From 6th April 2006, the rules for UK pension schemes including; retirement annuity contracts, small self-administered schemes, self-invested pension plans, personal pensions and occupational schemes; have been consolidated under ‘Registered Pension Schemes’ – either Defined Benefit or Defined Contribution Schemes.
More flexibility was offered to pension holders in April 2015 meaning that in most cases, 25% of pension pots can be withdrawn tax free whilst the remainder (no matter drawdown, lump sum or annuity income) is taxed at the pension holder’s marginal rate of up to 45%.
If income is sourced in the UK, than non-UK residents are liable to pay UK income tax on those earnings as is the case for earnings of UK residents. If you have a pension in the UK, this is counted as UK source income and so you are taxed at your marginal rate on the 75% that is not included in your tax free sum.
However, a Double Tax Agreement (DTA) between the country in which you are resident and the UK can mean that you are exempt from UK tax – choosing instead to pay tax where you are resident.
There exists a DTA between Spain and the UK. This means that UK pension holders resident in Spain pay tax in Spain and are not taxed at source in the UK.
From 6 April 2015, the UK tax treatment of benefits from DC schemes on death depends, amongst other things, on the age of the member at the time of death (i.e. pre or post 75). From this date, generally, there should be a lower UK tax cost on passing pension value to heirs on death. However, that said, there is still a possible current tax rate of up to 45%.
For those that are non-UK resident and have a QROPS, the UK tax cost on succession can be less.
QROPS can be transferred to Gibraltar. Gibraltar has no DTA with Spain and the obligatory Gibraltar income tax charged on pensions is 2.5%.
Without a DTA between Gibraltar and Spain, pension payments from a Gibraltar-based QROPS are taxed at 2.5% by Gibraltar. Tax residents in Spain would incur Spanish tax but would also benefit from the tax credit of 2.5%.
Inheritance tax is not applicable in in Gibraltar and the jurisdiction also protects against UK inheritance tax. Additionally, as with Malta, if the individual has been non-resident in the UK for five years or more, than death benefit charges are not levied.
QROPS can be transferred to Malta.
The DTA between Spain and Malta means that pensions held in Malta are taxable only in Spain for Spanish tax residents. This includes QROPS – so Malta charges no tax – but special regulations apply to Social Security and Government Service pensions.
If the pension holder has not been a UK resident for 5 years or more or the amount withdrawn is less than €100,000, UK income tax is not applicable. If the individual has been a non-resident of the UK for 5 years (similarly to above), than Malta also protects against death benefit charges.
There is no inheritance tax in Malta and the jurisdiction protects against UK inheritance tax.
There is no specific reference to QROPS in Spanish Law.
However, the following applies to the best of our knowledge.
Tax residents in Spain pay tiered rates of income tax on their income no matter where it is sourced. 183 days or more per annum resident in Spain qualifies an individual as a tax resident. However, other criteria can also mean an individual is classed as a tax resident. For example, if Spain is the main base or centre of the individual’s business, economic interest or work, or if the spouse of the individual is a tax resident.
There are special conditions for those who move to Spain in order to work. If this applies to you, you may choose whether to pay standard income tax or submit to non-resident income tax rules for six years including the tax year you moved to Spain.
David Beckham famously chose this option and some call it the “Beckham rule”.
This tax regime benefits expats in Spain as income tax rates apply only to earnings arising in Spain, not worldwide. This amounts to 24% on the first €600,000 and 45% over and above that. No tax is levied by Spain on foreign earnings (UK pensions for instance) nor on remittances.
Spain taxes non-residents on income sourced in Spain through a different regime.
Non-residents, or those under the expat scheme described, don’t pay tax on their pensions. Those who are tax resident under the standard conditions do pay tax on their foreign-earned pension.
Also relevant to pensioners in Spain are the rules around ‘irregular income’. A lump-sum from a UK pension up to €300,000 is taxed at a rate 30% lower. Spain offers a tax credit to account for any foreign tax incurred on pensions as long as the individual is a tax resident.
Spain also levies a Net Wealth tax. This, depending on the total figure, is applied at between 0.2 and 2.5%. Net wealth is calculated worldwide for residents. Non-residents are liable to the same tax on their net wealth in Spain only. The tax free allowance is €700,000 and the individual’s main dwelling up to €300,000 is also tax-exempt. Some of these tax powers are devolved so autonomous regions may have slightly different tax regimes with respect to the Net Wealth tax.
Also differing in autonomous regions are inheritance taxes. These apply to all residents of Spain. Inheritance tax is between 7.65% and 34%. This applies to all beneficiaries, heirs and recipients who are resident in Spain. Inheritance tax is also levied on those not resident but who receive assets in Spain such as property.
83 DTAs exist for Spain with the UK and Malta included.
Leave the Pension in the UK
If the pension stays put in the UK, and the individual is a resident of Spain, then UK taxes do not apply. Spanish taxes do apply to residents of Spain. Death benefit charges still apply to funds in the UK.
Transfer to a Gibraltar QROPS
If this option is taken and the UK pension is transferred to a QROPS in Gibraltar, than the individual must have been a non-UK resident for five years or more to benefit financially. Gibraltar tax of 2.5% is paid rather than UK marginal tax rates. Spanish tax residents pay tax in Spain but credited with the Gibraltar tax under the foreign tax relief regime. UK death benefit and inheritance protection apply to long-term non-UK residents with a Gibraltar QROPS.
Transfer to a Malta QROPS
If the pension is transferred to a Malta QROPS, the same requirements of five years as a non-UK resident apply before the individual is protected from UK taxes and death benefit charges. Maltese income tax is not paid due to the DTA between Spain and Malta. Tax is paid in Spain as a tax resident and no inheritance tax applies in Malta or from the UK.
This general information has been provided on the basis of our understanding of the current legislation in the UK, Gibraltar & Malta as of April 2015. Should any of the information provided be inaccurate, incomplete or misleading, we take no responsibility for any reliance placed on it. We recommend that individuals always seek specialist multi-jurisdictional (where relevant) tax advice so that their individual circumstances can be fully considered.