Little has been said so far about the effects of Brexit on the Spanish taxation of UK residents and businesses. People living in Spain are also concerned that they might pay more tax on their UK income.
Less than nine months remain before the fateful date and it is time to get into the open what will happen to the taxation of 100,000s of UK citizens who either live in Spain, have holiday homes in Spain or have invested in Spain.
The fact is that on March 29, 2019 the Spanish tax system will change in a fundamental manner for UK residents and businesses.
Of course, we still don’t know how Brexit will work out. Negotiations remain excruciatingly slow, and it is not hard to imagine that something as esoteric as Spanish tax rules must be near the bottom of the pile of matters for discussion, if it is on any list at all.
From a tax perspective, Brexit will not be a good thing for many UK citizens, assuming that Brexit will not be fudged with the UK finishing up as an EEA member, like Norway. If this were to happen then there would be no real change as most Spanish tax rules treat EEA member countries the same as the EU.
Good news for people living in Spain as residents. The tax treaty between Spain and the UK will in no way be affected by Brexit.
This tax treaty provides Spanish residents with exemption from UK taxation on most income that they receive from UK sources, examples:
– UK company and private pensions and employment income. However, the UK applies income tax to civil service pensions.
– Capital gains from the sale of UK investments. However, UK real estate capital gains are taxable in the UK on the profit that arises after 5 April 2016.
– Business income received from UK sources, as long as there is no permanent establishment in the UK.
– Dividends, loan interest and royalties. However, the UK could tax non-residents receiving dividends but does not do so at present.
In effect, because the UK tax system does not distinguish between EU and non-EU residents, Brexit will have no effect on the UK taxation of Spanish residents.
Where Brexit will harm UK residents
Like most countries, Spain taxes income and capital gains received by non-residents. EU citizens are treated differently to citizens of other countries because the EU has successfully prosecuted Spain for taxing EU citizens in a discriminatory manner, compared to its own residents.
After Brexit, UK resident individuals and companies will lose EU protection and become subject to the same discriminatory tax system that applies to all non-EU residents.
The UK/Spanish double tax treaty provides some protection, but the problems will apply to UK residents in these circumstances:
In summary, after Brexit the big losers will be
– The hundreds of thousands of UK residents who own Spanish holiday homes. They will pay 5% more tax on deemed rental income.
– Rental income will not only suffer an extra 5% tax but no property expenses will be allowed as a deduction.
– Depending on where property is located, UK residents may suffer a very significant tax disadvantage on inheritances and gifts of Spanish assets.
These problems are not difficult to fix and a simple agreement between Spain and the UK is all that is required to ensure that UK residents are not treated unfairly, in comparison with Spanish and EU residents.
Words Alistair Spence Clarke, FCA
Spence Clarke & Co, Chartered Accountants, Marbella