Transferring a UK Pension to Spain
QROPS Spain 2015 Rules – British expatriates living in Spain or wishing to retire in Spain can now transfer their pension into an HMRC registered QROPS (Qualifying Recognized Overseas Pension Scheme) in Malta to avoid paying UK taxes on death after 75 on their pension.
Any Spaniards who have worked in the UK and built up a UK pension can also transfer their UK pension overseas to avoid UK taxes on their pension(s).
Benefits of a Malta QROPS for Residents in Spain
Malta has a Double Taxation Agreement with Spain, which means you only get taxed on your pension income in Spain at retirement. A UK pension transfer to a QROPS in Malta has the following benefits:
- Zero tax on death in the UK
- No UK income tax on your pension – just pay Spanish income taxes at retirement
- You get a larger tax-free cash lump sum. You get 30% rather than 25% in the UK.
- Pension is paid directly into your Spanish bank account
- We can transfer to EUR, so that your pension income is more stable and doesn’t move with exchange rates
- You can keep in GBP if you want
- Can invest your pension in a fixed bank deposit with a guaranteed rate of return of 2.95% per year on your pension (including fees)
- If you want to take more risk, we can target 10%+ returns per year investing in a mix of equities and bonds
- Security in Old Age – if you ever return to live in the UK, you can remit 5% of your pension every year back into the UK tax-free
British expats living, working or intending to retire in Spain can take advantage of their offshore address and transfer their UK pension offshore to somewhere secure like Malta, a former British colony as well as a sovereign state and member of the EU. Malta is a well known offshore financial jurisdiction with strong pension regulations. The QROPS trustees also speak English.
Once transferred, members will no longer have to pay UK taxes on their pension as long as they have been offshore for 5 years and continue to live offshore.
Full Pension Flexibility for a QROPS Malta for Brits Resident in Spain
As Malta is in the EU, it has the same full pension freedoms and flexibilities as the UK. This means you can draw down your pension any time you like, as you see fit.
QROPS pension members in Spain can pass 100% of their pension pot as a cash lump sum upon death to their spouse or named beneficiaries and they can transfer the entire amount into EUR, so that they get a steady income stream which would be less affected by currency fluctuations.
Q. I Don’t Pay UK Tax on My Pension in Spain. Why Bother Transferring My UK Pension Overseas?
A. First, you get a much larger tax-free cash lump sum. Secondly, you avoid all tax on death, even after 75 years of age. Thirdly, you can transfer your pension to EUR which means your pension income won’t go up and down with exchange rates which helps you with monthly retirement planning. Lastly, if you ever return to the UK, it is likely your tax bill on your income will be minimal or nothing at all.
Which UK Pensions Are Taxed in Spain?
If you are tax resident in Spain, your UK state pension and any occupational pension income will be taxable only in Spain and not in the UK, under the terms of the UK-Spain Double Taxation Treaty.
UK Government service pensions (for example, civil service, local authority, fire service, police and most teachers) remain liable only to UK tax and are not taxable in Spain at all. A transfer of these type of pensions to a QROPS would mean avoiding the tax upon death that the UK may impose. However, most of these government pensions can no longer be moved to a QROPS with the exception of some local government pension schemes which opted out.
Personal Allowances for Spanish Income Tax on a QROPS – “Minimo Personal”
|Under 65 years old||5,550 Euros|
There is a small personal allowance for any income received in Spain which is non-taxable. The rest will be taxed as below.
From 1 January 2015 Spanish tax residents will see their tax rates reduced, with further reductions expected from 2016. The reduction will affect both the General Tax Rates and the Savings Income Tax rates, as follows:
i) General income:
Income Tax Rate in 2015
Tax Rate from 2016
up to EUR
These rates apply to general taxable income. Different rates may apply depending on the region (Comunidad Autónoma) where the taxpayer is resident and will be applied on the taxpayer’s annual income tax return.
ii) Savings income:
Savings (Investment income and capital gains) rate bands
Tax rate in 2015
Tax rate from 2016
up to EUR
The personal and family allowances will also increase. Your UK pension or Malta QROPS would be taxable under “savings” above.
So, income tax on your pension will be between 19 and 23 per cent which may be less than the UK, which taxes up to 45% on income.
Generally, it will be added to your Spanish income and taxed at the appropriate rate, however, with careful planning, the amount of your pension income that is liable to Spanish tax can be reduced significantly.
For Spanish tax residents, our trustees will supply a certificate confirming that the income being provided from the pension fund is a “temporary annuity” and on this basis the Spanish tax authorities will only subject a small proportion of your pension income to income tax.
Taking into account the personal allowances available to all residents of Spain, this could mean that a temporary annuity might be taxed at less than 3%.
What is the Maximum UK Pension I Can Transfer to Spain without Paying UK Tax?
The current lifetime allowance for pension funds has been set at £1.25 million from 2014/15.
Under UK rules the maximum tax-free lump sum is restricted to 25% of your total pension pot, whereas a QROPS can allow up to 30% tax-free; this additional 5% (potentially £75,000) can be taken tax-free prior to taking up residency in Spain.
Any total pension transfer value to a QROPS above 1.25m GBP would be taxed in the UK at your highest marginal rate of income tax.
The rate of tax you pay on pension savings above your lifetime allowance depends on how the money is paid to you. The tax rate is:
- 55% if your pension is paid to you as a cash lump sum
- 25% if you get it any other way, e.g. via pension payments or cash withdrawals when you are in Spain (even from within a QROPS)
Full Pension Freedoms on a QROPS for Spanish Residents
When it comes to drawing income from a QROPS, the retirement benefits in Spain are similar to those available from a flexible pension scheme in the UK. You can access as much of your pension as you like whenever you like, but you pay Spanish rather than UK income taxes.
Are Lump Sums on a QROPS Taxable in Spain?
If you receive your pension lump sum whilst resident in Spain, however, it is taxable in Spain.
The taxable amount is calculated as the difference between the capital received and the contributions you made and this ‘income’ will be taxed at between 19% and 23%, depending on the total amount of ‘savings income’ you receive that year.
If you are considering moving to Spain and not retired yet, we suggest taking your tax-free lump sum before moving it into a QROPS if you need the income.
Why live or retire in Spain as a British expat?
More than 990,000 Brits live and work in Spain, whilst 74,636 are pensioners. For the Brits living in Spain, you can take advantage of your offshore address to reduce UK tax on your pension as well as protect your wife and children from high taxation should anything happen to you.
One of the benefits of a QROPS is the availability to hold multiple currencies, so you could hold a portion of your pension in Pounds, Euros or Dollars or just hold the entire pension in one currency. Furthermore you have complete investment freedom, allowing you to invest your hard earned pension into virtually any bonds, cash, money markets, mutual funds, ETF’s, shares or property investment (property funds or commercial property investment not residential property investment).
If you just want a low risk pension, we can invest 100% or a proportion of your funds into bank notes which offer to return 100% of capital invested or we can invest in UK gilts (which is investing in UK debt which is backed by the UK government) to give you security and safety of your pension.
On the other hand, for those with a longer horizon, you can invest in mutual funds run by some of the most successful mutual fund managers in the world. You have virtually a free reign to invest in almost anything you desire (except residential property). Please contact us to find out all the options.
What is a QROPS Spain?
A Qualifying Recognized Overseas Pension Scheme (QROPS Spain) allows your UK pension to be transferred offshore to reduce your tax burden. Effectively, you will no longer pay UK tax on your pension whilst you are offshore and after 10 years of living offshore, the reporting requirements to HMRC cease.
If you are living in Spain at the moment, you can take advantage of your offshore address in order to move your UK pension into a QROPS to avoid further UK taxes down the line. A QROPS is a suitable vehicle to avoid UK taxes if you are considering living or retiring abroad. Furthermore, it may be sensible to move your pension into EUR to mitigate currency fluctuations. For most British residents in Spain, you can look into the possibility of a transfer to a QROPS in Malta.
What Will Tax Be on My QROPS in Spain?
What is the Personal Income Tax Rate in Spain?
The top rate of income tax is now a low 23% on savings or a pension. If you are working, however, the tax is between 19% and 45% for 2015.
For British expats living in Spain, a QROPS held by trustees in Malta is often the most suitable option as Malta has a Double Taxation Agreement with Spain allowing your pension to be paid gross, tax free in Malta.
A QROPS held in Malta will avoid both UK taxation and Maltese taxation with only income taxes expected to be paid in Spain upon remittance of pension income. So, although you avoid any UK taxes upon death such as the 55% that may be applied upon death, you will pay Spanish taxes on your pension income if you draw it in Spain upon retirement.
Since 2011, people in different regions pay different top rates of income tax. Local surcharges have been added by autonomous regions such as Andalucia and Cataluna. Click here for more.
What is the Corporate Tax Rate in Spain?
As of 1st January 2015, the general rate of company tax in Spain has been reduced from 30% to 28% in 2015 and 25% in 2016.
For small and reduced-sized companies, up to 2014 there were reduced rates, which have now been eliminated as the reduction in the general tax rate means they are meaningless, except for a transitory period in 2015, when the rate is 25%, except for the profit over 300,000 Euros for medium-sized companies where the tax is 28%.
A company is defined as small if the turnover in the previous year was less than 5 million Euros and the company has between 1 and 24 employees.
A company is defined as reduced-sized if the turnover in the previous year was less than 10 million Euros.
As of 1st January 2015, there has been introduced a new lower tax rate for newly-formed companies, which applies to the first two years in which it obtains a taxable profit. The rate is 15%.
QROPS Spain. How to Avoid Inheritance Tax for British expats in Spain
Most British expats do not realise that they have to pay 40% inheritance tax in the UK on any property, bank accounts, shares, funds or assets that are in their name. So, they could pay inheritance tax on an offshore bank account, a Spanish property, a UK property and any funds or shares they own.
There are ways of mitigating these taxes. If you want to know more about how to most effectively structure your assets for tax reductions, please contact us.
What happens to my QROPS if I return to the UK from Spain?
As long as you are outside the UK, the Malta QROPS will grow free of UK tax. If you ever return to live permanently in the UK and you have invested by an offshore insurance product such as a portfolio bond, you can remit 5% each year to the UK tax-free. So, often, you can move back to the UK and avoid all UK taxes even when back in the UK through sensible drawdowns and planning. Furthermore, the 5% every year can be rolled up and taken all at once.
Please send us an email to learn more about tax planning and ask for a free pension transfer analysis.
For enquiries, please send an email to firstname.lastname@example.org
Tax Reduction and Retirement Planning for British expatriates in Spain, QROPS Spain article written by QROPS Specialists.QROPS Spain 2015 by Richard Malpass