The author of this article – an international tax barrister – makes the case for people to consider the Balearic Islands, such as Ibiza, for the quality of life and as a place to be based when doing business. He sets out the positives – and a few potential pitfalls. 

The pandemic and the UK’s recently-written trade pact with the European Union has prompted a number of UK citizens with international business and other interests to think about where they want to be based in future. The coronavirus saga, as reported here yesterday, has hammered the global market for so-called “golden visas.” These visas are one way that those with the means have sought to diversify their residency/citizenship options. There are other ideas. In such a changed environment, it is easy to predict how lawyers and other advisors to the internationally-minded high net worth client want to review the “best” jurisdictions to be located in. It is likely that some movement is on the cards. The pandemic, and all the associated lockdowns, flight restrictions and tedious bureaucracy may also encourage people to permanently move to where there is guaranteed sunshine and a decent quality of life. 

An international tax barrister based in London, Leon Fernando Del Canto, has some thoughts on what people might wish to do in coming months – particularly once the worst of the pandemic is past. He fastens on the option of the Balearic Islands off the Spanish coast, such as Ibiza. 

The editors are pleased to share these thoughts; the usual editorial disclaimers apply. (The author says there is a need to prepare for a “post-COVID-19 economic slump”, but of course some economists have claimed we could see a sharp recovery, albeit not for all sectors.) We welcome people to jump into the debate. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

The effects of COVID-19 have been wide-ranging, most of which are indeed very negative. However, there are some positives, not least in the form of individuals reassessing their lifestyles and what works for them. Add to the pandemic a looming exit from the European Union and it comes as no surprise that the UK is looking less than appealing as a destination for wealthy individuals. 

The pandemic has prompted people to follow their dreams of living abroad, hence we are receiving more queries than ever before from entrepreneurs, investors and high net worth individuals considering relocating operations abroad where they can improve their quality of life while also mitigating their financial liabilities. 

As we prepare for the post COVID-19 economic slump, Spain is becoming one of the most attractive European markets in which to base oneself, as it is considered a gateway to other European markets, with more disposable domestic income than most. The UK is the number one foreign investor in Spain with investment by British companies up by 80 per cent since 2018, to €3.1 billion ($3.77 billion). 

Some are investing in Spanish real estate, some are acquiring Spanish assets, and others are deciding to move their business there. There are many options for high net worth individuals planning to make the move to a sunnier climate, drawn in by the financial incentives and favourable work-life balance. 

However, there are many legal and tax-related complexities that must be smoothly navigated to significantly mitigate one’s tax liabilities. A person will be classed as resident or non-resident depending on whether they have an investment or property in Spain. This will in turn determine the amount of tax you are liable to pay.

Some people buy their property through a company which can be effective. This was particularly popular in the late ‘90s when many HNW individuals created offshore corporate structures to purchase their property through. However, most have given them little consideration since, and the Spanish tax authorities are clamping down heavily. If a company was created before 2018 and the tax position has not been assessed recently, they are likely to be investigated.

As a result, many are seeking other ways of moving abroad. With COVID-19 having normalised virtual meetings, leading us a more digitally connected world, moving one’s business operations to the Balearic Islands is very feasible. 

Ibiza is a safe and solid place for foreign property investment, property values increasing by 56.5 per cent in the past five years. International buyers drive demand in Ibiza real estate, raising property values and improving the overall infrastructure. However, new planning permission regulations have made new build licences more difficult to obtain and legal guidance is essential to move the process forward.  

Local tax and property law issues for expats
Foreign nationals (or ‘expats’) with Spanish residency who own property in Mallorca, Menorca, Ibiza or Formentera are liable to pay a number of taxes consisting of personal income tax on property or any rental income, capital gains tax, city council tax and tax on assets (e.g. boats). 

Property income tax in the Balearic Islands 
Spanish income tax and residence rules must be carefully considered when owning property or investing in the Balearic Islands. For example, concerning holiday homes or rentals, you are liable to pay taxes on property you own and other assets and investments. Failing to pay the appropriate tax could result in your property building up a debt against it on which interest is also due, which often leads to difficulties in selling it and your bank account could be embargoed.

In 1998, the Spanish non-resident income tax law introduced a tax liability on properties in Spain owned by non-residents. Tax on property transfers (ITP) is applied to the purchase of “second-hand” properties, and value-added tax (IVA and AJD) to new build properties bought from the developer.

Owners of properties in the Balearics who don’t live in Spain have to present their personal income tax – known as IRNR – return annually. Income from a salary or self-employment will be declared in the country where you are a resident for tax purposes. 

Local property tax in Ibiza
In Ibiza, if you own a property, regardless of whether you are a resident, you must pay an annual property tax known as IBI – a municipal tax based on the ‘cadastral’ value of the property. Municipal capital gains tax must also be considered here, which is a tax on the increase in the value of urban plots that is accrued when a property is being sold. Legally, the seller must pay this tax, although it could be passed over to the buyer if specified in the contract. The amount of this capital gain depends partly on the surface of the piece of land and the length of time it belonged to the seller.

Spanish wills and inheritance
If you own property in Ibiza, or if your beneficiaries reside in Spain, then you will be liable for inheritance or succession tax. The main difference between UK and Spanish inheritance tax is that there is no exemption between husband and wife. When one dies, the other is liable for inheritance tax on worldwide assets. A surviving spouse may be left a “life interest” in the property instead. Those who are UK-domiciled must pay tax in both countries, however these liabilities can be offset against each other. An offshore trust can mitigate inheritance tax and further protect your assets.

Drafting a Spanish will is recommended to cover assets located in Spain, as well as a separate foreign will to cover assets in other countries. Issues would arise if there were any legal or tax conflicts between the application of the Spanish will and the international will.

HNW individuals are re-considering their ideal lifestyle and financial portfolios more so than ever. There are certainly wise options out there, it is just a matter of being aware of the potential risks and pitfalls when making these steps so that they can be wisely navigated.

About the author
Leon Fernando Del Canto is an international tax barrister based in London. He is the founder of Del Canto Chambers, an international tax legal firm with a country focus on the UK, Spain, Qatar, Colombia and Mexico.