Spain Wealth Tax

This article will speak about the Spanish wealth tax, discuss ways to reduce it, and analyse some positives and negatives associated with implementing the tax.

Whilst this article shouldn’t be considered tax advice, it is true at the time of writing.

If you want to invest in a tax-efficient way or ask me some questions, you can contact me using this form, or use the chat function below.  

Wealth Tax definition:

Tax – ‘Tax’ is a form of mandatory charges that have to be paid to the government by the citizens.

Taxes are applicable on citizens in various forms such as ‘Income Tax’, ‘Social Security Tax’, ‘Sales tax’, ‘Capital gains Tax’, ‘Property Tax’, ‘VAT’, ‘Wealth Tax’, ‘Property tax’, ‘Business Tax’, etc.

With the help of the revenue collected from the taxes, governments often cover their expenditure.

Some of the basic expenses of a government include paying professionals that work for the government, renovations of the government properties such as highways, roads, etc., and welfare activities taken up by the government.

Wealth Tax – Wealth Tax is the type of tax that is imposed on an individual residing in a country based on the assets owned by them. Wealth Tax is also known by the names ‘Capital tax’ and ‘Equity Tax’. 

Wealth Tax is applicable on an individual by taking into consideration of the assets under the person’s name such as ‘Cash’, ‘Bank Deposits’, ‘Properties (both movable and immovable)’, ‘shares’, ‘funds’, etc. In general words, the wealth tax is applicable by taking the market value of all the assets under a person into consideration.

For example, let us assume that if the wealth tax of a country is 1% of the total wealth of an individual.

If a person has 10 million dollars in the form of cash and shares and he also has another 10 million dollars in the form of real estate property, then the person is charged with wealth tax for 20 million dollars combined which would be $200,000 (1% of 20 million dollars). 

The liabilities (such as mortgage payments, loan payments, etc.) will be deducted from the wealth tax.

They would fall under the category of ‘Net Wealth Tax’. Therefore, in order to calculate the wealth tax of a person, we would have to subtract the liabilities from the net worth, which means the amount spent on the liabilities would be returned back to the citizen in the form of a discount on the Wealth Tax.

Many countries that used to have wealth tax such as ‘Denmark’, ‘Germany’, ‘Sweden’, ‘Finland’, ‘France’, ‘Austria’, ‘Luxembourg’, etc., have stopped using it now.

The countries that successfully implement the wealth tax are ‘Spain’, ‘Switzerland’, ‘Norway’, ‘Portugal’, etc. 

Pros and Cons of a Wealth Tax:

Pros:

• Most people often argue that wealth tax is a good way of approaching to the rich people when compared to the income tax. In general, it is imposed on high salaried professionals/wealthy individuals as good as it targets the employees and middle-class people. People with more assets have to pay more taxes and people with fewer assets would have to pay lesser taxes.
  
• Wealth Tax often helps in motivating the people to utilize the unused money that can either be in the form of a bank deposit or a property. Usually, people with more wealth usually deposit money in a bank or buy a property and keep it aside.
  But if there was a wealth tax applicable, the unused money will be spent mostly in the form of taxes. In order to avoid such situations, one has to put that unused money into action. This will lead to the circulation of unused money owned by millionaires.

• Wealth Tax reduces the inequality among the taxpayers of a respective country. Let us take a look at a short example that supports this statement. It is known that the United States doesn’t impose the wealth tax upon the individuals, whereas, it makes use of income tax and property tax.
  In a survey conducted in 2018, it was found out that the richest 10% people of the US had 70% of the nation’s wealth out of which, the 1% richest individuals owned approximately 32% of the country’s wealth.
  There would a substantially equal effect on the rich individuals as there was on the normal people if the United States had a wealth tax.

Cons:

• The major disadvantage of a wealth tax is that it would lead to double taxation on an individual. This means if a person earns a good amount of money, he would have to pay income tax on the money he earns as well as the wealth tax for possessing the same money for which he had paid the income tax for. Most critics say that this would not be considered fair regarding public policy. Most countries have stopped collecting wealth tax considering this major reason.

• It would lead to a lack of interest in additional work. People would often back off from the additional work through which they can be able to make a few more dollars in order to avoid taxation. This would affect the country’s economy in a way and is hence considered to be another backdrop by many people.

• Relocation of wealth can also become a problem due to the wealth tax. People who want to be relieved of the wealth tax by relocating their properties overseas would be able to succeed and therefore would simply renounce their citizenship or would not choose to move to countries where the wealth tax is imposed on the individuals. 

• Wealth Tax can also become a problem to collect from all the individuals. Most people are very talented in hiding their assets in order to be free from taxes and this could cause a problem while collecting the wealth tax.
  In order to collect this kind of money from the individuals, the government would have to spend a lot of money, which is not considered a good idea in most countries.

Spanish Wealth Tax:

Introduction – There are many types of taxes applicable to the citizens of Spain which vary depending on the residential status of the citizens.

Although, one of the taxes that is applicable to the residents and non-residents is the wealth tax in Spain. It is applicable as per the overall value of the net worth of the individual’s worldwide assets for the resident citizens and assets owned only in Spain for the non-residents.

The wealth tax in Spain is also known by the names ‘Spanish Wealth Tax’ or ‘Patrimonio’. Spanish wealth tax is not applicable to all the assets owned by a person, there are some exemptions. Some of the taxable assets are ‘Real Estate’, ‘Savings’, ‘Antiques (not all)’, ‘Cars’, ‘Ships/Boats’, ‘Jewelry’, ‘Some types of investments’, etc.

History – First, the Spanish Wealth Tax was introduced in the year 1977 as a temporary tax and it was continued for more than 30 years.

After imposing the wealth tax for 30 years, on January 1^st of 2008 the wealth tax was suspended. Again, in the year 2011 (the taxable year 2011 – 2012), it has been brought back with some major changes and has been extended for the years 2013 and 2014 as well and afterward it has been decided as a permanent tax. 

By looking at this, we can come to the conclusion that a tax which is stated to be temporary by the government will not be temporary.

Taxation – Most people who wish to move to Spain or purchase a property there are aware of the general taxes such as income tax, inheritance tax, capital gains tax, etc.

But what they are not aware of is that Spain also imposes a Wealth Tax on the individuals additional to the general taxes. 

Spanish Wealth Tax is applicable to both the resident citizens as well as the non-resident citizens of Spain.

Residential citizens are subjected to the Spanish wealth tax on their assets worldwide with the privilege of a few allowances, whereas, non-residents are subjected to the wealth tax for the assets they own in Spain.

Non-residents might lack some of the allowances that are applicable to the residents.

Wealth tax is managed by independent governments who can either follow the national laws while imposing or they can make laws of their own.

These laws are primarily focused on aspects such as ‘Tax-free allowances’, ‘Tax deductions & Tax rebates’, and ‘Imposed Tax Rates’. 

Most regions just follow the rules based on the national law for the Spanish Wealth Tax, whereas, some regions like ‘Catalonia’, ‘The Balearics’, ‘Andalucia’, and ‘Valencia’ have made some laws on their own. After the wealth tax has been made permanent, many regions were suggested to review their laws. 

Residents of Spain are subjected to the laws depending on the region of their location.

Non-residents are always subjected to national laws despite the location of their property. Some regions implement a tax rebate of 100 pc for the residents. This means that the residents of this region are not subjected to a wealth tax. 

Under the national law, any non-resident is required to hire a fiscal representative such as a lawyer or a gestor.

This is mandatory and the people should keep in mind the extra charges that involve in hiring a representative.

Deductions – As we have mentioned earlier, both the residents and the non-residents are subjected to the Spanish Wealth tax. However, there are some deductions, which means a person is not required to pay the wealth tax for their wealth ranging up to a certain limit.

• The limit for individual deduction in the case of residents is €700,000. This previously used to be €108,182. There is no individual deduction in the case of non-residents, which means that they cannot avoid the wealth tax despite the range of their wealth.
  This differs if the individual is a resident of regions that make their own laws. For example, the individual deduction for the residents in Catalonia is €500,000 only.

• Residents can also enjoy the privilege of permanent dwelling deductions on their primary residence. In this case, the deduction is €300,000, which previously used to be €150,253. Similar to the individual deduction, the permanent dwelling deduction is also not applicable to the non-residents.

• Married couples are sanctioned with a deduction which is combined with the individual deduction as well as the primary dwelling deduction.
  For example, a married couple, either resident or non-resident are entitled to a combined deduction of €1.4 million on the wealth they own.
  Including the primary dwelling (which should be owned in the joint names and is only applicable for residents), the couple is entitled to a €2 million tax-free allowance, where €1.4 million is an individual deduction and €600,000 is the primary dwelling deduction.

Since the wealth tax is applicable on the total assets owned by a person, mortgage debts are to be deducted. This is applicable to both the residents as well as the non-residents.

Tax Rates – The Spanish Wealth Tax is based on a system, where people are subjected to a larger amount of tax if they own more property.

Hence, the wealth tax is considered to be a progressive tax. As we already know, tax rates differ depending upon the region. The tax rates based on the regions that follow the national laws are as follows:

These tax rates are general and applicable in the normal regions. The tax rate ranges from 0.2% to 2.5% depending on the range. The tax rates might differ for the regions that make special laws.

• For Catalonia, the tax rate ranges between 0.21% to 2.75%.

• For Asturias, the tax rate ranges between 0.22% to 3%.

• For the Region of Murcia, the tax rate ranges between 0.24% to 3%.

• For Andalusia and Cantabria, the tax rate ranges between 0.24% to 3.03%.

• For Valencia, the tax rate ranges between 0.25% to 3.12%.

• For Balearics, the tax rate ranges between 0.28% to 3.45%.

• For Extremadura, the tax rate ranges between 0.3% to 3.75%.

Not all regions have higher tax rates than the general tax rates. Some regions have very lower rates when compared to that of the general tax rates.

For Example, the tax rate in Madrid is 0%, which means the residents are not required to pay the wealth tax while residing in Madrid.

Assets included in the wealth tax:

The following assets are subjected to the Spanish Wealth Tax.

• Real Estate Property
• Bank deposits
• Temporary Income Sources
• Insurances
• Professional Activities
• Luxurious Assets/properties such as Cars, Planes, Jewelry, Boats, etc.
• Antiques and Arts
• Administrative concessions, Royal rights, and Intellectual property rights.

Assets that are not included in the wealth tax:

The assets which are excluded/exempt from the wealth tax are as follows:

• Household contents (other than the contents included such Jewelry, Antiques, Arts, etc.)

• Small businesses that are managed by owners.

• Family companies, that are eligible for certain criteria.

• Pension rights.

• Intellectual property rights that are owned by the author.

• Business assets (only when the business is the primary source of income for the taxpayer.)

• Shares are also excluded only if it is a trading company of which at least 5% of the share capital is owned by the individual (20% including the shareholdings belonging to the spouse or other members of the family).
  The total earnings should be at least 50% in this case and the person has to be involved in the managerial duties.

• Businesses involving property/rental development which qualify for the criteria of the commercial activity are also exempt from the wealth tax. The criteria for which the rental/property development business should qualify in order to become commercial activity is as follows:

1. A separate part of the property should be used for the management of business activities. A shared office of the property will not qualify for this.

1. At least one person of the staff involved in the business should be on a full-time contract basis. This person can be a spouse of the respective individual only if they are registered as a social security employee in Spain. A small part would be collected from their earnings every month.

As we have already discussed, loans and mortgage payments which are considered to be liabilities are also deducted from the wealth tax.

There are however some conditions for this to be applicable. For example, if the mortgage payment is for the primary dwelling, which is already eligible for a deduction, then the mortgage payment won’t be deductible from the wealth tax.

When it comes to non-residents, the liabilities would only be deductible if the mortgage payment is related to a Spanish property.

Other Taxation Details:

Property Value for taxation – While taxing the assets under a person for the Wealth Tax, the highest among the below mentioned three values is used.

• The ‘Cadastral Value’, also known as the ‘Valor Catastral’ or ‘Rateable Value’. This type of value is mentioned in the IBI receipt similar to that of the UK’s Council Tax. 

• The value that has been given by the Spanish Tax Office/Taxing Authorities taken into consideration for any other tax purposes.

• Price as per the title agreement also known as the price paid in the Title deed.

Bank Balance taxation – Bank Balances of an individual are taxed as per the closing balance of the individual’s respective account based on the information, which is usually provided by the bank. 

The closing balance is taken into consideration as of 31^st December or the average bank balance maintained within the last three months of a calendar year.

Tax returns and Payments – The form for the wealth tax should be completed after each year’s ending and tax must be paid between May and July for all the liabilities.

In the case of married couples, each of them should make individual returns on their behalf which should include the details of the joint assets and liabilities along with their personal assets.

Usufruct/Freehold Interest Valuation – Both the Usufruct holder as well as the Freehold Interest holder are subjected to a wealth tax. Usufruct is the right to legally enjoy the benefits that occur from another person’s assets. Whereas, Freehold Interest is the complete ownership of a land or property opposite to leasehold. 

The Usufruct value is calculated to be 70 percent of the original value of the property, where the age of the respective usufruct holder is less than 20.

The value is reduced by 1 percent to a minimum of 10 percent of the value of the property as the holder grows older. 

The Freehold Interest value is calculated to be the difference between the overall value of the property and the usufruct interest.

Personal Portfolio Bands – Personal Portfolio Bands and other Life Assurance Products are taxed in favor of the individual by aiding to reduce various taxes (including the Spanish Wealth Tax) legally. 

According to the Spanish Tax Regulations, it is stated that the increasing Wealth and Income taxes should not exceed 60% of the person’s respective overall taxable income (No limit exists in case of non-residents). It is subjected to a 20% minimum of the calculated wealth tax. 

In this way, any wealthy person in Spain can be able to avoid wealth tax. If a person chooses not to withdraw any amount from their contract with Life Assurance company within a period of 5 years, they can avoid the wealth tax.

Pension – Pensions and the assets included in them are not subjected to the Spanish Wealth Tax. Therefore, a person can choose to invest in any type of assets within a Pension scheme and can avoid wealth tax. 

One of the best ways to utilize the pension schemes is to make use of a ‘QNUPS’ (Qualified None UK Pension Scheme). This is the best way as they contain various assets, which are tax-efficient and are also excluded from the UK Inheritance Tax.

Conclusion:

Taxes are one of the major issues that need to be taken into consideration, particularly if a person is thinking about moving to a different country. It is important that a person should get familiar with all the taxation-related details of the respective country that they wish to move to. 

If you are willing to move to Spain or planning to purchase a property in Spain or about to make an investment, it is better to get familiar with all the taxes in Spain including the Spanish Wealth Tax. 

A person cannot reduce the taxes in Spain by knowing about all the details related to Spanish Wealth Tax on their own.

Hence, it is ideal for anyone to create a strategy that is optimized and is created based on thorough planning. For this, they would have to consult a Spanish lawyer or a financial advisor (like us) regarding the details.

Optimizing taxes can lead to more profits. Hoping that this article was useful for you, we wish that you have maximum gains on all your assets.