As you consider purchasing a property in Spain, it is important to be mindful of the expenses that go beyond the asking price and regular maintenance fees. Understanding the tax implications of owning a property can save you from unexpected surprises.
Taking the time to familiarise yourself with the tax implications can make a significant difference. You may be subject to various taxes such as purchase taxes, annual wealth tax, capital gains tax, or succession tax.
To ensure that you and your heirs are not burdened with unexpected tax obligations, it is essential to be informed about these tax considerations in advance. Taking proactive steps can help you maximise the benefits of property ownership while minimising your liabilities.
Consider the purchase and local taxes
When purchasing a property in Spain, it is important to understand the various taxes that you will be required to pay. The type and amount of tax to be paid will depend on whether the property is a new build or pre-owned, as well as its value.
For new build properties, you will be required to pay a value-added tax (VAT) of 10%, known as ‘Impuesto sobre el Valor Añadido’ (IVA), as well as stamp duty, , or ‘Actos Jurídicos Documentados’ (AJD).
On the other hand, pre-owned properties are subject to a property transfer tax, or ‘Impuesto sobre Transmisiones Patrimoniales’ (ITP). The general rate varies between regions.
Once you have purchased your property, you will be liable for the ‘Impuesto sobre Bienes Inmuebles’ (IBI), which is the Spanish equivalent of council tax. The amount you’ll be required to pay each year is based on the official value of your property, or valor catastral.
Consider rental and notional rental income tax
If you decide to rent out your Spanish property, it is important to be aware of the taxes you will need to pay on the income. The amount payable will depend on whether you are a resident or non-resident, as well as other factors.
For residents, income tax is calculated using general scale rates. However, if you are renting out your property on a long-term basis, you may be eligible for a 60% tax reduction against the net rental income.
Non-residents have different tax obligations depending on where they live. EU/EEA residents are subject to a flat 19% tax rate on the net income after certain deductions, while non-EU/EEA residents (including UK residents) are required to pay 24% on the gross rental income without any deductions.
It is worth noting that if you own a Spanish holiday home or property that is not used as your main home, you may still be required to pay tax on what is known as ‘notional rental income’ during the periods when the property is not rented out. This is generally calculated as 1.1% of the ‘valor catastral’ (or 2% if the value has not been revised within the last ten years) and is then taxed at income tax rates which differ depending on your residency status.
Consider tax on capital gains
If you plan to sell your property in Spain, you should be aware that you may have to pay taxes on the gain you make from the sale.
If you are a resident in Spain, any gain from the sale will be added to your other investment income and gains for the year and taxed using the ‘savings income’ rates, which currently range from 19% to 28% depending on the amount of the gain.
However, if you are over 65 and the property you are selling is your main home, you may not have to pay tax on the gain if you meet certain requirements. If you are younger than 65, you could also qualify for this relief if you use the full proceeds to purchase another main home within the EU/EEA within two years.
For non-residents of Spain, the capital gains tax will be charged at a flat rate of 19%.
You may also have to pay ‘Plusvalía municipal’ when selling a property. This local land tax is payable on the increase in the value of the land (excluding buildings) and the amount may vary according to the size of the local population and length of ownership.
Consider wealth and solidarity tax
In Spain, an annual wealth tax is levied based on the total value of your assets as of 31 December of the calendar year. This tax applies to worldwide assets if you are a resident in Spain, while non-residents only have their Spanish assets assessed.
Every individual is eligible for a €700,000 personal allowance, and residents receive an additional €300,000 home allowance. This allowance is per person, meaning that a resident couple could potentially have a combined allowance of up to €2 million if assets are in both of their names.
It is always important to take this into consideration when purchasing Spanish property, especially if it is a high-end property or if you have substantial wealth. The same applies if you are a Spanish resident purchasing property abroad.
Residents of Andalucía should note that the annual wealth tax has now been completely scrapped for that region, although the temporary ‘solidarity tax’ confirmed in December 2022 will remain in place until the 2024 tax year.
Spain’s solidarity tax on large fortunes, or ‘impuesto de solidaridad a las grandes fortunas’ is a temporary tax that was introduced to help with the current cost of living crisis. It is to be abolished after the 2023 tax year if no further extension takes place.
Solidarity tax is only applied to large fortunes of above €3 million, and although it is extra to Spain’s regular annual wealth tax, those affected by this temporary measure will not pay tax twice. When calculating an individual’s net wealth, worldwide assets will be considered for Spanish residents, while non-residents will only have assets they hold in Spain taken into account.
Consider Spanish inheritance tax
Planning for the future includes not only managing your assets while you are alive, but also considering what happens to them after you pass away. In Spain, inheritance and gift taxes are always due on Spanish property, regardless of the residence of the deceased or heirs. It is, therefore, important to factor in the potential tax implications for your beneficiaries when planning your estate.
In Spain, the rates for inheritance and gift taxes vary depending on what region you are living in, who the beneficiary is, and the value of the inheritance or gift.
Fortunately, there will be a significant reduction on the value of the main home for spouses, descendants, and ascendants who keep the property for at least five years after receipt of the property. In the absence of direct family, a more remote family member over the age of 65 who has lived with the deceased two years prior to death would also be eligible. This reduction helps alleviate the tax burden on beneficiaries.
In addition, there are some personal reductions available to close relatives, other extended family, and even non-family members.
Considering the potential tax implications of inheritance and gifting can help ensure that your loved ones receive the maximum benefit from your estate. It’s essential to seek professional advice and plan your estate accordingly to minimise tax liability and ensure that your wishes are carried out.
Consider whether to own the property through a company
Owning a Spanish property through a company was once a popular strategy for wealthy expatriates looking to reduce their tax liabilities. However, changes over the years have diminished the advantages of this approach, and it may now be more of a disadvantage than a benefit.
Under current regulations, “enveloped” property is subject to savings income tax on any profits and is liable for both wealth and succession taxes, without being eligible for any of the main home allowances. In some cases, Spanish corporation tax may also be due.
As such, it is important to seek objective advice and carefully weigh the pros and cons before deciding whether to hold your Spanish property through a company.
Consider the advice of experts
Navigating the Spanish tax system can be challenging, especially when you need to consider how it interacts with the tax regime in your home country. The rules and regulations surrounding taxes can be complex and they often change over time, making it difficult to stay up-to-date.
That is why it’s essential to seek the advice of a specialist, cross-border wealth management advisor to help you establish a tax strategy that works for your unique circumstances. By doing so, you may discover ways to lower your tax liabilities and ultimately reduce your overall tax bill.
Do not underestimate the potential benefits of seeking professional advice in this area – it could save you a significant amount of money in the long run. Blevins Franks has 45 years of experience supporting expatriates in Spain with specialist tax planning, as well as pensions, estate planning and investment management services.
We have nine offices across the popular expatriate areas of Spain, with advisers living locally. They have the cross-border expertise to make sure your financial affairs are in order so you can relax and enjoy your new home away from home in Spain.
Contact Blevins Franks today.
