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Spain continues to be a favourite destination for retired British expats. While Brexit may have changed the residence rules for newcomers, it is still generally still possible for most UK nationals to enjoy their retirement years in the Spanish sunshine.

Living in Spain offers many benefits, and the lifestyle is very conducive to a healthy and happy retirement. Of course, like any country, there are some drawbacks and a key concern for many people is the local tax regime.

How are taxes affected by being Spanish resident?

It is really important to understand how being Spanish resident will affect your tax position. Once you meet any of the criteria that make you tax resident there (you spend 183+ days in Spain, or your centre of economic or vital interests is there), you are liable for Spanish tax on your worldwide income, gains and wealth, and subject to the Spanish succession and gift tax regime.

Besides the expected income and capital gains taxes, Spain additionally imposes an annual wealth tax which generally affects those with net worldwide assets over €1,000,000. Combined, this can result in a discouraging annual tax bill.

Should you fear tax liabilities in Spain?

We often come across people who would love to live in Spain but are too worried about how much tax they will pay to make the move. They are limited to spending short periods in their Spanish holiday home instead – which is now more of a minefield with the EU’s 90-day rule.

But you do not necessarily need to fear taxation in Spain – some people even find they improve their tax situation by becoming a Spanish resident. While tax rates can look high, the Spanish tax regime does present tax mitigation opportunities – the way you hold your assets, and take income from them, can make a significant difference to how much tax you pay. Many British expats continue to hold the same arrangements they had in the UK, but this can be a very costly mistake.

A reduced tax bill for you

There are ways to reduce your overall liability for income tax, capital gains tax and other taxes on your savings, investments, assets and pensions. If there is a more tax-efficient way to hold your capital and assets, shouldn’t you explore if it could work for you? Don’t miss out on structures available in Spain that can reduce your tax liability as well as providing other potential benefits.

Less taxation for your heirs

Of course, the less tax you pay in your lifetime, the more you have to either spend now or pass on to your chosen heirs. But with some investment structures you may also be able to lower the inheritance tax liability for your heirs. Ideally, you want a solution that will limit inheritance taxes while also providing tax-efficient income and investment growth throughout your lifetime.

More estate planning flexibility

Strategic tax planning can also help make things easier for your family when you are gone. Many investment arrangements that provide tax efficiency also offer more estate planning flexibility and control.

Maximising real returns

Effective tax planning also plays a part in helping returns outpace the cost of living.  Ultimately, what counts when assessing the value of investments are actual returns – after all tax, expenses and inflation are taken into account.

Jason Porter is a Director of specialist expat financial advisers Blevins Franks and head of the company’s European Emigration Advisory Service.

He will analyse retiring to France, Portugal and Cyprus in November, December and January.