Considering moving to Spain with your UK pension? Or already here and wondering what to do with it? You’re not alone—and the financial implications can be huge. With post-Brexit rules, a game-changing 2021 Spanish tax ruling, and recent UK reforms, understanding how your pension will be taxed in Spain is essential for anyone planning to retire, invest, or pass on wealth across borders.

As tax lawyers advising UK nationals in Spain, we advise our clients on how to avoid painful mistakes when managing pension transfers, withdrawals, and estate planning. This  guide covers some of the basics you need to know—from avoiding surprise 54% income tax bills to making the most of regional tax benefits.

 

The 2021 Ruling That Changed Everything

In 2021, a landmark Spanish tax ruling fundamentally altered the tax landscape for UK pension transfers.

What happened?

The Spanish tax authority determined that when a Spanish tax resident transfers a UK pension—especially from a jurisdiction outside the EU/EEA—the entire value of the fund may be immediately taxable as income in Spain.

Why it matters:

• The UK is now considered a “third country” post-Brexit.
• That means a transfer from the UK to any overseas pension scheme, such as a QROPS, can trigger full Spanish income tax on the entire pension value, not just the withdrawn income.

Depending on your region in Spain, this could result in an income tax bill between 46% and 54%.

Timing is everything:

If you complete the pension transfer before you become a Spanish tax resident, this heavy tax exposure may be avoided. But once you're tax resident—even if it's mid-year—the risk is real.

 

QROPS – No Longer the Easy Solution

What is a QROPS?

A Qualifying Recognised Overseas Pension Scheme (QROPS) allows you to transfer your UK pension abroad while remaining compliant with HMRC rules. Historically, QROPS were popular with British expats because they offered:

• Freedom from UK pension rules
• Investment flexibility
• Estate planning advantages

But things have changed:

As of October 30, 2024, most QROPS transfers are now subject to a 25% Overseas Transfer Charge (OTC)—unless:

• You're tax resident in the same country as the QROPS, and
• The QROPS is established in that country

Spain currently has only one approved QROPS,  with limited accessibility.

And the problems don’t stop there:

• If your pension pot exceeds £1,073,100, the excess is taxed at 25% even if you meet residency conditions.
• Even if you avoid UK charges, Spanish income tax may still apply—on the full value of the transferred fund if you’re a Spanish tax resident.

Verdict:

QROPS can still work in niche scenarios, but for most Spanish-based UK nationals, they’re no longer the default choice—and may even create unexpected tax traps.

 

The Case for Keeping Your UK Pension in a SIPP

If transferring your pension invites income tax and hefty charges, what’s the alternative? More and more British expats are opting to retain their UK pension in a SIPP (Self-Invested Personal Pension) and manage their income smartly from abroad.

 

Benefits of using a SIPP while living in Spain:

• FCA-regulated: Greater protection against mis-selling and scams
• Cost-effective: Lower fees compared to QROPS
• Flexible withdrawals
• Apply for a No Tax (NT) code to stop UK withholding tax and ensure income is only taxed in Spain
• No triggering of immediate income tax on the fund value

Plus, with the abolition of the Lifetime Allowance in 2024, one of QROPS’ big advantages—avoiding LTA charges—is now gone.

 

How Spain Taxes UK Pensions (Post-Brexit)

Once you become a Spanish tax resident, you are taxed on your worldwide income, including all UK pensions.

Let’s break down the types:

1. Private/Occupational Pensions

• Taxed only in Spain (under the UK-Spain Double Taxation Agreement)
• You must prove Spanish residency to HMRC to remove UK tax deduction

2. UK State Pension

• Paid gross from the UK
• Taxable only in Spain

3. UK Government Service Pensions

• Taxed only in the UK
• Must be declared in Spain, but not taxed again—just used to calculate your marginal rate on other income

4. The 25% “Tax-Free” Lump Sum

• Not recognised in Spain
• If taken after becoming a tax resident, it's fully taxable
• Potential strategy: consider withdrawing before relocating to Spain

 

 

Wealth Tax and UK Pensions

Spain imposes an annual Wealth Tax on high-net-worth individuals.

What’s included?

• Worldwide assets, including UK pensions, if you're a Spanish resident
• Following Brexit, UK pensions are considered non-EU assets—so previous exemptions no longer apply

Current Wealth Tax Thresholds in Spain (2025)

If you're a Spanish tax resident, your worldwide assets—including UK pension funds—may be subject to annual wealth tax. The rules vary by region, and here’s how they currently stand:

• National Baseline:
• Each individual receives a general exemption of €700,000.
• If you own your primary residence in Spain, you can exclude up to an additional €300,000 of its value.
• Wealth above these thresholds is taxed progressively, with rates ranging from 0.2% to 3.5% depending on total net worth.
• Balearic Islands:
• In 2024, the regional government significantly increased the minimum wealth tax exemption to €3 million per person.
• This means that most individuals with assets below this threshold will owe no wealth tax.
• If your net wealth exceeds €3 million, you will still benefit from lower effective rates due to the larger exemption.
• Madrid:
• Madrid currently offers a 100% exemption from wealth tax for residents.
• This makes it one of the most tax-friendly regions in Spain for high-net-worth individuals.

If your pension pot plus other assets exceeds these thresholds, Wealth Tax applies—and it can get expensive.

The regional differences can also drastically impact your annual tax bill—especially if you hold substantial UK pension assets or other investments. Strategic relocation within Spain (or careful timing of asset transfers) can yield major tax savings.

 

Inheritance Tax – Don’t Get Caught Out

Spain vs. UK: Two very different systems

• UK: Inheritance tax (IHT) paid by the estate
• Spain: Inheritance tax (ISD) paid by the beneficiary

Residency matters:

• If your heirs live in Spain, they may pay Spanish tax on your worldwide assets
• If they’re non-resident, they only pay tax on Spanish assets

Good news (for some): The Balearic Islands have made major reforms:

• 0% inheritance tax for spouses and children
• Reductions for siblings, nieces, nephews—even non-residents can benefit

But in other regions, rates can go up to 34%, with much lower allowances.

UK Pension IHT Changes (from April 2027):

UK pensions, including QROPS, will no longer be shielded from IHT. Instead:

• They’ll be included in your UK estate
• Up to 40% inheritance tax may apply if unused at death

Even if you’ve been non-UK resident for over 10 years, UK-based pensions may still be caught. Estate planning must adapt accordingly.

 

Practical Advice & Action Steps

Before Moving to Spain:

• Consider taking the 25% UK lump sum early
• Consider consolidating pensions in a low-cost, FCA-regulated SIPP
• Consult a cross-border tax lawyer to structure your move

After Becoming Resident:

• Be strategic with pension withdrawals to avoid high marginal tax rates
• Monitor Spanish regional tax rules (wealth, inheritance, income)
• Keep documentation up to date with HMRC (NT codes, tax residency forms)

 

Final Thoughts

The rules around UK pensions and Spanish taxation can be complex. As lawyers focused on UK-Spain tax planning, we help clients:

• Navigate the 2021 ruling
• Optimise for income, wealth, and inheritance tax
• Understand regional tax benefits
• Stay compliant with Spanish Tax regulations

If you hold a UK pension and are considering moving to Spain, contact us to schedule a consultation and receive personalised advice to your cross-border tax and retirement planning needs.