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Downsizing your home or property portfolio can potentially realise many cost savings, but did you know that mitigating Spanish wealth tax could be one of them? 

With careful planning, scaling down property ownership can also increase your accessible wealth without necessarily short-changing your heirs. 

The tax costs of property

As far as investments go, property can be very costly to maintain. Wherever you hold real estate, it is likely to attract some sort of council tax, stamp duty and capital gains tax. These costs usually increase with the property’s value, as does the size of any mortgage and maintenance expenses. If you have UK property, recent changes – such as the reduction of buy-to-let tax relief on residential properties and new capital gains tax liability for non-residents – may have increased your tax burden. 

Read our article, Is your UK property worth its weight in tax?

Here in Spain, real estate can also tip you over the threshold for wealth tax and significantly increase your tax bill. While rates and allowances vary regionally, usually annual wealth taxes of between 0.2% and 3.5% apply where the combined value of assets owned exceeds €700,000 (Spanish-only assets for non-residents; worldwide for residents). 

Spanish residents benefit from an additional €300,000 main home allowance per individual. However, as worldwide assets are counted when assessing liability for residents, second homes and UK/overseas property could potentially cost several thousands in extra wealth taxes.

See more about Spanish wealth tax

Minimising wealth tax

By releasing capital held in property, you could gain the opportunity to shelter it from wealth tax liability. If you have a sizeable portfolio and do not need immediate access to that capital, it may be possible to reinvest it – alongside other liquid funds – into a Spanish-compliant investment structure that does not attract wealth tax. 

Besides the potential to legitimately minimise your wealth tax bill, selling property to restructure the capital can offer other benefits, such as income tax deferral. It is also easier to structure investment capital to reduce Spanish succession tax liability for your heirs than it is with property. 

Even if you are not able to reduce your wealth tax liability, it is sensible to explore alternative investments to property that may offer more flexibility and tax efficiency in Spain. You could, for example, benefit from choosing arrangements that allow you to take a regular income and hold investments in multiple currencies to minimise exchange rate risk. 

A locally-based financial adviser with cross-border experience and specialist tax expertise is best placed to help you take advantage of available opportunities.

Freeing up your capital

One potential downside of property as an investment is that it locks your money away in an illiquid way, usually for a long term. If you want to access your capital, perhaps due to unexpected circumstances, you may not be able to sell property easily or for an acceptable price. Alternative structures, such as investment funds, allow you to sell the amount you need, not the whole investment. They can also offer more diversification than property, spreading risk across a range of different assets – like equities and bonds as well as real estate – and also by market sector, geographical region etc.

Remember: most investments will still be subject to wealth tax in Spain, but you may be able to reduce liability by locking funds away for a fixed term in a particular Spanish-compliant solution. If this option is available to you, you would need to weigh up whether liquidity is more important to you than reducing wealth tax. 

Downsizing your home

Of course, not all property is owned as an investment. Many expatriates own their own Spanish home, and also keep hold of UK property for personal use or in case they return.

Downsizing the property you live in can be a relatively straightforward way to boost your accessible wealth. It needn’t be a compromise for space. Many find that once children have flown the nest, a smaller home can suit their needs better in more ways than just lower bills and expenses.  

It also needn’t be at the expense of your heirs. While many people plan for their home to provide future financial security for their family, it is possible to reduce the size of your property to unlock capital and still leave a lasting legacy. With suitable financial planning, you could restructure released funds to enjoy a more generous retirement income during your lifetime, for example, while also reducing the inheritance tax payable by your chosen heirs in the future.

Whether you hold numerous properties within your investment portfolio or just a large family home, a good adviser can ensure that you hold all of your assets in the most tax-efficient way possible. Talk to a regulated professional with in-depth understanding of both the Spanish and UK tax regimes to secure the best approach for your family’s circumstances and goals.

Contact Blevins Franks to discuss your options

 

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.