How does living and working in Spain for up to 5 years, whilst only paying 24% tax sound to you?
Spain has always been a ‘go to’ holiday and retirement destination for Brits. The attraction is obvious – what’s not to like in terms of the sunshine, quality of life and value for money lifestyle, plus low travel costs to and from the UK.
However, Brexit has left many Brits reconsidering Spain as a longer term destination, given as non EU members, any stay longer than three months requires a long term visa. This includes those who may have a second home in Spain but who aren’t also resident there.
So here is some good news for those who are working for a UK or other non Spanish employer and are able to live and work fully remotely from Spain.
As of January 2023, Spain launched their new Digital Nomad Visa. This visa allows access to the Beckham tax law, famously enacted when David Beckham was playing for Real Madrid. Essentially this provides much reduced Spanish tax rates for up to 5 years of residence and for those who can and do work remotely, perhaps something to seriously consider.
General aspects of the Spanish Digital Nomad Visa
The new visa for digital nomads would allow individuals to reside and work in Spain whilst continuing to work for their UK or overseas company. This is valid for a period of 3 years, but extensions may be requested for an additional 2 more years. This enables UK individuals who apply, to then work in Spain under this arrangement for 5 years, whilst only paying Spanish tax.
Spanish Digital Nomad Visa holders are then taxed as follows on their non Spanish employment income / pension income:
- 24% up to €600,000
- 47%.over €600,000
For those currently living in the UK and paying UK tax on earnings up to €600,000, there are significant tax savings to be made by relocating to Spain and taking advantage of this new visa.
For example, in the current tax year, 2023/24, UK (England) resident individuals pay 40% tax for income over £50,270 and 45% tax over £125,140. It follows that for someone who earns say £200,000, they could save tax in the region of £23,000.
The Digital Nomad Visa would provide other tax benefits:
- Investment income – interest from Spanish banks, dividends or rental income form Spanish property would be taxed in Spain at their current rates, currently from 19% to 28%. For Brits moving to Spain to take advantage of this visa scheme, we would suggest that non real estate investments are left in the UK, taking advantage of UK disregarded income rules, leading to potentially zero tax liability on investments held.
- Capital Gains – Gains made on sale of non Spanish assets, would also be outside the scope of Spanish tax
- Wealth and Solidarity taxes – Non Spanish assets will not be subject to these taxes. Spanish assets are taken into account, but thresholds are high, around €700,000, depending on Spanish territory.
How to apply for the Visa
You can either apply for a digital nomad Visa within your home country, or when you arrive in Spain via a tourist visa. Applications can be made directly through the Spanish ministerial website, or you can engage an immigration lawyer to help you. NB, we would always suggest that advice is taken via an appropriately experienced and qualified visa lawyer, simply because getting this first part wrong in some way, could very well lead to an inability to access the beneficial Beckham Tax Law.
Qualifying conditions for beneficial tax regime
To apply for the special tax regime under the Spanish Digital Nomad Visa, there are some initial requirements for the UK individual to meet:
- You must not have been a tax resident in Spain during the 5 tax periods prior to the period in which you move to Spain.
- There is a real and continuous activity of at least one year of the company or group of companies with which you have an employment or professional relationship.
- You can provide documentation to support the fact that the labour or professional relationship can be carried out remotely.
- Depending on the nature of your existing working relationship:
- If you are an employee, you will have to show the existence of an employment agreement for at least the last three months prior to your application
- If you are a freelancer or self employed individual, you will need to prove you had a commercial relationship with one or several companies for at least three months.
- You must be able to prove monthly income of €2,334 or annual income of €28,000.
If a UK individual meets the above conditions, plus they will work for a company based outside Spain (or, if located in Spain, has more than 20% of its professional activity attributable to output in Spain), then good to go!
Breaking UK Tax Residence
Assuming tax mitigation is the only or main driver in relocating to Spain, there is little point in going to great lengths to achieve Spanish residence, if you do not also break UK tax residence. Failure to do so, would mean you continue to be taxed in the UK on your worldwide income and the reduced Spanish tax benefits would be irrelevant. Non-UK Residence allows exemption from UK tax on overseas income and gains, hence why immigration to Spain, whilst breaking UK tax residence would be required.
Residence rules differ from country to country, but are largely determined according to the amount of presence you have in that country in a particular tax year. The UK is no different and HMRC’s statutory residence tests are used to determine an individual’s residence for UK tax purposes.
The tests primarily consider the amount of time you spend in the UK, plus consideration to the number of connections (or ties) you have with the UK.
The application of HMRC’s residence tests should always be applied on a bespoke basis. The saying ‘one size does not fit all’ is very relevant here and it follows that anyone considering relocating to Spain, which includes breaking UK tax residence should actively seek professional advice re same
Temporary non residence – Anti Avoidance
Whilst breaking UK tax residence and becoming resident in Spain for say 5 years, will potentially allow for significant tax savings, there is UK anti- avoidance tax legislation in place, which essentially taxes some sources of income, eg pension drawdowns, close company dividends and life assurance gains, plus capital gains on assets sold, even when an individual is non-UK resident.
This applies where the individual does not achieve 5 years non UK tax residence, i.e makes the decision to return to the UK before 5 years have elapsed. This avoidance rule only applies to the above income receipts, or assets sold which were held prior to leaving the UK and the income/gains involved, would then be taxed in the year of return to the UK.
Whilst the Spanish digital nomad visa is valid (with extensions) for a period of 5 years, care should be taken for individuals who have realised some UK income sources or sold any historic assets and wish to return to the UK before this. This could, for example, apply to those who have signed up to the scheme for 3 years (without extensions).
If you are interested in the Spanish Digital Nomad scheme and would like to discuss your bespoke tax position relative to an potential application, please do not hesitate to get in touch with Lynn Gracie, Charlie Dunning or your usual AAB contact.