A possibility might be a wealth tax – an annual tax on the value of national or worldwide capital assets. In some countries, the band of assets it is charged upon is restricted – commonly to real estate – while in others there is a much wider scope.

In all cases the tax is payable each year. For those bearing the brunt, it becomes just another layer of annual taxes, mainly paid from income and a particular burden for those who are ‘asset-rich, income-poor’. Three countries with forms of wealth tax are France, Spain and Portugal.

Table: Wealth taxes in Spain, France and Portugal

Source: Blevins Franks

*You are only liable to wealth tax in France if the value of your chargeable assets exceed €1.3m (£1.12m, $1.42m), but once exceeded, wealth tax is payable from €800,000 upwards. The tax is based on the wealth of the household.

**Spain has a €700,000 personal exemption and a separate €300,000 main home exemption.

The scope of wealth tax in France was severely restricted in 2018, with it now only applying to property. Residents are liable to wealth tax on their worldwide real estate, while non-residents are only liable to wealth tax on their French real estate.

The UK/France double tax treaty provides substantial relief from French wealth tax for UK nationals. For the first five French tax years after becoming a resident of France, the wealth tax will only be charged on real estate assets in France.

Over the years, Spanish wealth tax has been on and off, depending upon the state of the Spanish economy, but in 2021 the Spanish general budget fully reintroduced wealth tax.

Like France, Spanish wealth tax is payable by residents on their worldwide assets, and non-residents on their Spanish assets. But unlike France, the liability is not based on the household, but the individual, with joint asset values divided 50-50, and is chargeable on the value of most capital assets, rather than just real estate.

Certain assets are exempt, including the first €300,000 of value in the main home in Spain.

Spain has 17 autonomous regions, each able to set its own wealth tax rules, leading to significant differences in rates. Some regions like Madrid and more recently Andalucia provide a 100% exemption. The potential for other regions following this initiative led the national government to introduce a new state Solidarity Tax on Large Fortunes, which the regions cannot alter or exempt.

The exemptions mirror wealth tax, with the next €3m at 0%, so the first tax charge at 1.7% only kicks in at wealth over €4m (€8m for a married couple). To avoid double taxation, taxpayers can deduct the wealth tax liability already paid from any Solidarity Tax liability.

Portugal began charging a form of wealth tax in 2017, based solely on the value of Portuguese real estate with a higher registered value, as an addition to their version of council tax (IMI).

Every person is entitled to a deduction of €600,000, so couples who are both the registered owners of a property have a €1.2 million exemption. Beyond this value, tax is charged at 0.7%, then 1% when the taxable value exceeds €1 million (or €2 million for a couple), then 1.5% over €2m (€4m for a couple).

There is some degree of tax break in France and Spain, for those people you might describe as ‘asset-rich, income-poor’, where the sum of a number of taxes, including wealth tax cannot exceed a certain percentage of the individual or couples’ income.

In France it is the combined French income tax, wealth tax and social charges cannot exceed 75% of total income. If it does, the taxpayer can claim a refund of the excess taxes paid. In Spain, the cumulative wealth and income taxes cannot exceed 60% of the general and savings net taxable base income, subject to paying a minimum of 20% of the full wealth tax liability.

In both states it is beneficial to invest in assets or products which limit taxable income. With the correct advice, certain tax efficient investments and financial products, it is possible to manage the situation and minimise one’s exposure to wealth tax. On the other hand, a concentration in real estate is likely to maximise one’s liability.

If the UK were to follow the same path as some EU member states and introduce a wealth tax, then it might well encourage a shift in how and what the wealthy in the UK invest in, and potentially lead to a shift away from property, towards more wealth tax-beneficial investments.

This article was written for International Adviser by Jason Porter, business development director at Blevins Franks.

While exclusions include pension rights (other than purchased annuities), a May 2019 binding ruling from Spain’s Directorate-General for Tax (DGT) concluded that non-EU pension plans do not qualify for the wealth tax exemption, stating ‘the consolidated rights and economic rights of pension plans established in non-EU Members States may not benefit from the exemption’.

This means that Spanish wealth tax now applies to a UK pension fund, from the point at which a member can take benefits, currently age 55. UK personal pension funds will be added to other worldwide assets to calculate tax liability each year.

This is a new development, and a client could try defending their pension plan with the Spanish tax authorities. Alternatively, consider a transfer of the funds into a Spanish or EU pension plan, such as an EU-based Qualifying Recognised Overseas Pension Scheme (Qrops).

A couple’s wealth tax exemption amounts to €2m, including main home relief. The state rates start at 0.2% for wealth up to €167,129 and rise progressively to 3.5% for wealth above roughly €10.7m (£9.43m, $11.7m), while each Spanish autonomous region has its own set of rates.

A possible means of reducing wealth tax for a Spanish resident is utilising the rule which says the cumulative wealth and income taxes cannot exceed 60% of the general and savings net taxable base amount. While this limitation is subject to a payment of a minimum of 20% of the full wealth tax calculation, some relatively simple tax planning can reduce assessable income, and in turn wealth tax liability.

You should beware of a further 2021 binding ruling from the DGT, which sets out that a pension deemed to not originate from Spain, or from within the EU, protected under the 2016 EU Pensions Directive, which is transferred to another scheme, is a transfer of a third country pension resulting in the entire value of the pension being taxable.

Therefore, the potential transfer of a UK scheme to an EU-based Qrops to avoid Spanish wealth tax would also avoid Spanish income tax on the transfer only if it occurs prior to the scheme holder acquiring tax residence in Spain.

This article was written for International Adviser by Jason Porter, director of expat financial planning firm Blevins Franks.

It will be rolled out at a national level rather than devolving it to the different regions to stop the autonomous communities from changing the tax rates or introducing additional allowances.

For instance, the region of Andalucía recently scrapped the existing wealth tax.

The solidarity tax is supposed to be temporary and will apply for two years after it comes into force.

It will be levied on 31 December each year, meaning that if passed soon it could come into effect as early as 31 December 2022. If not, it will begin from the end of 2023.

As it stands, the solidarity tax will apply to taxpayers who have a net worth over €3m (£2.6m, $3.1m)

Spain's Solidarity Tax rates

The draft legislation states that a taxpayer’s total combined individual income tax, wealth tax and solidarity tax should not exceed 60% of their taxable income, but they will need to pay at least 20% of the solidarity tax, explained Nicole Booth, UK and international tax director at De Giorgio Wealth Management.

If an individual owes both wealth and solidarity taxes, then the liability under the wealth tax is credited against the solidarity tax for that year.

Taxpayers will also have a €700,000 allowance, plus €300,000 against the value of their main home.

Additionally, overseas wealth taxes paid on the same assets can be deducted.

Any individual not resident in Spain or in an EU or EEA country will be legally required to appoint a fiscal representative to file the relevant returns.

International law firm Garrigues added that there are also changes to the treatment of assets held by non-resident taxpayers.

If they have securities representing “holdings in the equity of entities” that are not traded on organised markets and with at least 50% of those assets consisting of Spanish real estate, the assets “will be deemed to be located in Spain”, the law firm explained.

Spain has recently imposed significant windfall taxes on the largest energy companies and banks and swung a scythe through the sales tax imposed on natural gas, reducing this from 21% to 5%.

But it is in the area of taxation, where the different political positions of those parties in power at a regional and national level have resulted in conflicting ideas.

Spanish wealth tax

Wealth tax was introduced in Spain in 1977, but in December 2008 it was effectively suspended by way of a 100% tax deduction.

In September 2011, the socialist government, with severely reduced tax revenues following the 2008 economic crash, was forced to reinstate wealth tax as a supposedly temporary measure, though it remained until 2021, when it finally became permanent, with the abolition of the 100% tax credit.

Wealth tax as it stands includes a €700,000 (£610,585, $694,463) exemption per person, along with a further €300,000 for the main home. Thus, a couple could have up to €2m of relief. Wealth tax kicks in at 0.2% on the next €167,129 of wealth, rising up to 3.5% on assets valued in excess of roughly €10.7m.

Spain, one of the most decentralised of European states, has 17 autonomous regions, each having considerable leeway in deciding roughly 50% of the income taxes charged on their residents, as well as having freedom in deciding what to do with wealth and estate taxes.

Madrid is a region that has been at the forefront of developments in this area, deciding many years ago to maintain a 100% wealth tax deduction.

New kids on the block

More recently, Juanma Moreno, leader of the right-wing Partido Popular (PP) party and President of Andalusia decided wealth tax was “an obstacle for investment”, and introduced a 100% tax deduction, like that of Madrid.

His view, that the reduction in tax collection – calculated at 0.6% of Andalusia’s annual tax revenue, or €95m – is not a great loss, compared to the estimated increase in 7,000 wealthy new residents it was hoped would be encouraged to move there as a result of this, along with an income tax reduction.

Moreno’s comment that “We were a tax hellhole but now we’re the region with the second lowest taxes in Spain,” seemed to resonate amongst other PP regional leaders, with Murcia and Galicia also considering similar wealth tax deductions.

Computer says ‘no’

Perhaps Madrid’s PP leader, Isabel Diaz Ayuso’s comment of, “Welcome to paradise”, referring to her fellow regional leaders moves to join Madrid in eliminating wealth tax, may have been the straw that broke the camel’s back.

The national government, headed by Socialist prime minister Pedro Sanchez, saw these moves as endangering a strong welfare state, in favour of “tax gifts to the minority”.

While there is not even a bill yet to put before the Spanish Parliament, and the government would still need to obtain a majority in a vote, the fact they aim to put it through an ‘urgent legislative’ procedure proves the governments’ opposition to the position taken by Andalusia, and the potential for a domino effect across other autonomous regions.

The only real difference the new has over the old wealth tax is the inability of the autonomous regions to adjust the reliefs and tax rates themselves – the new solidarity tax is controlled centrally, allowing only the national government to decide its operation.

The new tax is expected to be charged at 1.7% on wealth exceeding €3m, at 2.1% between €5-10m and 3.5% thereafter. Spanish taxpayers finding themselves liable to both the old and the new taxes will be able to set one off against the other.

It is estimated that the new tax will affect 23,000 taxpayers, which is 0.1% of Spain’s population, and is expected to collect around €1.5bn across 2023 and 2024.

In addition, the government announced an increase in capital gains tax for gains over €200,000, to 27% (1% increase), and 28% for gains over €300,000 (2% increase). The detail on these tax changes, and others, is not expected until later this year but they are required by Brussels in order for Spain to receive its share of the EU’s post-pandemic recovery scheme.

From a Spanish perspective, the political left and right’s tax moves show the deep ideological differences between both ends of the political spectrum, which will inevitably play out in the May 2023 regional elections and the general election, expected before the 2023-year end.

This article was written for International Adviser by Jason Porter, director of specialist expat financial planning firm Blevins Franks and head of its European emigration advisory service.

Spanish nationals and foreigners within the Andalusian region will no longer pay tax on their worldwide assets of over €700,000 (£612,260, $694,110).

Andalucia is an autonomous community in Spain. The territory is divided into eight provinces: Almería, Cádiz, Córdoba, Granada, Huelva, Jaén, Málaga, and Seville, which is the capital city.

Juanma Moreno, the president of the Andalucían government, announced on 19 September 2022 that the region will abolish the wealth tax with immediate effect.

He also added the it is set to reduce personal income tax by 4.3% and abolish the water tax.

Tax regime

Accountancy firm Spence Clarke assessed the advantages of living in Andalucía, effective immediately, which include:

• Virtually nil inheritance and gift tax for close family;
• Maximum investment income tax of 26%. The rates are between 19% and 26% with the top rate only applying on income over €200,000;
• Capital gains tax rates of 19% – 26%, same as investment income;
• Buy to let residential letting net income taxed at an effective maximum tax rate of 20%;
• Letting income is calculated after deducting all related expenses, including loan interest;
• Private pensions are treated as investment income, taking income as the difference between sums invested and sums withdrawn. In some cases, tax can be as low as 2.5% of income drawn; and
• A full range of international tax treaties that ensure that double taxation almost never happens.

Alistair Spence Clarke, founding partner of Spence Clarke, said: “We know from discussions in the past with many, many, individuals wishing to move to Spain that they decided they couldn’t, often simply because of wealth tax. So, getting rid of this tax will be a true game changer, especially when combined with near exemption from inheritance tax and the relatively attractive income tax regimes.

“We also predict that most of those that decided on basing themselves in other countries like Portugal will now change their minds and move to Andalucía full time. Many people who opted for residence in Madrid will now rethink their situation and move to one of the best areas of Spain, with all the benefits of the sea, mountains and inland beauty of Andalucia.

“There is no doubt that Andalucia is now going to present real competition for Madrid. Areas like Cataluña, the Balearics, Valencia and Murcia need to seriously rethink their tax systems and stop scaring off wealthy foreigners and Spanish nationals, with punitive taxes that are principally motivated by left wing political dogma.”

‘Shrewd move’

Victor France, group chief executive of Abbey Wealth, said: “We speak with lots of potential expats who have found the wealth tax a barrier.

“A more attractive tax regime will certainly add to the appeal of the region and is a shrewd move by local government to encourage more high net worth individuals, investors and businesses to establish their permanent residence in the region.”

Blacktower Financial Management added: “This is being done in an attempt to attract high-level tax payers to the area and to encourage them to remain in Andalucia permanently in order to bring an increased level of investment into the area.

“This follows 20 of the top wealth tax payers leaving the region in 2022, taking with them €18m worth of tax. This is predicted to attract 7,000 new residents to the area, the economic benefits of which will exceed by far the 0.6% of regional income provided by wealth tax in previous years.”