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From 6th April 2015, those over 55 have been able to release all of their money from private pensions to do with as they wish. However, the UK government has stipulated that, even if you are not resident in the UK, you will still have to pay UK income tax on the balance of the fund over the tax free payment of 25%. If you are a Spanish resident, you can then apply to the UK tax office to have this tax refunded. How long this will take is uncertain.
Here we have another problem. Up to now, some people will have taken their 25% payments, tax free in the UK, and declared nothing to Spain where these payments are taxable. If the lump sum was taken before they became resident, there is not a problem but a Spanish resident will have to pay tax on these lump sums. Keeping quiet has been a perceived solution for some. However, with effect from 1st January 2015, under the terms of the EU Directive on administrative cooperation in the field of direct taxation, there is automatic exchange of information between the tax authorities of Member States for five categories of income and capital. These include income from employment, director’s fees, life insurance products, pensions and ownership of and income from immovable property.
What could this mean in practice for those with pension funds? Firstly, anyone taking their lump sum and not declaring it in Spain is taking a major risk. Secondly, those who have accessed their full fund from 6th April 2015, and been taxed by the UK on 75% of it, may then make a claim for the tax paid stating that they are non-UK resident. The UK tax office could then supply details to the Spanish tax office including the 25% lump sum. Therefore, although UK tax could be reclaimed for the 75% element, the individual could then have to pay tax in Spain based on 100% of the value of the fund.
Taking the fund in instalments could be a solution so as to reduce the marginal rates of tax but tax will still be due in Spain on the funds taken. A QROPS (Qualifying Recognised Overseas Pension Scheme) is an option rather than taking the full fund. A QROPS gives the individual the opportunity to draw an income whilst keeping the remainder of the fund intact. It also enables a person to pass on the income facility or the remaining lump sum as a whole. Again it is advisable to take tax advice here so as not to create a problem for beneficiaries.
Contact me today on (+34) 96 558 7633 or firstname.lastname@example.org to see how we can help.