covered by exemptions. So where a mortgage is for the purchase of the main home (the value of which for wealth tax is covered by the main home exemption) no deduction is available for that mortgage.

For a non-resident, only Spanish liabilities would be taken into account and there is no exemption to consider. To obtain relief it would normally have to be a Spanish mortgage attached to a Spanish property.

Spanish Wealth Tax – Bank Balances

Bank balances are valued at the higher of the closing balance on 31st December or the average balance during the 4th quarter.

‘Personal Portfolio Bonds’

Life assurance contracts (such as a ‘Personal Portfolio Bond’) are taxed very favourably in Spain, helping to legally reduce various Spanish taxes including wealth tax.

The Spanish tax regulations state that cumulative wealth and income taxes cannot exceed 60% of a resident’s total taxable income (there is no limit for non-residents), subject to a minimum of 20% of the wealth tax calculation. This is a major way that a wealthy person can avoid wealth tax as a resident of Spain.

If you are able to tie up your capital for five years, you can also set up your Personal Portfolio Bond so that the life assurance has no immediate ‘value’ at all and can therefore be excluded from your wealth tax return. All you need to do is agree with the life assurance company that the contract cannot be redeemed for five years and one day. This will mean that no withdrawals are possible for the first 5 years, so you will first need to ensure that this is the best option for you.

Joint Income Tax Returns for the Wealth Tax in Spain

If you are married and have opted to file a joint income tax return, then to calculate your 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 your spouse and yourself in proportion to the amount of each of your taxable wealth.

Returns and Payments

Where there is a liability, the wealth tax form must be completed after the end of each year and the tax is payable between May and July. Husband and wife need to make separate returns reflecting their shares of any joint assets and liabilities in addition to any personal items.

Whether you are buying property in Spain as a holiday home or investment, or if you are planning to move there permanently, it is important to make sure you are informed of all the tax issues in advance. Many British people are caught out by rules they were not aware of and this can result in more tax being paid than necessary. Professional advice will prove invaluable, and in order to make sure you are fully informed and kept up to date with any changes, find an adviser who specialises in both Spanish and UK taxation.

+ The official decree bringing back patrimonio (pdf in Spanish)
+ Summary of the new conditions from the Spanish Tax Authority (Agencia Tributaria) pdf in Spanish


The information for this guide was provided by Blevins Franks and Raymundo Larraín Nesbitt (a Spanish-qualified lawyer).

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2007 © Blevins Franks and 2011 © Raymundo Larraín Nesbitt. All rights reserved.

 

Spanish Wealth Tax Rates and Conditions in the Past

The rates for 2007 returns (applicable to the net tax base of wealth owned on 31st December 2007) were as follows:

From € To € Tax rate % Total 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

Wealth tax in Spain Deductions

Residents

  • Individual deduction: €108,182.18
  • Own home deduction: €150,253.03

 

A married couple would each be entitled to the individual deduction as well as the deduction on their share of the main home owned in joint names.

Non-residents

If you own property or other assets in Spain but are not resident there, you are not entitled to any deductions and have to pay wealth tax on these assets at the rates above. It may only amount to a few hundred Euros, depending on the value of the property, but you will always have some liability as a non-resident owner of Spanish property.

 

The information for this guide was provided by Blevins Franks and Raymundo Larraín Nesbitt (a Spanish-qualified lawyer).

 

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Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2.007 © Blevins Franks and 2.011 © Raymundo Larraín Nesbitt. All rights reserved.