Tax issues

It is an unfortunate fact of modern life that we all have to pay taxes and there is no government that makes this a simple procedure. There are several taxes that you may have to pay in Spain even before you have residencia, and the only simple way to organise your tax situation is through your gestor. He can advise you on your personal tax situation and possibly even suggest ways in which you can minimise your taxes and remain within the law.

The positive is that taxes in Spain are generally low – certainly lower than the UK in most circumstances. As part of the EU, Spain has treaties with other European countries that should ensure that you only pay tax in one country, although there are exceptions. The first major exception is that a UK government pension can only be taxed in the UK. The other major exception is that inheritance tax (impuesto sobre sucesiones y donaciones) on Spanish-owned assets is only payable in Spain and cannot be directed back to the UK where you pay no inheritance tax whatsoever until you have assets of around £260,000. Inheritance tax in Spain kicks in at a much lower level. So what taxes will you have to pay?

Property tax

If you are officially non-resident in Spain you are liable for wealth tax and unearned income tax on your Spanish property (patrimonio & renta). The wealth tax is currently levied at 0.2% of the property value on the escritura, the rateable value of the property (valor catastral) or the market value while the unearned income tax (renta) is based on the assumption by the Spanish authorities that if you have a property in Spain and you are not officially resident, you must be renting it out). Currently this tax is 25% of 1.1% of the rateable value. Now you know why you need a gestor! The tax situation is complex and it is better to pay someone else to sort it out for you

If you have residencia and you only own one property you do not pay all these taxes but you do have to pay them on second properties. You will still be liable for the wealth tax. If you only own one property perhaps it would be a benefit to have the status of being a resident.

Income tax

Resident

If you are resident in Spain, income tax is payable on both earned and unearned income from worldwide sources. There are a number of allowances which can be offset against your tax liability related to age, dependants, pension contributions and mortgages but in real terms the only person who can really help you through this maze of regulations is the gestor. Your income tax liability is likely to be considerably lower in Spain than it might be if you still lived in the UK but I am not a tax expert and would not presume to give advice in this book. Entire books have been written on this topic. Take professional advice!

Non-resident

If you are non-resident or still waiting for residencia to be granted the situation is different and much easier to explain. Any declared income in Spain is taxed at a flat rate of 25% and you cannot offset allowances against your tax liability.

Capital gains tax

Whatever your legal status in Spain, resident or non-resident, you could find yourself with a liability for capital gains tax. This will happen if you sell Spanish assets and for most expatriates this asset will be their home. With non-resident status there is a flat rate of 35% payable on the difference between the official buying price and the official selling price. If you should decide to sell and you have non-resident status, 5% of the selling price will automatically be taken from the sale by the buyer’s lawyer and paid to the local town hall against your CGT liability. There is no way you can avoid this.

One way of reducing your CGT liability is to ensure that you have the correct receipts, showing that VAT has been paid on any improvements made to your property. This unfortunately does not happen very often since so many expatriates use the services of expatriate tradesmen who are working for cash and do not issue receipts. Fine at the time of having the work done but it could pose problems for you in the future. You can also offset the costs of buying and selling against your CGT liability.

If you are resident, any CGT liable on the sale of your property will be collected through your Spanish income tax and you will be allowed a fixed deduction or an allowance for inflation before the tax is collected. For residents over 65 any capital gain is tax-free.

For non-residents the tax is fixed at a flat rate of 35% but if you have owned the property for more than two years there is an allowance for inflation but the age exemption does not apply. There are however many examples of non-residents who have paid the 5% withholding tax and moved their money out of Spain without paying another penny of CGT – that is why the 5% tax on the total value of the property was introduced in the first place.

Wealth tax (patrimonio)

I have already discussed this in the property tax section and if you have residencia you are liable for this tax on your worldwide assets: property, vehicles, jewellery, investments and cash in the bank, less any liabilities such as mortgages. With resident status each individual has a tax-free allowance, which is currently €110,000 per person. There is no allowance if you are nonresident. Once more your gestor can help you with this tax. The tax is payable on a sliding scale according to the level of your ‘wealth’.

Inheritance tax

This is the real tax minefield in Spain and you should contact your gestor to discuss your potential liability and ways in which you might minimise it. The problem with inheritance tax is that it is very difficult to legitimately avoid since if a property is held in joint names any sale requires the signature of both parties and if one is deceased there is no way that both can sign.

Inheritance tax is payable on any property or assets including money in the bank and cars owned in Spain or indeed any other assets. It is the one tax that is not the subject of agreements between EU states and there also is no exemption between husband and wife even if the property is in joint names - each member of the partnership holds an equal share in Spanish law and therefore must pay the tax on the share of the deceased. This could cause problems but once more, consult your gestor. Unmarried couples on the Costa del Sol can now register their relationship at the local town hall and in return they will qualify for the same rights as a married couple so long as their partnership is registered.

There are different levels of inheritance tax payable depending on the relationship between the donor and the recipient.

One legitimate way of avoiding inheritance tax is to register your Spanish property as a company under Spanish law. If you do this at the time of buying it is very simple. If you do it at a later stage you will have to ‘sell’ your property to the company and this will incur selling charges and the appropriate taxes. The other potential negative is that the company will be liable for taxes every year so unless your property is a very expensive one it may not be a good solution. Once more – take advice!