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Personal tax  •  Tax Planning  •  Taxation

Holiday home tax: Possible Brexit tax hikes for Spanish home owners

By RJP LLP on 28 November 2019

One of the investor outcomes of Brexit, which is now looking increasingly likely to go ahead, is the impact it will have on the taxation of properties in Spain which are owned by UK taxpayers. The tax rules in Spain are very different to the UK; for instance the Spanish tax year runs from January to December, not April to April and the rates of tax payable are very different.

Like most countries, Spain has specific tax laws for non-residents with different rates and rules for taxpayers depending on whether they are EU/EEA residents or not. Currently, UK residents with Spanish property have special EU rights, but if the UK leaves the EU as planned, then these individuals will immediately lose their status as EU residents and will forfeit their current rights. This means the tax rate for all rental income from a Spanish property will increase from 19% to 24%. In addition, UK residents renting out Spanish property will no longer be able to offset their income expenses against rental revenues for Spanish tax purposes. This could make a big difference to the long term affordability of Spanish holiday homes.

Will leaving the EU mean more tax is payable in Spain?

Based on the current rules, leaving the EU will mean owners of Spanish rental property will see a 5% increase in the amount of tax they need to pay on rental income.

Holiday home tax rules worked example: The following example highlights how this arises:

Because Jane’s taxable income in the UK from this source will be after deduction of certain expenses, which have not been allowed in Spain, she will not be able to claim full double tax credit relief against her UK tax liability.  Jane has an apartment in Malaga and rents it for €1,500 per month. She has expenses - a mortgage and allowable running costs of €1000 per month. Pre Brexit, the tax on her rental income of €6000 is €1,140. After Brexit it will be €4,320 because the rate will increase to 24% and she will no longer be able to offset her expenses.

What is the ‘valor catastral’?

One obvious solution for people who do not depend on rental income is to leave the property empty for periods to reduce the income tax. In the case of Spain, this won’t be beneficial because according to Spanish tax rules, all second homes are deemed to generate imaginary rent equal to 1.1% to 2% (usually the latter) of the rateable value (known as ‘valor catastral’) of the property. This theoretical rental income is also taxable at 24% for non-EU residents instead of at 19%.

Capital gains tax considerations for Spanish property

Clearly, these new rules could mean it becomes much more expensive to sustain a holiday property in Spain after Brexit. Depending on what is negotiated as part of the final Withdrawal Agreement, there may be certain dispensations offered to Spanish property owners, with a view to avoiding mass sales of rental properties in Spain. If it is necessary to dispose of an asset, any capital gains will need to be declared and the appropriate tax paid both in Spain and in the UK. Currently, capital gains tax in Spain on a property used as a second home or let out is taxable at 19%, and in the UK capital gains tax rates on residential property are generally 28%, with a tax credit given for Spanish capital gains tax paid. In addition, exchange rate gains are taxable.

When do the new holiday home tax rules become effective?

Depending on when Brexit actually happens, it may result in a situation where the UK ultimately leaves part way into a new Spanish tax year. The system does allow for split year tax treatment, so if this occurs, tax calculations may be more complex due to having to take into consideration the different tax rates and allowances pre and post Brexit.

For information on holiday home tax rules for property owned abroad and managing the tax associated with overseas property investments, please contact us at partners@rjp.co.uk.

 

 

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31 December 2020 - Review disposals of chargeable assets to avoid a possible CGT increase

Capital gains tax is due to be reviewed by the government and if a CGT rise is announced, the new rates may become effective from the next tax year on 6 April 2021. Take advice now if you are thinking of selling property or have other assets giving rise to a capital gains tax liability.