Spanish Property Tax – When, Where, How, Who?
August 18th, 2006
There was good news for non-residents of Spain who own property in Spain at the start of this year – the rate for capital gains tax was slashed from 35% to 18%.
The bad news for Spanish residents was that it was increased from 15% to 18%. The new regulations also reduced the withholding provision that non-residents pay when selling property in Spain from 5% to 3%.
The new law came about because the European Commission viewed the disparity as discriminatory because it meant a higher tax burden on non-Spanish nationals who are less likely to be Spanish residents. Consequently the European Commission sent Spain a formal request to amend this legislation.
When you come to sell your property in Spain you may be liable to Spanish capital gains tax. If you move to Spain and become a Spanish tax resident, you will be liable to Spanish capital gains tax on your worldwide gains. As a non-UK resident, you become completely UK capital gains tax exempt – even on UK property.
Once you are resident in Spain, there is possible relief for the main home in Spain, but not for the sale of UK property even if it was a former home unless you can possibly satisfy the re-investment rules which are quite restrictive.
For property acquisitions on or before 31st December 1994, the time-apportioned gain up to 20th January is reduced by 11.11% for every year (or part year) of ownership prior to 31st December 1994. It therefore reduces that part of the gain to nil for property acquired on or before 31st December 1986.
The gain from 20th January 2006 is taxed in full, though. So, as time progresses, the longer an older property is retained before sale, the higher will be the taxable fraction of the gain. The new 18% tax rate applies to all types of asset, not just property.
Principal Private Residence Exemption
In Spain you are exempt from capital gains tax on the sale of your main residence if you are 65 years or over and you have lived in the property for three years or more.
If you are under 65, and you have lived in the house for at least three years, then you can relieve the gain via the acquisition of a new home as long as you are Spanish tax resident. You must re-invest the net sale proceeds (after repaying any mortgage) into a new main residence within a period of two years either side of the sale.
The tax relief is based on the proportion of the total sale proceeds reinvested into the new home. If the new home costs more than the sale price of the old home, then all of the tax is deferred. If only half of the sale proceeds are reinvested, then only half of the gain is deferred. The main residence does not need to be in Spain to qualify for the relief, nor does the new home. Expenditure on improving or enhancing the property is allowable as a deduction when calculating the net gain.
Main Exemptions
Assets divided on divorce or the dissolution of a community marriage regime are exempt from capital gains tax, as are gifts to certain charities and non-profit making entities. For family companies (and the definitions are very tight), it is possible to pass the asset to the next generation without paying capital gains tax, but it is simply deferred (or rolled-over) into the cost base of the next generations. Thus tax will eventually be payable on the gain.
Plusvalia
In addition to any mainstream capital gains tax on the sale of property there is also a local tax in urban areas commonly known as the Plusvalia (which translates as “gain”), on the growth in the value of urban land excluding the buildings. Any Plusvalia tax paid is allowed as a cost of disposal in calculating the mainstream capital gains tax.
Gifts
If you gift an asset which has a disposal market value in excess of your original cost, then you will be liable to Spanish capital gains tax. The recipient might also be liable to Spanish gifts tax depending on the circumstances.
Double Tax Treaty
Under the UK/Spain Double Tax Treaty, if you are a UK taxpayer you can claim the Spanish tax paid against any UK capital gains tax liability on the same gain, but if the UK tax is less than the Spanish tax you will not get any refund from Spain.
Bill Blevins – Managing Director of Blevins Franks
