Wealth tax in Spain can be tricky, especially for expats with high-value assets. That’s because the tax is imposed on your worldwide net worth, including properties, investments, and other valuable assets. While the tax rates vary across Spain's autonomous regions, it can be particularly punitive for high-net-worth individuals.
The 60% rule can help mitigate your wealth tax in Spain. But what is it and how does it work?
What is the Wealth Tax 60% Rule in Spain?
The 60% rule is a provision in Spanish tax law that limits the combined burden of wealth tax (Patrimonio) and income tax (IRPF) to a maximum of 60% of an individual's taxable income. This rule applies to both Spanish residents and non-residents, including UK and other EU expats residing in Spain.
Let's say you're a UK expat living in Spain with a taxable income of €100,000 and a net worth of €5 million. Without the 60% rule, your wealth tax liability could be as high as €80,000. However, with the rule in place, your combined wealth and income tax cannot exceed €60,000 (60% of your taxable income). This effectively caps your wealth tax liability.
Who is liable for Wealth Tax in Spain?
Both residents and non-residents are subject to wealth tax in Spain. However, there are important distinctions:
Residents: Spanish residents are liable for wealth tax on their worldwide assets.
Non-residents: Non-residents are only liable for wealth tax on assets located within Spain.
It's important to note that Spain's autonomous communities (ACs) have the authority to apply regional variations to the wealth tax rules. This includes adjusting tax rates, allowances, and exemptions.
Tax-free allowances are available, consisting of a national exemption of €700,000 per person and an additional main residence uplift that varies by AC. For instance, Andalusia provides an extra €300,000 exemption (€600,000 for married couples).
How to Reduce your Wealth Tax Burden with the 60% Rule in Spain
The 60% rule can help lessen your wealth tax liability in Spain. By investing in Spanish-compliant investment bonds or other tax-efficient structures, you can reduce your taxable income base, thereby lowering the combined tax liability to the 60% cap.
Are there Other Ways to Reduce Wealth Tax in Spain?
Spanish Compliant Investment Bonds: These tax-efficient investment vehicles can help minimise your tax exposure on capital gains and future income withdrawals.
Retirement Planning: This includes the use of tax-advantaged accounts like Spanish Pension Plans (Planes de Pensiones). It can help shelter a portion of your assets from wealth tax.
Asset Structuring: Consulting with a financial advisor to explore asset structuring options, such as trusts or offshore holdings, may help minimise your wealth tax exposure in Spain.
Conclusion
The 60% rule in Spain offers significant relief for high-net-worth individuals by capping the combined wealth and income tax at 60% of taxable income. By strategically managing investments, utilizing tax-efficient structures, and exploring retirement planning options, expats and residents alike can reduce their wealth tax burden. Consulting with a financial advisor can provide tailored strategies to ensure optimal tax efficiency and compliance with Spanish tax laws.