If you own, or are thinking of buying, property here in Spain, you need to be aware of all the tax implications and what your tax liabilities are, both in Spain and your home country if you are no
If you own, or are thinking of buying, property here in Spain, you need to be aware of all the tax implications and what your tax liabilities are, both in Spain and your home country if you are not resident in Spain. These vary depending on where you are tax resident and what you intend to do with the property: holiday home, to rent out, an investment to be sold on, or as a future main home.
On buying the property, there will be purchase tax (ITP) at 7% or 8% depending on the particular region (8% applies in Catalu?, Baleares, and in Andalucia on the excess over ?400,000). In the Canary Islands the rate is 6.5%. On new properties acquired from a developer, however, there is no ITP but Spanish IVA (VAT) at 8% is payable. There is no IVA in the Canary Islands; instead, a sales tax (IGIC) of 5% is levied on new property from a developer.
If a residential property, IBI tax (equivalent to UK council tax) is paid by the person who occupies it on the 1st January in any year (you if it is a holiday home or only rented for short lets). IBI is calculated on the basis of the notional rental value (valor catastral) of your property multiplied by the tax rate fixed in your locality.
There may also be other local taxes raised annually by the town hall, which can incur a 20% penalty if unpaid by the due date.
Tax on rental income
Where the property is to be let, the rental income is taxable in Spain, regardless of your residence status.
Spanish residents will pay tax on the income and any rental income from abroad at the progressive scale rates from 24% to 45% (from 2011). There is a reduction of 50% available (60% from 2011) against net rental income applicable to long-term lets which would normally be for at least one year in duration.
Non-Spanish residents are taxed on at 24% on the gross income. The tenant is obliged to withhold 24% from the rent and pay it to the Spanish tax authorities.
Where the property is not used as your main home, a purely notional income is deemed to arise for periods where the property is not actually let, normally based on 2% of the valor catastral as shown in the IBI notice for the year, taxed at the scale rates for Spanish residents, and 24% for non-residents.
If you are UK resident, the income will also be taxable in the UK. Both countries will apply their own rules to calculate the tax, so the taxable amount is likely to be different in each country. You can offset the Spanish tax actually paid against the UK liability to avoid double taxation, but if the UK tax is higher, further tax will be due in the UK.
Capital gains tax
Looking ahead, when you eventually come to sell your Spanish property capital gains tax will be due on the gain, at 19% on the first ?6,000 and 21% on the balance. Spanish residents will have to add in other gains and investment income when calculating the tax due.
For Spanish residents, gains on disposal of the main home are exempt where you have lived in the property for at least three years and you are:
1.Over the age of 65; or
2.The full proceeds of sale (i.e. the selling price) are reinvested in a new main home within a certain period.
There is also a local tax known as the ?Plusvalia? and raised in urban areas on the growth in the value of land, and which is allowed as a cost of disposal in calculating the mainstream capital gains tax.
For UK residents, the gain would be taxable in the UK, but as with rental income, under the terms of the double tax treaty, any tax paid in Spain by UK residents can be credited against the tax due in the UK.
Taxes on death
If you die owning the property, or gift it during your lifetime, Spanish succession tax will apply, regardless of your residence position. If non-resident in Spain or you have lived here for less than five years as a declared resident, the State rules will apply, and these are not generous ? spouses and children are entitled to a deduction of just under ?16,000 per beneficiary, and pay tax at progressive rates from 7.65% to 34% on the excess. Taxes are much higher for unrelated individuals, such as unmarried partners or stepchildren.
If Spanish resident, each Autonomous Region can set its own rates and exemptions, and in some Regions, succession tax has been significantly reduced, whilst in others, it is still significant.
Taking advice from someone who understands the Spanish implications (and also the UK implications if you remain UK resident) can help you mitigate taxes. Speak to a tax and wealth management firm like Blevins Franks with experience of reducing taxation in Spain to be confident both that you are not paying more tax than is necessary and that you will get caught out with an unexpected tax bill.
The 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; an individual must take personalised advice.
9th December 2010, updated 20th January 2011