Wealth tax (impuesto de patrimonio) is a Spanish tax that, instead of taxing income or expenditure, taxes people’s possessions.
This is a tax that takes many foreigners by surprise as Spain is one of a vanishingly few countries to have a tax on wealth, alongside France, Switzerland, Norway and the Netherlands who have similar.
If you are considering buying a luxury property in Spain, it’s important to keep this potentially unexpected cost in mind.
Who has to pay wealth tax?
Wealth tax in Spain can only be applied to individuals, both resident and non-resident, with assets and rights within Spanish territory.
Those who are obliged to file a wealth tax return are those whose:
- Net assets exceed the exempt minimum, which is 700,000 euros in most Autonomous Communities.
- Gross wealth (i.e. without taking debts into account) exceeds two million euros.
Differences between Autonomous Communities
While this is a state-regulated tax, its implementation is devolved to the Autonomous Communities (regions), and some of these have differing regulations (tax brackets, minimum exemptions, allowances, etc).
Residents are subject to the regulations of the region where they live, while non-residents are subject to the regulations of the region where most of the assets are located.
Many regions, including Andalucía, Asturias, the Balearic Islands, Cantabria, Catalonia, Extremadura, Galicia, Murcia and Valencia have modified their tax brackets while the individual exemption has been modified in Aragon, Catalonia, Extremadura and Valencia.
Some regions have a greater number of exempt assets (for example forests in the case of Catalonia) and others have tax rebates (up to 100% in Madrid).
How is wealth tax calculated in Spain?
To explain how wealth tax is calculated in Spain, we’ll use the State regulations as a reference, bearing in mind that there are variations depending on the Autonomous Community.
In order to calculate Spanish wealth tax, individuals must:
- Add up all assets and rights
- Subtract debts
- Subtract up to a 300,000-euro deduction for a primary residence within Spanish territory
- Subtract an individual deduction of 700,000 euros
- Take this net taxable base to calculate the tax payable, which is divided into brackets (from 0.2% to 3.5%).
A married couple lives in a house worth 500,000 euros, have investment funds worth 1.5 million euros and own a car worth 60,000 euros. As the wealth tax is individual, everything will have to be divided by two. The house can be omitted because the value owned by each person is less than 300,000 euros (500,000 euros divided by two is 250,000 euros), leaving a total net worth of 780,000 euros each. The minimum exemption is 700,000 euros and therefore each person in the marriage will have to pay tax on 80,000 euros. As it is in the lowest bracket (0.2%), they, therefore, have to pay 160 euros each.
Another example would be a foreigner who has a property worth one million euros in Spain but does not reside in the country. As this property is not his residence, the habitual residence deduction cannot be applied, only the individual 700,000 euros. Therefore, the taxable base would be 300,000 euros and the tax payable would be 732.89 euros (0.2% of the first 167,129.45 euros and 0.3% of the rest).
If a person has all their wealth accumulated in a home of 2.1 million euros, but with a mortgage for 1.2 million euros, their net wealth would be 900,000 euros. As it is their main residence, the property would appear in the wealth tax as 600,000 euros, below the exempt minimum and would not have to pay any wealth tax. However, as their gross wealth is over two million euros, they are still obliged to file a tax return.
How is the value of assets calculated?
One of the main problems with wealth tax is the valuation of assets. While it’s relatively easy to know how much money you have in a bank account or shares listed on the stock exchange, other assets are tricky to value.
In the case of property, the largest between the cadastral value, the purchase value of the property and the value ascertained by the administration for other taxes are taken.
In the case of accounts and deposits, either the value on 31 December or the average of the last quarter is taken – whichever is the largest.
For shares, promissory notes and bonds, if they are listed on a stock market, the market value (average value of the last quarter of the year) is used. If they are not listed, they are taken into account at nominal value.
Pension plans are exempt from the wealth tax.
Income tax and taxation abroad
Besides the deductions, allowances and reductions at the regional level, there are two at the national level that is also important to consider.
The first concerns income tax and means that even if you have a large estate, if you don’t have a large income, the amount to be paid will be significantly reduced. The idea is that the sum of personal income tax and wealth tax should not exceed 60 per cent of the person’s income for the year. This reduction, however, only applies to those who are resident in Spain.
The second concerns assets abroad. If the equivalent to the wealth tax for these assets has been paid in another country then this value can be deducted from the tax return.
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