TAXATION: (Arising from a property purchase)
These notes are intended to make a purchasor aware of the personal tax obligations which can arise after a property has been purchased, whether the purchasor is resident in Spain or not and whether or not there has been income received. The following notes are intended as a guide only. It would always be advisable to seek specialist advice from a tax consultant who has knowledge of the Spanish tax system.
Any person living in Spain for 183 days in a year will be deemed to be resident for tax purposes for that year as well as any person who derives his main source of income from employment or business in Spain but is resident in Spain for less than 183 days. For those deemed to be resident there is a requirement to disclose information about assets held outside of Spain for any of three categories of assets if the value for any one category exceeds €50,000. The categories are: Savings or deposits including annuities; Shares or investments; and Property. If disclosure is required any resultant Spanish tax will normally be reduced by the amount of any tax payable overseas.
Personal Taxes – Non resident
A. As a non-resident property owner in Spain liability arises for income tax whether or not there has been income arising from the property. Tax will either be be charged based on the amount of rent received or assessed on the value of the property if there has not been any income.
B. If rent has been received a tax “Impuesto sobre la Renta de las Personas Fisicas -IRPF” is charged on the amount of the rental income. The amount of tax payable will vary according to individual circumstances. Many non-resident property owners elect to pay a flat rate of tax of 25% bearing in mind the income is likely to be taxable in the property owner’s country of residence and any Spanish tax paid will be off-set from any liability arising in their home country.
C. If no rent has been received, as would be the case if the property has been purchased for the owners own holiday use, then a tax known as the “Rendimientos del capital inmobiliario” is assessed on the “Valor Catastral” a deemed value of the property usually lower than the market value. Tax is levied annually on 2% of this value and taxed at 25%. A property with a Valor Catastral of €300,000 will result in income tax of €1,500 being payable.
D. A profit arising from a subsequent sale of the property will be liable to Spanish Capital Gains Tax. For non -residents this is taxed at 35%. The gain is reduced for any inflationary element and by any amounts spent on improving the property.
Personal Taxes – Resident
A. As a resident property owner in Spain liability arises for income only when there has been income arising from the property. Tax “Impuesto sobre la Renta de las Personas Fisicas -IRPF” will be charged based on the amount of rent received less expenses. There is a sliding scale and tax will be charged depending on your total income.
Because the tax rate has a small element for local taxes which vary by region it is not possible to refer to this scale except to state it ranges between 24.35% and 56% and it subject to reductions depending upon the personal circumstances of the tax payer such as their being dependents.
B. A profit arising from a subsequent sale of the property will be liable to Spanish Capital Gains Tax. For residents this is taxed at 15%. The gain is reduced for any inflationary element and by any amounts spent on improving the property and can be rolled over into a subsequent property purchase if only one property is owned and the property is the owner’s main residence.
All purchasors need to be aware of the “Plusvalia” tax. This tax is the liability of the vendor of the property. It is a tax levied on the increase in the “Valor del suelo” (Land Value) This tax is a local tax charged by each municipality on the increase in value of urban land in its own district. It is distinct from Capital Gains Tax which is a Central Government tax.
The local authorities determine the amount of “Plusvalía” to be paid when a house is sold. The market value or sales price of the property does not have an effect on the plusvalía tax.
Normally, but not necessarily, the seller pays the Plusvalía tax. However, this will depend on the sale agreement. The tax is calculated according to the “Valor del suelo” of the property and the number of years it has been in the ownership of the vendor.
Capital Transfer Tax – Spanish Succession Tax
People can go to great lengths to reduce the amount of tax they have to pay wherever they may live. Groucho Marx despairing about what he considered to be huge tax demands decided the only way to escape them was to find a way to opt out of the tax system all together. This entailed drastic steps. He had to demonstrate that he had no links with his country and considered himself no longer domiciled in the USA. The steps he had to take included resigning from all the clubs and associations he was connected with and buying a funeral plot outside the shores of America.
It is not suggested that a UK Spanish resident contemplates taking such far reaching steps but in any approach to tax planning as well as an individual’s residency status the country of domicile is important. The country of domicile is generally viewed by most tax jurisdictions as being the country of birth or the adopted country of the taxpayer.
The country of residence is important when considering tax liabilities arising from income derived and assets held in the country of residence but not for considering tax which arises upon death when assets are transferred to beneficiaries.
The country of domicile will affect the taxation of assets arising on death wherever they may be situated. This means that the UK tax authorities will take a slice of a UK Spanish resident’s assets in Spain as well as a slice being claimed by the Spanish fiscal authorities. The UK authorities will also seek to tax income arising in Spain. However tax protocol between countries has become more civilised (there are no longer wars fought over custom duties and taxes!) and a taxpayer will end up only paying an amount of tax equivalent to the highest amount assessed by one tax jurisdiction. This is achieved through the mechanism known as “Double taxation Relief” whereby tax paid in the lowest tax jurisdiction can be used as a credit against the amount payable in the highest tax jurisdiction.
Residency rules in both Spain and the UK are similar. An individual will be deemed a resident of Spain or the UK if they have a lived for a period of 183 days or more in a tax year in either country.
For most the fundamental tax concern would arise on death. The Capital Transfer Tax payable in the UK and the Spanish Succession Tax payable in Spain are very different. In the UK the asset threshold before Capital Transfer Tax is payable is £325,000 with tax levied at 40% on the value of assets above this threshold with a complete exemption on transfers between spouses; whilst in Spain there is no threshold and tax is levied on a sliding scale starting at 7.60% and rising to 34.00% on assets above 797,555.10 euros. In the UK the tax is payable by the estate whilst in Spain it is payable by the recipient (beneficiary). It is due only if the recipient is resident in Spain or the asset being inherited or gifted is an asset located in Spain. This would mean UK assets would only be taxable in Spain if they were transferred to a resident in Spain.
In Spain there are recipient exemptions when assets are left to issue (children) or other family members including step-children, brothers and sisters, cousins, nieces and nephews, aunts and uncles as well as grandparents and great grandparents. Spouses also qualify for recipient exemption but unlike the UK do not benefit from a blanket exemption. These exemptions can be as high as 47,858.59 euros if the recipient is a resident of Spain and below the age of 21. The exemptions are much less if the recipient is not resident in Spain. UK domiciled Spanish residents will be liable for both the UK Capital Transfer Tax and the Spanish Succession Tax. Any UK tax payable would be reduced by the amount of tax paid in Spain.
Should you hold combined assets in Spain and the UK valued significantly above the UK threshold of £325,000 it is likely that the Capital Transfer Tax liability on the Spanish held assets will be more than the Spanish Succession Tax resulting in an additional tax charged being levied by the UK authorities.
The different rates of tax levied on income by the UK and Spanish authorities are not that different. There are close similarities in the approach followed by the two tax regimes and most individuals will not encounter any major surprises. It should be borne in mind that a UK resident of Spain and thus a non-resident of the UK will still be liable for UK tax on their Spanish income unless that individual has established a “non-ordinary residency “tax status in the UK; in which case UK tax is only payable on income derived from Spain and remitted to the UK.