The UK tax authority HM Revenue & Customs has issued another warning against hiding assets offshore, and this includes overseas property. Many British residents own property in c
The UK tax authority HM Revenue & Customs has issued another warning against hiding assets offshore, and this includes overseas property. Many British residents own property in countries like Spain, but not all of them fulfil their tax obligations in the UK and/or here in Spain. Both countries are now taking a closer look at property ownership to ensure they receive all tax due.
Tax obligations
If you own property in Spain but are a UK resident, you need to comply with both the UK and Spanish regulations.
As a UK taxpayer, you need to declare the rent on your annual UK tax return. Any gains on sale need to be declared and taxed in the UK. Overseas property must also be declared as part of your estate for UK inheritance tax purposes if you are UK domiciled.
In Spain, rental income from the property is taxable under the local rules, with special regulations and tax rate for non-residents. If you do not rent out the property, or for times when it is unlet, a notional income is deemed to arise and tax is due on this. There is therefore always some income tax to pay in Spain (the notional income is not taxable in the UK).
If and when you sell the property you will pay tax on the capital gain under the savings income regime (if held for less than a year, any gain is likely to be taxed at the scale rates from 2013).
The net equity value of the property is currently liable to wealth tax if it is valued at over the individual allowance. As this is ?700,000 (the ?300,000 main home exemption is not available to non-residents), if owned by a couple in joint names up to ?1,400,000 can be sheltered from this tax. A mortgage can also reduce its taxable value.
The property will be subject to succession tax if you die or give it away as a gift. This can be expensive for non-residents as you cannot benefit from the more favourable local rules.
Spain and the UK apply their own rules to calculate the tax due in each case, so the taxable amount will be different in each country.
You do not however have to pay tax twice. In the case of rental income, capital gains and succession tax you can offset the Spanish tax paid against the UK liability to avoid double taxation. If the UK tax is higher, further tax will be due in the UK. If the UK tax is lower, you do not get a refund for the difference.
It can be hard enough getting tax planning right in one country; getting it right when it involves two countries is even more complicated. You should seek professional advice from a firm like Blevins Franks which specialises in both Spanish and UK taxation and how the two interact.
UK warning
Chief Secretary to the UK Treasury, Danny Alexander, has warned that the government is going after tax dodgers to make sure they pay their fair share. This includes those hiding assets offshore. It is targeting wealthy Britons who own property abroad as it has concerns that owners are failing to declare millions of pounds of rent.
Its team of tax investigators is looking through tax return records across different databases and public records, comparing them all and looking for ?oddities?.
In one example, HM Revenue & Customs recently launched a successful case against a UK taxpayer who owned and rented out over 10 properties abroad but had not declared any income. The case involved over ?100,000 of unpaid tax.
People who only own one overseas property could also be targeted, though HRMC is particularly focusing on those who own a few houses.
HMRC had announced that it was targeting wealthy individuals who own land and property abroad last autumn. It applies sophisticated data mining techniques to public information to identify people own property abroad.
It then uses risk assessment tools to compare the information to that supplied on tax returns. This highlights people who do not appear to be correctly declaring the income and gains, and those who do not have the means to purchase the property.
The internet plays a big part in the research. For example, most holiday rentals are advertised online. There have even been reports about investigators looking through Twitter accounts for people discussing their property and lifestyles. HMRC can use the internet to spot ?anomalies?, ?lifestyle indicators? and ?unexplained inconsistencies? ? in other words, any discrepancy between information provided on tax returns and reality.
Much of this work is being done by HMRC?s Affluent Unit. Its remit has been expanded to cover people with assets over ?1 million – previously the threshold was ?2.5 million. It is also hiring 100 additional staff.
In Spain
The Spanish Tax Authority, Agencia Tributaria has linked up with the Land Registry to receive property ownership information and also receives electricity usage data and ownership details for every property in Spain. It compares these records with tax returns and last year began writing to people who had not submitted returns. Besides looking at income and wealth tax returns, it is also looking at non-resident tax returns.
The Spanish tax amnesty, due to end on 30th November, also covers non-resident income tax.
For advice on Spanish and UK tax law, and effective tax planning in both countries, speak to experienced tax and wealth management firm. Blevins Franks has decades of experience advising British expatriates in Spain and helping them legitimately lower their tax liabilities.
26th October 2012
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 should take personalised advice.
