Spanish Capital Gains Tax Relief on the Main Home

16.03.10

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The Spanish gains tax regulations can provide relief on the sale of the main home for Spanish tax residents whose property qualifies as their habitual main residence. If you are 65 years or older

The Spanish gains tax regulations can provide relief on the sale of the main home for Spanish tax residents whose property qualifies as their habitual main residence. If you are 65 years or older the gain is tax free even if you do not buy another property. If you are under 65, the exemption only applies if you reinvest the proceeds of sale into a new main residence within a four year period, starting from two years before the sale. There is some confusion about whether this relief applies if your new main home is located outside Spain, so this article looks into this issue.

 

How does the relief work?

 

For the property you are selling to qualify as your main home, you need to have lived in it for a continuous period of at least three years from the date the property was bought or construction was completed. If you have to sell earlier because of a change of job, marriage, separation or death of a partner, the tax relief can still apply.

 

The relief is based on the proportion of the total sales proceeds reinvested in the new home. If it costs more than the sale price of the old home, the full gain is exempt. If only half of the sale proceeds are reinvested, then only half of the gain is exempt and the other half is taxable in the year of sale.

 

If the property being sold has a mortgage on it, it is the net sale proceeds (after deducting the mortgage) which need to be fully reinvested to escape capital gains tax.

 

The taxpayer must declare the gain on his Spanish tax return together with his intention to reinvest the proceeds into a new main home, or the relief will not apply.

 

Location of the properties

 

While the tax relief is only available to Spanish tax residents (as the property cannot be your main home if you are not Spanish tax resident), the properties themselves do not need to be located in Spain ? either the residence you are selling or the new one you are buying.

 

So, if you move to Spain and sell your main home in your former country of residence (eg the UK) after you become Spanish resident, you may be able to avoid Spanish capital gains tax under these provisions. You have to purchase your Spanish home within the two years preceding the date of sale of the UK property or within two years following the sale. The purchase price of the Spanish property should be at least the net sale proceeds of your UK property for full relief to apply.

 

If the Spanish property costs less than the amount you received from the sale of your UK property, you will be charged tax in Spain on a proportion of the gain equivalent to the sale proceeds not reinvested.

 

Similarly, if you sell your main home in Spain and move to another country, reinvestment relief can still apply to the former Spanish home even though the new home is not located in Spain, provided that you and your family make this property your new main home. The purchase of the new home must take place within the relevant time limits and the full sale proceeds must be reinvested for full relief to apply. If the family members move overseas to the new home, but the taxpayer remains in Spain, the relief will not apply as the property has not become the taxpayer?s new main home.

 

An example of relief applying in such a case is given in a formal response to a query submitted to the Spanish tax administration.

 

Furthermore, it would be a clear breach of EU law if Spain did not allow the relief for reinvestment in a new home situated within another EU country. This situation arose in Portugal, and so the European Commission took action, as below:

 

?In July 2004 the European Commission invited Portugal to change its rules which prohibit the capital gains tax relief where the new main home is situated outside Portugal. The European Commission considers these rules to be discriminatory and contrary to the EC Treaty rules on the free movement of people, etc.

 

?Portugal did not amend its legislation within the 2 months time limit given by the Commission, so in January 2005 the Commission decided to refer Portugal to the European Court of Justice.

 

?On 26 October 2006, the European Court of Justice ruled that the restriction of the relief to the purchase of a primary residence located in only Portugal was an infringement of the fundamental freedoms guaranteed by the EU Treaty.

 

?As a result of the European Court decision, taxpayers should be able to benefit from the main residence relief in Portugal, provided the proceeds are reinvested in another primary residence within the European Union.?

 

By David Franks, Chief Executive, Blevins Franks

 

12th March 2010

 

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.

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