UK-ES Tax Treaty: Residence is Key

For British retirees UK-Spain Double Taxation Convention (DTC) is the essential document that shapes their financial landscape. The UK-Spain treaty provides clarity and protection. But its most critical function is in determining which country gets the primary right to tax different streams of retirement income. For a UK retiree in Spain, understanding this allocation is paramount to effective financial planning.

Residence-Based Taxation

Your UK tax residency status is the key. Once you become a tax resident of Spain, the UK generally only taxes you on specific UK-sourced income (like UK rental income). The treaty then steps in to clarify and limit these taxing rights.

• You are a Spanish Tax Resident if: You spend more than 183 days in Spain during a calendar year, or your main center of vital or economic interests is in Spain.
• Worldwide Income: As a Spanish tax resident, you must declare your worldwide income in Spain for Personal Income Tax (IRPF), which includes your UK pensions.
• Avoiding Dual Residency: The treaty includes “tie-breaker” rules to determine which country you are exclusively a resident of for tax purposes if you meet the residency criteria in both

Taxation of Pensions and Government Service Payments (Article 17)

This is the cornerstone article for retirees and its interpretation is crucial.

• UK Government Pensions (e.g., Civil Service, Armed Forces): The treaty grants the exclusive right to tax these pensions to the paying country. This means your UK government pension will be taxable only in the UK, not in Spain. You will declare it to HMRC and pay UK income tax on it. In Spain, you would list it on your tax return but claim an exemption under the treaty.
• All Other Pensions (Private Pensions, Annuities, SIPP/Personal Pension Drawdown): This is the critical distinction. For all non-government pensions, the treaty grants the primary right to tax to the recipient’s country of residence. Therefore, if you are a Spanish tax resident, your private pension income, annuities, and drawdown from a SIPP or personal pension are taxable in Spain. The UK surrenders its right to tax this income.

Treatment of the UK State Pension

• UK State Pension: The UK-Spain treaty does not contain a specific article that grants exclusive taxing rights to the UK for the State Pension. As a result, it falls under the general rules for pensions (Article 17). This means it is considered a pension and is therefore taxable in Spain for a Spanish resident. You must declare your full UK State Pension on your Spanish tax return (Declaración de la Renta). To avoid double taxation, the treaty allows you to claim a credit in Spain for any UK tax paid on the same income, though the State Pension is typically paid gross.

Taxation of Lump Sums

• UK Rules: In the UK, you can generally take a 25% Pension Commencement Lump Sum (PCLS) tax-free.
• Spanish Rules Apply: If you are a Spanish tax resident when you take the lump sum, Spain’s tax rules will apply. Spain generally does not offer a 25% tax-free element. The entire lump sum is typically taxed as pension income. Yet, Spanish law may provide a 40% tax reduction on lump sums received, provided certain conditions are met (e.g., relating to the timing of the pension contributions)

Elimination of Double Taxation (Article 21)

This is the safety net of the treaty. Both countries agree to provide relief if, under the treaty’s rules, income could still be taxed in both jurisdictions.

• In the UK: If the UK has taxed an item of income that the treaty gives Spain the right to tax, the UK will typically provide relief by allowing a credit against UK tax for the Spanish tax paid.
• In Spain: This is more common for retirees. If Spain has the right to tax your pension and it was also taxed in the UK , Spain will give you a credit for the UK tax paid against your Spanish tax liability. The credit is limited to the amount of Spanish tax attributable to that specific income.
  • pension as with a private pension or the State Pension,
  • taxed in the UK should not happen if the treaty is applied correctly

Compliance and Declarations in Spain

• Annual Tax Return (Modelo 100): You must declare all your worldwide income, including your UK pensions (State, Private, and Government Service), in your annual Spanish Personal Income Tax return (IRPF).
• Declaration of Overseas Assets (Modelo 720): If you hold assets outside of Spain exceeding €50,000 , you are legally required to file the Modelo 720 declaration.
  • this includes certain uncrystallized pension pots and bank accounts.

AEAT

Spain: Agencia Estatal de Administración Tributaria

Tax Treaty in AEAT

HMRC

UK: His Majesty’s Revenue & Customs

Tax Treaty in HMRC

Key Considerations Beyond the Treaty

• Wealth Tax (Impuesto sobre el Patrimonio): UK retirees are not shielded from Spain’s Wealth Tax on their worldwide assets above the exemption thresholds. This requires separate planning and reporting.
• Form 720: This is a critical Spanish reporting obligation. Residents in Spain must declare their worldwide assets (e.g., bank accounts, investments, property) exceeding €50,000 per category using this form. It is an information return, not a wealth tax return, but carries severe penalties for non-compliance.
• The 90% Rule for UK Government Pensions: While your UK government pension is only taxable in the UK, Spanish authorities will still consider its value when calculating your eligibility for means-tested benefits or public healthcare, depending on your status .
  • e.g., if you are not covered under the S1 form scheme

In conclusion, the UK-Spain tax treaty provides a clear, residence-based framework that largely shifts the tax burden on private pension income to Spain for retirees resident there. For the British retiree, success lies in understanding that their SIPP drawdown and State Pension become Spanish-taxed income, while their civil service pension remains UK-taxed.

Navigating this split effectively, while complying with Spanish wealth and asset reporting, is the key to a financially stable and compliant retirement in Spain.