INCOME TAX REGULATIONS FOR RESIDENTS


I have touched on this subject in previous articles, but this week I thought we could look in detail at some of the provisions for a resident British individual when making an Income Tax Declaration.

Before I begin, I will just recap on the rulings for tax liabilities for those of you who are non-resident: for each property owned, an annual Patrimonio (Wealth Tax) and Renta (Own Use Income Tax) payment should be made.  The Patrimonio is calculated at 0.2% of the declared value as shown in the Escritura - or rateable value, whichever is higher -  and is payable for the whole year hatever month the property was bought.  The Renta is calculated at 1.1% of the rateable value x 25%.  This is proportional, and therefore due only for the months after the property was purchased.  This tax is always paid a year in arrears, and can be administered at any time throughout the year.  

So - turning to Income Tax Declarations for residents, these are also always payable in arrears, so in 2003 taxes will be due for the year 2002.  The Spanish tax year runs from 1st January to 31st December, unlike the British system which still employs the April to April financial calendar.  Income Tax Declarations have to be made at a specific time of the year, commencing at the beginning of May until 21st June.  A late declaration will attract a penalty payment, which is usually 5% of the tax amount to be paid.

At present, a Declaration can only be made by a Resident who has actually been issued a Residencia card.  There is a slight problem with the Residencia cards in that many people are not receiving notification letters that their Residencias are ready to be completed.  Until your cards have been signed and fingerprinted they cannot be regarded as fully processed, and I recommend that if you applied for your Residencia prior to December 2001 but have heard nothing to date, you make enquiries to ascertain if your card is ready.  

Once you have your Residencia, you should advise your bank as soon as possible so you do not pay the annual charge for issuing the Certificate of non-residency.  This will also alert your bank that if you have a deposit or savings account, they need to produce a Certificate of any interest earned for inclusion in your tax return.  Any interest you receive will then be paid NET of income tax.  The income tax deducted may be reclaimed in your tax declaration the following year, if your total income falls below the minimum level.

When the voluntary tax period is to hand, you will need to arrange for someone to make a Declaration on your behalf, in which you should declare your worldwide assets upon which you receive an income.  This includes pensions, investments, interest received on deposit accounts, stocks and shares and rental income from a secondary lodging. You can alternatively make an appointment at Denia Hacienda (Tax Office) to attend their offices and make the Declaration direct. 

There is a reciprocal agreement between Spain and the UK that if tax is paid in the UK, only the balance, if appropriate, will be due to be claimed in Spain.  A balance could be due if the tax threshold in Spain is different from that in the UK, and it also has to be borne in mind that as the UK has not yet converted to the Euro, any Declaration will be subject to exchange rate fluctuation. From next year, the Spanish Income Tax threshold will be reduced to start at 15% with a ceiling of 45%.

Please note: Government pensions are exempt from the tax declaration, so if you worked in the public sector in any capacity (e.g. teacher, police officer, civil servant) you will not need to declare this pension.

If you have sold or bought a property in the previous year, this will also have to be declared.  If you have reinvested the total sale proceeds in the new property, and you will be living in that property, it is unlikely you will have to pay any capital gains tax.  If, on the other hand, you have bought a new property for less money than the one you sold, or it is an additional property, unless you can show the balance of monies were reinvested in other ways into your main dwelling, you will have to pay capital gains tax.   If you have made a profit on the sale of your property, this is calculated at 20%, which is a lower rate than the 35% calculation for non-residents.

From the beginning of 2002, the law changed to exclude any Residencia holder over 65 years of age  from paying capital gains tax.

It is possible to apply for UK tax relief, i.e. to transfer your tax base completely to Spain, but you cannot do this for any Government pensions you receive.  In addition, Spain have recently introduced new rulings in this respect: in order for them to certify your UK tax exemption form, they require that you have made at least one Income Tax Declaration in Spain, that you produce a Certificate of Empadronamiento from your local Town Hall, and that you provide Certificates from the relevant sources of your taxable pensions/income to confirm each amount received.  As this appears to be contrary to the UK guidelines for applying for tax relief, I have been in contact with the British Inland Revenue.  They are currently assessing this situation, and I shall advise you should anything significant arise from this assessment.

Each year, the Tax Office issue a guideline for those people who are not eligible for making a Tax Declaration. This usually only encompasses Spanish nationals or individuals who receive their pension taxed at source in Spain, although some tax advisers extend the exemption for those residents who only receive a Government pension of under 21.000 Euros.  I would recommend  if you are in any doubt, you make a Declaration, even if this results in a nil amount due, and I shall advise you of the Tax Office guidelines for next year's Declarations when these have been confirmed (I anticipate February/March 2003).

The Declaration will be prepared in duplicate.  Both copies should be signed and taken to your bank: the top copy is retained by the bank and the second copy stamped and returned to you.  The bank will then administer payment from your account. If the Declaration is small (usually under 100 Euros) it is paid in one amount.  If the sum is larger, two thirds of the monies will be deducted from your account immediately and the remainder will be transferred in November.  The bank should arrange this automatically, but do check your account to ensure this is the case.

The above is only intended for general information purposes; if you have any doubts or queries regarding your Income Tax Declaration I recommend you speak to an accountant or your fiscal adviser.