The tax landscape in Mallorca in 2017
It is important to review your tax planning from time to time, to check that it is up to date with Spanish tax reforms over recent years as well as international developments that may affect you. You also want to make sure you are using all the opportunities available in Spain to reduce tax liabilities for yourself and your heirs.
This article summarises the key taxes affecting residents of Mallorca and those owning property here.
The 2017 state budget did not introduce any changes to the progressive rates of income tax. The rates are therefore as follows:
Income € Tax rate
0 – 12,450 19%
12,450 – 20,200 24%
20,200 – 35,200 30%
35,200 – 60,000 37%
Over 60,000 45%
These rates are made up of state and regional rates, and each Autonomous Community can amend their local rates. Last year, in Islas Baleares, the income tax rates ranged over 13 income tax bands from 19% to 47.5% (for income over €175,000). At the time of writing the Balearics government has just finalised its 2017 budget and it seems that there are no changes here, so the same income tax rates will apply in 2017.
The above rates only apply to general income (employment, pension, rental income, etc).
The 2017 rates for savings income are:
Income € Tax rate
0 – 6,000 19%
6,000 – 50,000 21%
Over 50,000 23%
Note that when it comes to tax on capital gains, since 2015 all gains
are taxed at the savings tax rates, even those arising on assets held for less
than a year.
Savings income covers interest, dividends, income derived from life assurance contracts, purchased annuity income and capital gains on the sale or transfer of assets.
Non-residents who earn income in Spain pay tax at fixed rates of 19% if they are EU or EEA residents or 24% if resident elsewhere. When it comes to rental income, EU/EEA residents can deduct allowable expenses and so are taxed on the net rental income. Non-EU/EEA residents are taxed on total gross income.
Wealth tax is possibly the most unpopular tax among Mallorca’s wealthier residents and property owners. The tax was ‘abolished’ in 2008, though in reality the legislation was kept in place and a 100% exemption was applied. Then the financial crisis hit and this exemption was cancelled for 2011-2012. Since then wealth tax has been extended year after year.
The 2016 Spanish general budget established a 100% relief for wealth tax from January 2017, but unfortunately this has not gone ahead. As part of measures to increase tax revenue in 2017, wealth tax has been extended again for 2017.
Spanish residents pay wealth tax on the net value of their worldwide assets as at 31st December. Non-residents are liable on Spanish assets only. In Islas Baleares, rates rise progressively from 0.28% to 3.45%. There are however reductions available, ranging from €700,000 to €1 million for local residents, depending on whether you own your home or not.
This can be a tough tax for wealthy residents. If you are affected seek specialist advice on how you may be able to reduce it, particularly on your investment capital where the way you hold assets can make a considerable difference.
Succession and gift tax
Spanish succession and gift tax affects everyone living here or owning local property or other Spanish asset.
Tax is paid by each recipient and spouses are not exempt. Allowances under the state rules are just €15,956 for spouses, descendants and ascendants, €7,993 for other close relatives and nil for everyone else. There is a 95% allowance against the main home (with a maximum of €122,606 per inheritor) when inherited by a spouse or descendant and kept for at least 10 years.
Under state rules, tax is applied at progressive rates from 7.65% to 34%. Multipliers, depending on the relationship and the recipient’s net worth, mean the tax can rise to 82% in extreme cases.
In Islas Baleares, the allowance for spouses, descendants and ascendants (groups I & II) increases to €25,000. Additionally, they only pay 1% tax on inheritances under €700,000. Above this amount the tax rate ranges from 8% to 20% for these beneficiaries. Higher rates apply for other beneficiaries. Children under 21 have higher allowances and 99% reduction on inheritances. The main home relief in this region is 100% with a maximum of €180,000.
UK nationals need estate planning to cover both Spanish succession tax and UK inheritance tax.
Do not forget that Modelo 720 needs to be submitted by 31st March 2017, reporting the non-Spanish assets you owned at 31st December 2016 if you were resident in Spain. You need to declare all overseas assets worth over €50,000. If you have submitted this form before, you only need to report again if the value of an asset increased by more than €20,000, or you sold an asset, closed an account, or obtained a new asset over €50,000.
Automatic exchange of information
The global automatic exchange of information regime, implemented under the Common Reporting Standard, is now in force. This year the Spanish tax authorities will receive information on all its taxpayers’ overseas financial assets from 54 jurisdictions. A further 47 countries will start to collect data in 2017, ready to exchange it in 2018.
The loss of financial privacy affects us all. If we live in one country and have assets in another, our information will be shared between countries. Our local tax authority will automatically receive information on the financial assets we own overseas, without asking for it, regardless of whether they have any questions about our tax affairs. If you live in Mallorca and have, for example, investments in the Isle of Man, or bank accounts in Switzerland, or pension funds in the UK, the Spanish tax authorities will receive information on these assets.
Cross-border tax planning is complex. You need to ensure you are declaring income and paying tax in the right country, and are only using legitimate tax planning arrangements.
With specialist advice you can often use compliant arrangements to reduce tax on your savings, investments, pensions and assets. Blevins Franks has been advising UK nationals in Spain on their tax and wealth management for over 40 years, and has had a Mallorca office for 20 years. We have in-depth knowledge of Spanish taxation and how to use tax regime to your advantage - with the right tax planning Spain can be very tax efficient for retired expatriates.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
Blevins Franks Financial Management Limited (BFFM) is authorised and regulated by the Financial Conduct Authority in the UK, reference number 179731. Where advice is provided outside the UK, via the Insurance Mediation Directive from Malta, the regulatory system differs in some respects from that of the UK. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts and companies. Blevins Franks Tax Limited provides taxation advice; its advisers are fully qualified tax specialists. This promotion has been approved and issued by BFFM.
Read more about the financial issues that can affect you on our website www.blevinsfranks.com