Spain has been attracting Britons looking for holiday homes close to the Mediterranean and those wishing to retire to the sun for the past fifty years. With the Spanish authorities increasingly scrutinising the tax arrangements of foreign owners over the past decade or so, it is more important than ever for those spending a lifetime’s savings on a dream property to fully understand their tax position on purchase.
Capital gains tax in Spain
Gains on any transfer or sale of assets are taxable at progressive rates of 19%, 21% and 23% for Spanish residents. The 19% band applies to the first €6,000 of the taxpayer’s total gains and savings income during the year. Where total gains and savings income exceed €6,000, the next €44,000 is taxable at 21%, and the excess over €50,000 at 23%. Non-Spanish residents’ capital gains are taxed at a flat rate of 19%.
When a non-resident sells Spanish property, the purchaser is required to withhold 3% of the purchase price and pay it over to the Spanish tax office (Agencia Tributaria) on behalf of the vendor. This is a payment on account of the total tax payable by the vendor.
If there is an extra tax due payable, then the vendor will need to pay any balance through their tax return within the corresponding deadline. However, if there is a refund due, they will have to apply for it and wait for the Spanish tax office to approve it.
Spain does not simply exempt the main home from taxation; it employs a set of rules which enable exemption from taxation on any gain, as long as the sale proceeds are reinvested in another main home, provided:
1. You have lived in the property for a continuous period of at least three years (or if less, you must prove that you are selling the property because of a change of job, separation or the death of a partner);
2. The property you are selling was your main home at the time of the sale, or at any time during the last two years prior to the date of sale. This effectively allows a two-year window in which to sell the property after moving out;
3. You must buy the new main home within a period of two years, starting from the date of the sale. It is also possible to buy the new main home before the disposal of the former main home.
4. You must live in that new property for a continuous period of at least three years;
5. You must be either resident in Spain or in another EU/EEA country with a tax information exchange agreement with Spain (the UK currently qualifies).
The tax relief is based on the proportion of the total sales proceeds reinvested in the new home (net of any mortgage). If the new home costs more than the sale price of the old home, then the whole 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.
Main home reinvestment relief is not automatic. The taxpayer must declare the gain on their Spanish tax return, together with their intention to reinvest the proceeds into a new main home. If the required declarations are not made, the relief will not be accepted by the Spanish tax authorities.
British expatriates could expose themselves to capital gains tax in Spain, if as is common:
- They do not reinvest the whole proceeds from the UK sale of their former main home into the Spanish property; or
- They retain the UK home for more than two years after moving to Spain, perhaps because they want to make sure they are happy in their new surroundings before selling the old UK home.
If selling the main home in Spain to 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 you make this property your new main home.
Main home relief for over 65s
Spain offers a preferential position for the over 65s in relation to capital gains tax.
If the property sold qualifies as the main home under the three-year rule, and you are Spanish tax resident at the date of sale, the gain is tax free in Spain and there is no need to reinvest in a new property (assuming you are over 65 when you sell it).
This relief is not applicable for non-Spanish residents who are selling a property in Spain that used to be their main home when they lived there. Therefore, it may be worthwhile considering maintaining Spanish tax residence until the property is sold, particularly if the proceeds are not going to be reinvested in a new main home in the UK.
Other CGT relief for over 65s
In addition to the main home relief, since 2015 there has been an exemption on capital gains derived from the disposal of assets (not just real estate) for taxpayers over 65 years old, who reinvested the proceeds (totally or partially) in a whole-of-life annuity contract within a six-month period.
The maximum amount that can be invested is €240,000 and there is a deadline for this purpose. If the re-invested amount is less than the sale proceeds, only the amount re-invested is exempt with the excess taxable. The taxpayer would need to inform the insurance company that he is investing the proceeds from the disposal in order to obtain the capital gains tax relief and include the information on the corresponding Spanish tax return.
Spanish wealth tax
Spanish wealth tax is payable by residents and non-residents based on assets held at 31 December each year. While Spanish residents are liable on their worldwide assets, non-residents are only liable on their Spanish assets.
The general State exemptions available are up to €1 million per individual (a €700,000 personal exemption, and up to €300,000 specifically against the value of the main home). The different Autonomous Regions of Spain can vary the allowances and rates, and there is a large degree of variation between them. Madrid, for instance, applies a 100% allowance of the wealth tax due and thus there is no wealth tax payable.
The maximum rate, which in general applies in excess of €10.7 million, varies between the State maximum of 2.5% (which also applies in the Islas Canarias), to those of Andalucía (3.03%), Comunidad Valenciana (3.12%) and the Islas Baleares (3.45%).
Since 2015 there has been equal treatment for Spanish tax residents and non-residents for wealth tax purposes. Therefore, Spanish non-residents who reside in another EU/EEA country may be able to apply the rules of the Autonomous Region in Spain where most of their assets are located if these prove more beneficial than the State rules.
To take advantage of the available opportunities and secure the most tax-efficient approach, UK nationals with Spanish assets should talk to a regulated professional with in-depth understanding of both the Spanish and UK tax regimes.
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.