How to retire to Spain – and stop the taxman raiding your wealth

Sunny Spain is the dream retirement destination for thousands of us – golden coasts, delicious food and a rich culture are hard to resist. It is little wonder that more than 100,000 British pensioners have already settled in the country.

Relocating to a warmer climate may be enticing, but it is crucial to plan ahead before making the move. If rushed, it could kick up surprise tax bills and pension headaches.

Here, Telegraph Money explains everything you need to know about relocating to Spain, from taxes and visas to pensions and property prices.

How much money you will need to retire to Spain

Pensioners are categorised as “economically inactive” in Spain, which means they have to fulfil extra requirements to stay in the country, compared with working age people.

There are two types of visas to earn the right to live in the country: the “non-lucrative visa” and the “golden visa”.

The non-lucrative visa requires proof of your financial resources to pass the income check, which applies for one year. On renewal, the visa then lasts for another two years.

As of 2023, the income requirement is €28,800 (£25,043), plus €7,200 per dependent for each year you live in Spain. The immigration authority will also accept available savings.

The visa renewal process requires you to prove your income will last over each period, or that you have roughly double the savings compared with the initial one-year application. The income requirement increased by 3.5pc last year, so plan around an annual increase of around this size.

Today, if you receive the full new state pension of £10,600 each year, you would need another €16,610 from other sources as a single person, or €11,620 as a couple. 

A more flexible option might be the “Golden Visa”, which provides permanent legal residency without the requirement to spend any time in Spain – but it requires a €500,000 investment in real estate, or €1m in investment funds, bank deposits, or listed company shares in Spanish financial institutions, €2m in Spanish government debt, or a business investment that delivers jobs.

How you will be taxed in Spain

Anyone planning their move must consider their financial and tax situation before they relocate, or risk facing hefty bills.

British tax-efficient investments, such as Isas and National Savings & Investments, do not have the same tax-efficient treatment abroad. In Spain, any interest, dividends or capital gains arising within these accounts will be taxable.

When it comes to pensions, income is taxable where the pension holder lives. The only exception is Government employee pensions, which will only be taxable in the UK.

Importantly, the 25pc tax-free pension cash rule will not apply if you take this after relocating to Spain. Your cash lump sum is taxable because Spain does not have a non-taxable element of a pension fund. Those planning ahead may be better off taking the tax-free cash before relocating.

Anyone planning to sell their family home in Britain after making the move may also be stung by charges.

Jason Porter, of Blevin Franks, said: “Most countries have some form of main home tax relief, so in the normal course of events no capital gains tax arises on sale, but the UK’s rules are significantly different than those in Spain. While the sale may not lead to a tax liability in the UK, it may in Spain if it occurs after you have left.”

Similarly, anyone planning to delay selling a British business until they have left to avoid UK capital gains tax, are likely to find the sale taxable in Spain, he added.

Spain, like other countries in Europe, has additional taxes that do not exist in Britain, such as a wealth tax. This means expats must fill in additional tax return forms. Any assets around the world must be declared on a wealth tax return where they exceed €2m.

More recently, several Spanish regions considered matching Madrid’s 100pc exemption to wealth tax. The central government, fearing a significant reduction in tax collection, decided this year to impose a new “solidarity tax” at a national level, starting at 1.7pc on wealth over €3m, then to 2.1pc at €5m and 3.5pc at €10m.

Where both wealth and solidarity tax might be payable, a taxpayer will not pay twice on the same assets. Overseas assets exceeding €50,000 must also be declared on a form “modelo 720”. Failure to do so could result in significant penalties.

Inheritance taxes vary hugely from region to region in Spain. Some areas like Madrid have 100pc relief on inheritance tax, while other regions can charge up to 34pc in death duties. 

Buying Spanish property

Spanish property is much cheaper than the value of an average British home. The national average square metre costs €1,625 (£1,396) in Spain, compared to £2,863 in Britain, according to Knight Frank, an estate agent. In the first three months of 2021, the Murcia region in Southeastern Spain had the cheapest property value, at €981 per square metre.

Owning property worth more than €500,000 in Spain is one of the criterias for the “golden visa”.

However, buying real estate in Spain attracts certain taxes, stamp duty and fees. These costs amount to 11pc of the property purchase price, mainly due to VAT, the adviser estimated. In addition there are conveyancing fees, typically around 1pc of the property purchase price.

Getting health cover or insurance  

Britons must prove they will not be an “undue burden” on the Spanish state, which requires them to have comprehensive health insurance.

Anyone applying for a visa must hold a private healthcare insurance policy that provides full coverage of at least €30,000 for the full period of the residency permit.