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Taxation of UK pensions in Spain

Over the past few decades Spain has established itself as one of the most desired and popular overseas destinations among the UK retirees, as many plan their retirement in this sunny country, in particular on the Spanish Mediterranean Coast. Apart from the glorious weather throughout the year, especially on Costa del Sol, Spain offers laid back lifestyle and relatively low cost of living – it doesn’t get much better than this.

In this article we will focus on the tax liability that arises from your UK pensions in Spain.  It’s important to elaborate on this issue so that you have all in order before you arrive and settle in.

In general, your income from pension may have multiple sources, for instance a personal pension, a government state pension, a government service pension or an occupational pension.  Each of the aforementioned types of pensions is differently classed for tax purposes in Spain.

According to the article 17 of the UK-Spain Double Taxation Treaty pensions and other similar remuneration paid to an individual who is resident in Spain are taxable only in Spain.

However, the article 18 of the mentioned treaty highlights that pensions and other similar remunerations paid by, or out of funds created by the UK government, a political subdivision or a local authority in respect of services rendered to that State or subdivision or authority shall be taxable only in that State, i.e. the UK.

British receiving pensions in Spain are subject to taxation

Therefore with the exception of any government service pension income that you get from the UK, which are taxed there at the source, all your worldwide pension income will be subject to Spanish income taxation.  Nonetheless, the way income from personal pensions is treated in Spain can differ.

Basically, purchased annuities are taxed favourably in Spain.  It is known that UK pensions ask the pension account holder to purchase an annuity from an insurance company with a percentage of their pension pot.  This annuity then pays out an income for the duration of the life of the account holder.  This type of income from an insurance company is taxed favourably in Spain.

Referring to the fiscal treatment of Disability Pensions recognized in another EU member, these have been exempt since 2014.

In any event, due to the magnitude and complexity of all the implications of this change we would highly recommend you to appoint a fiscal advisor since once your pension has been deemed taxable in a certain way, you cannot then change the way it is taxed. At this point, Lexland´s tax department offers bespoke advisory services both on Spanish and international tax to private clients, Spanish & multinational corporations on any matter related to tax authorities at all levels (State, regional and local). We pride ourselves on ability to provide a tailored advice for each client by managing your taxes in a manner that allows you to obtain the maximum benefit. You can rest assured that we have just the right solution for you. Thus, irrespective of whether you are a British citizen or not, should you wish to know more about your tax liability do not hesitate to contact us.