10 Annual Property Taxes & Capital Gains Tax
So, if you buy a property in Spain, what taxes are you letting yourself in for (after the actual transaction taxes mentioned in section 9 above)? In this section we do not cover income tax itself (Impuesto sobre la Renta de las personas Fisicas), as this is too complicated to include in a guide about property related matters.
As you read about these taxes, you will see why until recently it was a legal requirement that a non-resident must have a representante fiscal (fiscal representative) in Spain to manage their tax affairs, and why, when the legal requirement was removed, most non-residents (as well as many residents) continue to use their services.
These taxes may vary depending on whether the payer is resident or non-resident. For tax purposes, residence is normally determined by whether the person is actually resident in Spain for 183 days in the tax year. There can however be exceptions to this general rule.
But what is a reasonable certainty is that a person who spends less than 183 days during a tax year in Spain, and does not have residencia, will not be regarded as resident, and will therefore only pay tax to the Spanish authorities on their assets and income in Spain. Such a person would be liable to UK tax on their worldwide assets and income, and would generally obtain a set-off under the UK’s Double Tax Treaty with Spain against this for those taxes paid in Spain.
For a person who becomes resident in Spain, either officially or by spending more than 183 days there, the position is generally reversed: tax is due to the Spanish authorities on their world-wide assets and income, with a set-off for any tax paid in the UK. This is however a very complex area, and you should obtain specialist advice on your tax status and its implications.
01 Impuesto sobre Bienes Inmuebles – IBI
Sometimes known as contribuciones, this is the annual real estate tax - the equivalent of local rates that is paid by residents and non-residents. It is based on the valor catastral, which is revised every 10 years, and updated annually in line with inflation. It is paid to the local authority for services such as refuse collection, hospitals, police, schools etc. It is a municipal tax and so can vary considerably from one area to another for the same type of property (just as council tax varies in the UK), but typically it is 0.4% of the valor catastral. It could be as low as €72 for a small rural property to €1,500 for a large villa in a town such as Marbella.
02 Impuesto sobre el Patrimonio
This is a wealth tax that both residents and non-residents pay this – but it affects them differently. Residents have an exemption of €108,182 each, so a property owned jointly by husband and wife is free of patrimonio up to €216,364. Non-residents do not benefit from this exemption. Mortgages or other debts registered against the property can be deducted from their value, whether resident or non-resident.
03 Régimen Económico
Under Spanish law, when residents marry they have to make a decision about their regimen económico (financial status). Note that this only applies to married couples. This status can be changed – although it is a complex process - by making a notarial declaration (escritura), certifying this at the Civil Registry at the town hall, paying the fees to Hacienda, then sending it to the property register.
The status affects tax, the situation in the case of divorce, and inheritance. Married couples have to decide whether, in their marriage, for tax purposes, their assets (including not only property, but all other forms of wealth – bank accounts, investments, cars, ownership of businesses, art collections, antiques, jewellery) will be held jointly (bienes conjuntos or gananciales) or separately (separación de bienes).
Normally, the régimen económico chosen by Spanish people is joint ownership (gananciales). This means that everything is owned jointly, regardless of who actually paid for it. It is however possible to choose separación de bienes, which then means that each person is treated separately as an individual and is regarded as owning 100% whatever they personally buy (i.e. the tax treatment is more or less as though they were not married, in order to put each person on an equal basis). The only exception to this is that in the case of divorce, and with regard only to the main residence, a judge is unlikely to grant possession to one party, if the other party is a dependent.
The advice we have received from a Spanish notary is that the Spanish rules regarding the régimen económico will be applied to residents, but not to non-residents, where in the case of a dispute, the Spanish judge would apply UK law (remember that the rules only apply to married couples).
In general, where a married couple are buying a property jointly, and both are contributing, the purchase and mortgage should be in joint names (as “bienes gananciales”).
If the property and mortgage are to be in the sole name of one purchaser (“separación de bienes”), then that purchaser must prove to the notary that the money used for the purchase is his/her own (e.g. from an inheritance or an insurance claim – earned income is deemed to be joint). In addition, the other married partner must sign a declaration that they accept the régimen económico of “separación de bienes”. This declaration must also be notarised.
So, patrimonio will be applied in accordance with the régimen económico for residents.
Originally, the tax was introduced as a special tax, called the Impuesto Extraordinario sobre el Patrimonio, in 1978 especially to encourage Spanish people to declare wealth that was often hidden in undeclared or under-valued property.
The tax rate was set at a very low 0.2% up to €167,000, the intention being that anyone who did not declare assets in 1978 would then be subject to fines, and the undeclared value or under-valuation would be subject to income tax (at much higher rates up to 48%) in the year in which it was discovered.
The “extraordinary” tax worked much as intended, but the authorities found it a good way of keeping track of people’s assets, and of generating much needed revenue in the run up to EMU, and so it has never been discontinued, and is now known simply as the Impuesto sobre el Patrimonio or patrimonio for short. The tax rates are 0.2% up to €167,123; 0.3% from €167,123 to €334,246; 0.5% from €334,252 to €668,499; increasing to a top rate of 2.5% on properties worth more than €10,695,996. The tax is based on the higher of the market value or the valor catastral.
So a resident couple with bienes conjuntos owning a property jointly worth €721,214, with a mortgage of €120,202 would each pay tax on €192,323. (half of the property worth, less half of the mortgage each)
The tax rate is 0.2% on the first €167,123 = €334 plus 0.3% on the next €25,200 = €75, making €409 in total each.
In this example, the two together amount to around 0.11% of the total property value. In a simpler example of one non-resident owning a property worth €150,000 with no mortgage, the tax would simply be 0.2%.
However, on 1st January 1997 the patrimonio was handed over from the central government to the autonomous regions, who can now make whatever changes to the tax they wish. Therefore differences can increasingly be expected in the exemptions and rates of tax in the different regions of Spain.
04 Impuesto sobre la Renta
This is a Property Owners’ Imputed Income Tax, paid by residents on a second property and non-residents on any property owned in Spain, other than land in the country, urban plots and property used commercially. It imputes 2% of the valor catastral to property owners as a notional income - this is reduced to 1.1% if the valor catastral has been revised since 1994.
For residents, this notional income is added to their normal income and taxed at their particular income tax rates. Non-residents are taxed at a flat rate of 25%. For non-residents therefore, this tax is equivalent to 0.5% of the valor catastral, (reduced to 0.275% if the valor catastral has been revised since 1994). Again, the income would be taxed according to the regimen económico.
05 Comunidad de Propietarios
The fees charged by the Comunidad de Propietarios, the elected organisation responsible for internal smooth running of the urbanisation or development can also be added to the list of taxes, as they are a legal requirement. In general, these charges may range from as little as Pta. €300 on a flat on a small development where the local authority provides more services, to as much as €3,000 on a large villa on a large development where the Comunidad takes responsibility for more services, communal swimming pool and leisure facilities etc. As a very rough guideline, these charges may range between around 0.5% and 0.75% of the value of your property.
From the tax point of view, these charges are also relevant if the property is rented, because – for residents only - they can be deducted from the taxable income. A non resident is liable for the total amount received from the rented property, without the possibility of deductions.
So how do you pay these annual property taxes?
The best way of dealing with the IBI is to set up a domiciliación (direct debit) from your bank. You can include any other municipal charges with this. You obtain a form from your bank, which authorises them to pay the bill, and you lodge this with your Ayuntamiento (town hall), to tell them to send the bill to your bank. You can pay the Comunidad de Propietarios in the same way.
For the Impuesto sobre el Patrimonio wealth tax and Impuesto sobre la Renta imputed income tax, the procedure is now considerably easier if you are a non-resident owner of one property only. You have to complete a Form 214 where you can declare both wealth tax and imputed income tax as well as income tax for non-residents. You can file this form at the local Agencia Tributaria (Tax Office) at any time during the year.
But if the property is owned jointly, both partners will have to file a form. In order to file the form, you need to take with you the IBI receipt (as this shows the referencia catastral, to enable the office to check the catastral value), and the escritura (which shows the market value).
If you are a resident, or a non-resident with more than one property, you cannot use the simplified Form 214 procedure. In this case, you (and your partner if the property is owned jointly) need to file a Form 714 for wealth tax and a Form 210 for the imputed income tax. These can only be filed between May 1st and June 20th - hence the need for your own gestor (fiscal representative).
If you let out your property, you are subject to Impuesto sobre la Renta (Spanish income tax) on the net earnings. For residents, this income is added to other income and taxed normally.
Non-residents should pay a retención (withholding tax) of 25% to Hacienda on all income in Spain. This is to be declared on Form 210, normally within 30 days of receiving the income, but arrangements can be made to file quarterly. As a non-resident, this withholding tax accounts for your tax liability, and there are no further allowances or calculations. If the tenant is a Spanish legal entity (i.e. a company or organisation rather than a Spanish individual), that entity is required to pay the withholding tax (this removes the need for a non-resident owner to do this).
06 Offshore Transfer Tax
You may have heard about buying a property in Spain through an offshore company in order to avoid the transfer taxes - which, as we have seen, are normally either 6% or 7.5% of the purchase price - and inheritance tax.
Since 1996 this option is much less attractive. In the Law concerning the Taxation of Non Residents’ Income, there is now a special charge of 3% of the valor catastral on properties owned by non-resident companies.
In addition, the law requires that – both for residents and non-residents – any sale of shares in such a company will be taxed in the same way as if it were the sale of the house itself, if either the assets of the company are at least 50% in property; or if as a result of the sale, the purchaser of the shares acquires control of the company.
Although this was the normal method of house purchase in the 1980’s, there are now only around 12,000 offshore companies left in Gibraltar, as individuals transfer the ownership back into their own names and take residence in Spain.
If a property is to be owned by a group of friends or relations, and especially if the members of the group may change fairly frequently, it may still be advantageous to own through a company, as this could avoid a lot of administration and costs when the ownership changes.
There are now two possibilities for such a company which obtain an exemption from the special 3% tax:
- (a) If the company and its real owners are fiscal residents of “normal” countries which have taxation treaties with Spain, and if the company can provide the Spanish tax authorities with a certificate that it has paid its taxes in that country;
- (b) If the company is registered in Spain itself, where it would pay tax at company rates on its assets and on its rental value. There are allowable expenses, and a low tax rate for small companies in Spain, so this could also be an advantageous route, especially for family trusts. However, if you use such a structure, it will be more difficult (if not impossible) to obtain a mortgage.
Impuesto sobre el Incremento Patrimonial
And finally, if or when you come to sell the property, there is the Impuesto sobre el Incremento Patrimonial (capital gains tax - CGT).
This is now a substantial cost for non-residents, and so is worth taking into account when you purchase the property
The system of capital gains tax was changed from 1st January 1997, and the old annual allowance of 11.11% and the exemption if the property had been owned for 10 years or more were removed at that date. Since 1997 non-residents are subject to a flat rate of 35% CGT on profits from the sale of their Spanish home.
Residents and non-residents both have two allowances they can claim:
- (a) There is an annual allowance available to adjust the original purchase price to allow for inflation – so for example, if you bought the property in 1996 and sold it in 2000 you are allowed to inflate the purchase price by this coeficiente de actualización (inflation factor) – which in this case is 1.08.
- (b) Expenses of purchase, including transfer tax or VAT, plusvalía, and the notary, lawyer, registration and other fees.
Residents have three other allowances not available to non-residents, which mean that they can avoid CGT, and at worst will only pay 20%:
- (a) Most importantly, if a resident is aged over 65, he is exempt from CGT completely;
- (b) The proceeds of the sale of a principal residence are also exempt from tax if they are used to purchase another main home;
- (c) The maximum rate of tax is 20% if the gain has been generated over more than 2 years.
A resident has his capital gain added to his income and taxed at his marginal rate. Normally, this starts at 15% and rises to 40% - but tax on the gain (if earned over more than 2 years) is limited to a maximum of 20%.
Also, as mentioned earlier, if the vendor is non-resident, the buyer is required to deduct a 5% withholding tax from the amount paid, and deposit this with Hacienda. Generally, this is more or less a similar amount to the amount of the vendor’s 35% capital gains tax liability, and so it either forces the non-resident vendor to declare for CGT, in order to obtain any repayment due, or the retention paid is regarded as covering his capital gains tax liability.
Usufructos Vitalicios
In addition, it is worth noting that a resident aged 65 or older who contracts with a company to sell his principal residence in exchange for the lifetime right to inhabit the dwelling, along with a monthly payment, will not be taxed on any capital gain involved. This makes such “home reversion schemes”, known as usufructos vitalicios, relatively more attractive and worth exploring with a good financial advisor.
The usufructo vitalicio is also used quite legitimately, to avoid one round of inheritance tax. Parents will purchase their property in the names of their children, whilst reserving for themselves the right to inhabit the property for as long as they live. When they die, the children simply take full possession of the property, with no inheritance tax due as it is already in their names. However, again, if you create a usufructo vitalicio, it will be more difficult to obtain a mortgage.
Generally speaking, if you are still resident for tax purposes in the UK, and domiciled in the UK (more on this in Section 13 on Inheritance), you will be liable for UK capital gains tax on the sale of a second home in Spain (but not if this is your main residence under the UK rules). There is a double tax treaty between the UK and Spain which means that any tax paid in Spain will be available to set off against any UK tax liability – so you will not pay twice.
Inland Revenue
However, this is a very specialised and complicated area, requiring specialist advice. For information about UK tax for non-residents, the Inland Revenue has a helpline: + 44 151 472 6196. They also have a booklet order line on + 44 845 900 0404.
Their website is at: www.inlandrevenue.gov.uk. Booklets IR20 on taxation for non-residents, and CGT1 on capital gains aspects are likely to be the most relevant.