Tax expert Peter Howarth says the Hacienda – the Spain tax authority – is now routinely investigating all forms of investment and pension income from overseas.

“A number of clients have reported receiving letters about their offshore bank accounts. It is the first time we have seen the Hacienda using information supplied by a tax haven to pursue tax on undeclared income. The Hacienda has also sent enquiries based on information received from other OECD tax authorities.”

In particular, Howarth explains this might affect both residents who have offshore accounts and those who are claiming non-residence but have told their bank they live in Spain.

Expats who may have undeclared income should review their position and, if appropriate, make the most of the tax amnesty announced by the Spanish government, says Howarth.

The amnesty, which runs until 30 November 2012, allows people to admit to undeclared assets and pay a nominal ten per cent tax rate.

The amnesty is part of series of measures to tackle Spain’s ‘hidden economy’. They include rules obliging people who set up overseas investments to notify the tax authorities and a ban on cash payments of €2,500 euros or more.

In addition, the Organisation for Economic Co-operation and Development (OECD) now requires all member states to routinely and regularly swap all information relevant to personal taxes.

Howarth says a range of factors were conspiring against those who were not declaring their full income:

“For countries under pressure to shore up their public finances, tax evasion is a logical area to target and – as the current example shows – tax authorities from different countries are now routinely working together to catch offenders.

“In addition, a lot of data is readily available online so it is easy to track them down. We are convinced it is only a matter of time before the Hacienda begins to use Land Registry records to pursue those with properties in the UK. The world is becoming smaller and more transparent. People need to put their affairs in order now or potentially face tough penalties.”

Spanish IHT reclaims On a separate tax issue, the expected European Court of Justice (ECJ) ruling in favour of Spain amending its inheritance tax (IHT) laws could see thousands claiming overpaid tax.

The different IHT treatment between residents and non-residents recently led the European Commission to take Spain before the ECJ on March 7 2012.

In the meantime, the Spanish IHT rules are still in force and conservative estimates based on data from the Spanish Tax Authorities has indicated that 60,000 UK families have been overcharged IHT by an average of £12,000 each in the last 8 years, says pressure group Spanish Legal Reclaims.

However, only 40,000 are still able to make a claim due to the Spanish legal time limits, which stop claimants attempting to make a claim after 4 years from the tax payment date.

Experts believe it will take two more years for the Spanish Authorities to amend the IHT Laws.

According to Luis Cuervo CEO at Spanish Legal Reclaims hundreds of families from across the UK and Spain have now come forward as they believe they have fallen foul of this Spanish tax loop and have been wrongfully overcharged IHT by 100%.

“The reclaim amounts we are currently dealing with are also higher than the anticipated average reclaim we were expecting. Our current data shows that the average reclaim amount is currently £12,000 when we estimated claimants would have average reclaims of £10,000.”

Cuervo says anyone who has inherited a Spanish property and who is not a Spanish resident will have been a victim of discriminatory IHT, which has seen non residents pay higher IHT bills.

The Spanish IHT system is complex, non residents will pay according to a scale that could reach up to 34% of the inherited property value without any tax deduction, explains Cuervo.

Currently, 99% tax exemption applies to Spanish residents.

For example for a property worth €150,000 non residents will pay approximately 9% IHT, whereas Spanish residents will pay nothing in the majority of cases or a maximum of 0.9%.

For a €500,000 property non residents will pay 20% IHT whilst Spanish residents would again pay between 0% – 0.9%.