Tax Implications Of Buying Property In Mallorca

19.08.16

Please note that this article is over six months old. While Blevins Franks takes care to make sure that information is accurate on the date of publication, some content may change over time. You should not rely on the accuracy of legislation and tax information in this article; take professional advice for your circumstances.

Mallorca is a great place to buy property, but you need to understand what tax you will need to pay, from purchase taxes when buying to capital gains tax when selling, as well as income, wealth and succession taxes.

Mallorca is a great place to buy property, but you need to understand what tax you will need to pay, from purchase taxes when buying to capital gains tax when selling, as well as income, wealth and succession taxes.

Mallorca offers properties to suit all budgets, but before buying you need to think about more than the price tag – you need to understand the tax implications too.

What you pay will depend on where you are resident and how you use the property – different taxes apply for your main home, holiday homes, rentals, or investment properties. You also need to consider how owning a property could affect wealth and succession tax.

Buying a property

Unless you buy a brand new property, you must pay the purchase tax, Impuesto sobre Transmisiones Patrimoniales. In the Balearics this ranges from 8% to 11% depending on the property value. While this does not apply to new builds, you will be charged 10% for Spanish VAT, Impuesto sobre el Valor Añadido (IVA).

You will also be liable for the Actos Jurídicos Documentados tax. Equivalent to UK stamp duty, this is generally between 0.5% and 1.2% of the property value on the deed.

Resident or not, if you own a Spanish residential property for your own use you face the annual Impuesto sobre Bienes Inmuebles (IBI). Similar to UK council tax, what you pay depends on the official value, called valor catastral.

If the previous owner did not pay IBI, you could be liable for unpaid charges over the last five years, plus penalties of 20%, so make sure you see the latest IBI receipt – ideally for the previous five years.

Likewise, when you sell, expect to show five years’ worth of IBI receipts. Also make sure the ownership information is officially changed so you are no longer liable at that address.

Letting a property
Regardless of your residency, rental income on Spanish property is taxable in Spain. If you are resident here, tax on rental income – including from abroad – will be charged at general income tax rates, ranging from 19% to 47.5% for 2016.

For long-term lets, you can get a 60% tax reduction against the net rental income if you are a Spanish resident. This is the amount received after deducting costs like local taxes, maintenance, insurance, agents’ fees and interest on loans to purchase or improve the property, as well as annual depreciation of 3%.

EU residents are taxed 19% on the net rental income after expenses. Non-EU residents pay 24% on the gross rental income with no deductible expenses.

Second homes and holiday homes
If you own a Spanish holiday home or property not used as your main home (seen to be the case for all non-residents) and it is not rented out, you need to pay tax on ‘notional rental income’. It is only payable for the period a property is empty.

Called imputación de rentas inmobiliarias, it is generally based on 1.1% of the valor catastral, rising to 2% if the value has not been revised within ten years. Spanish residents pay this at the scale income tax rates, EU residents at 19% and anyone else at 24%.

Selling a property

Capital gains tax
Non-residents pay a flat rate of 19% on gains from the sale of Spanish property. For residents, gains are added to other investment income over the year and taxed using the savings income scale. The 2016 rates are 19% up to €6,000, 21% for the next €44,000 and 23% for anything over this.

In any case, you will not be taxed on gains from your main home if you are under 65, have lived in the property for at least three consecutive years and buy another property within the EU as your main home within two years of selling. If you reinvest less than the proceeds from the sale, however, the excess will be taxed. Other potential benefits are available for Spanish resident taxpayers over 65 years old.

Local land tax
When selling Spanish property you also pay plusvalía municipal on the increase in the value of the land, excluding buildings. This applies to residents and non-residents alike, and varies according to the size of the local population and the length of ownership.

Other tax implications

Wealth tax
Besides income tax, Spain also charges an annual wealth tax. Residents are liable for all worldwide assets, otherwise you are liable for Spanish assets only. Wealth tax rates for Islas Baleares range from 0.28% up to €170,472 to 3.45% for assets over €10,909,915.

There is an annual €700,000 allowance, with Spanish residents getting another allowance of up to €300,000 for the value of their main home. So couples who jointly own a home and are both resident could receive a total reduction of €2,000,000 in wealth tax liability.

Succession and gift taxes
If you die owning a Spanish property, or gift it during your lifetime, succession and gift tax (Impuesto sobre Sucesiones y Donaciones) apply, regardless of where you or the recipients are resident.

In Islas Baleares, tax rates on gifts range from 7.65% to 34% depending on the value. However, additional charges based on your relationship with the recipient and their net worth could increase this up to 82% in extreme cases.

Tax on inheritances depends on how much you give and to whom. Rates for spouses, direct descendants and ascendants range from 1% to 20%, otherwise the same rates apply as for gifts – 7.65% to 34%.

A 100% main home relief up to €180,000 is available to a spouse, descendant or ascendant who keeps the property for at least ten years. If it is not the main home, a €25,000 allowance applies for direct relatives (up to €50,000 for minors), €8,000 for other relatives and €1,000 for non-family.

Note that if you are a UK national you may be considered a UK domicile, even if you’re a Spanish resident, and therefore also liable for UK inheritance tax.

The importance of tax planning

Spanish tax can be complicated, especially if you have to consider the tax regime in your home country as well as the interaction between them. However, with careful, personalised tax planning, Spain can be a very tax-efficient place to live.

At Blevins Franks we have decades of experience advising expatriates on wealth and tax management in Spain. Speak to us to make sure your financial affairs are in order so you can relax and enjoy your new property in Mallorca.

Any questions? Ask our financial advisers for help.

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 is advised to seek personalised advice.
 

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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