How abroad operations will help HNWs mitigate tax liabilities

The new year has been accompanied by a new national lockdown in the UK. Add to this our official departure from the EU, and suddenly the UK is looking far less appealing as a place to live and work, writes Leon Fernando Del Canto, founder of international tax law firm Del Canto Chambers.

Rumblings about the introduction of a wealth tax to pay for Covid lockdowns certainly don’t help.

Is it any wonder then that people are reflecting on how to reduce the stresses and strains of these events on both a personal and professional level? The reflections of high net worth (HNW) individuals are often resulting in the desire to live abroad.

Entrepreneurs and investors are looking to European countries which can offer a superior quality of life and a safe haven for assets. Spain is proving to be a favourite base for high earners. Seen as a portal into European markets, British companies’ investments in Spain have risen by 80% since 2018 to €3.1bn (£2.76bn, $3.77bn), and Spanish real estate is booming.

Covid-19 has served to make virtual meetings more user friendly. We are settling into a more digitally connected world, shrinking the globe and making a business move to a place like Spain or the Balearics much more doable.

Benefitting from the financial incentives on offer takes a little knowledge of the tax system. Your tax liability depends on your status as resident or non-resident, according to your ownership of investment or property in Spain.

HNW individuals used to purchase their properties through offshore companies but this practice is falling away as Spanish authorities have increased vigilance such that companies created before 2018 whose tax situation has not recently been assessed will face investigation. This has galvanised many wealth creators to find other ways to live abroad.

Ibiza has proved itself solid for foreign property investment with property values rocketing by 56.5% since 2015. New regulations relating to planning permission, however, have made new build licenses trickier to obtain, making legal guidance a must.

Local tax and property laws in in the Balearic Islands

Expats with Spanish residency who own property in Mallorca, Menorca, Ibiza or Formentera are liable to pay: personal income tax on property or any income rental; capital gains tax; city council tax; and tax on assets, such as boats.

Tax on property transfers is due on the purchase of ‘second-hand’ properties, while value-added tax is applied to new build properties bought from the developer.

Personal income and wealth tax must be declared annually by owners of properties in the Balearics who are not resident in Spain.

For tax purposes, any income from salary or self-employment must be declared in the country in which you reside, in addition to Spain.

Double tax treaty provisions must be checked in advance.

Spanish Wills and inheritance

Should you own property in Ibiza, or should your beneficiaries reside in Spain, you become liable for inheritance or succession tax. Spanish inheritance tax differs from that in the UK in that there is no exemption between husband and wife.

On the death of one, the other becomes liable for inheritance tax on global assets, although the surviving spouse may inherit a ‘life interest’ in the property.

Those domiciled in the UK are required to pay tax in both countries, albeit these liabilities can be offset against each other. Inheritance tax can be mitigated by an offshore fund to protect your assets.

A Spanish Will should be drafted, or the UK updated, to cover assets in Spain in addition to a separate foreign Will to protect assets in other countries. This reduces the risk of potential legal or tax conflicts between the application of the Spanish Will and the international Will.

With Brexit and the imposition of further lockdowns on the horizon, there has never been a better time for HNW individuals to reassess how and where they want to live and what they want their portfolios to look like.

With a little savvy knowledge of the potential legal and tax-related pitfalls, a move abroad could be a wise one indeed.

This article was written for International Adviser by Leon Fernando Del Canto, founder of international tax law firm Del Canto Chambers.