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Property in Spain for British citizens in Tarifa
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Owning property in Spain is very popular and it is the prefered choice of many as a country to which to retire. It is not far from the UK, flights are readily available and it is deemed to have good quality of life. However, there are also other advantages to consider for tax and investment purposes.
Information provided by DN-Law, Costa de la luz, specialized in spanish property law. Visit their website for further articles or contact them by email.
We will consider in this article three relevant subjects for the British domiciled owning property in Spain and planning to retire there:
· the non-resident taxation regime;
· tax-efficient investments; and
· tax planning opportunities.
THE NON-RESIDENT TAXATION REGIME
There are currently more than one million non-resident property owners in Spain and to tackle this booming market the Spanish Parliament passed the Non Residents Income Tax Act (Ley 41/1998, the new Act from now on). According to the new Act and the Self-Assessment regime, non-residents receiving any income or owning any assets in Spain must file a return every year, including all Spanish taxable income calculated according to certain rules.
LIABILITY TO INCOME TAX ACCORDING TO THE NEW ACT
The most surprising element of the new act for the UK tax adviser may be that owning a villa in Spain is deemed to produce a taxable income, notional in nature, equal to a 1.1-2% of the property value, determined by the town council's tables. A standard 25% tax rate is applicable to that notional income and will be payable on submission. It is important to note that there are no expenses, deductions or allowances available for non-residents.
WEALTH TAX
This tax is charged annually on the value of any assets situated in Spain at 31 of December every year. There are no allowances for non-residents although some deductions are available. The assessment is made on the value of all the assets situated in Spain. The tax is charged at 0.2% for any value between ¤0-104,000 and is progressively increased up to 2.5% for values above ¤6.7 million. As an illustration, the Wealth Tax liability for a ¤250,000 villa would be around ¤740.
CAPITAL GAINS TAX
Transferring property located in Spain by a non-resident in Spain will be subjected to Capital Gains tax in Spain, both according to Spanish legislation and to the provisions of the Double Treaty with the UK.
The disposal price must be the real price obtained, and will be checked by the Tax Agency several months after the transaction has been completed. The net gain after deducting the acquisition costs, will be taxed at a standard rate of 35% for non-residents, and obviously the main residence relief is not available.
The seller will receive from the buyer the sale proceeds less 5% tax. It is then the buyer's statutory responsibility to pay the 5% to the Tax Agency on account of the seller's capital gain tax liability.
Some professionals still think that it is fine to follow the former Spanish practice of under-declaring the real value of a property. This practice is no longer recommended as the Tax Agency has statutory powers to determine the real value of the property and to charge penalties if the undervaluation is deemed to be intentional.
INHERITANCE AND GIFT TAX
It is worth noting that the English tax planning approach needs to be reconsidered when discussing Spanish Inheritance and Gift tax rules.
· Spanish IHT is an acquisition tax and not a transfer tax like its UK equivalent. The acquisition by inheritance or gift of a property situated in Spain carries a real obligation to Inheritance and Gift Tax payable by the inheritors or the receiver of the gift. The beneficiary position -and not the transferor's estate- should be considered for planning purposes. The British domiciled resident in Spain will also be taxed in the UK for his Spanish property, as part of his worldwide assets. The inheritors, residents or not, will be taxed in Spain in respect of the Spanish property.
· There are three factors to be considered to determine the tax payable:
-the assets received –the tax payable will be progressively higher depending on the value of the assets received;
-the relationship of the inheritor with the deceased_the final tax bill will be lower for closer relatives, such as spouse and sous. The spouse is not an exempt beneficiary and her allowance is approximately ¤10,000. This is the same for the children;
-the wealth position of the recipient –the tax payable will depend on the overall wealth of the recipient. For non-residents, only the Spanish assets will be considered; for residents, the worldwide assets will be taken into account.
· The legal concept of Trust does not exist in Spanish Law, and this is an important issue to be considered by the UK tax adviser. There is no concept of beneficial title distinct of the legal title on the same asset. Consequently, if the asset is given in trust, the executor or trustee will be taxed as receiving a gift. For tax planning purposes a large estate should be divided, if possible, amongst a number of beneficiaries, as close to the transferor as possible.
· There are no IHT provisions in the double treaty with the UK and it is very important that the Spanish Inheritance Law regulations are considered together with the UK IHT rules. The details and provision in drafting a will should be discussed with a lawyer familiar with both the English and the Spanish legislation.
TAX ADMINISTRATION
In any comunication with the Spanish Tax Agency (AEAT) non-residents need a tax reference number (NIE). To facilitate the relationship with the Tax Agency a Spanish tax representative should be appointed, although it is not always mandatory. The importance of the representative is mainly for notification purposes as very strict deadlines are laid down in the Spanish Fiscal regulations on this respect.
Tax efficient investments
In order to provide an appropriate level of income when retiring to Spain the current UK resident may consider investing in certain Spanish financial products.
The use of an approved life insurance policy providing an annuity or a regular income upon survival may be a good option for the British resident who could start contributing whilst still living in the UK. There is no Income Tax payable until the annuity is paid out or a withdrawal made. Once the individual becomes Spanish resident the money received will be taxed according to the Income Tax Act (Ley 40/1998) which provides a favourable tax treatment for residents.
Other tax efficient investments such as investment funds, treasury bonds, and deposits may be considered. Bank accounts, treasury bonds, and Government stocks interest received by UK residents will not be taxed in Spain, however they will need to be included in the UK tax return. The tax efficiency of different investments will depend on various factors such as age, total income, terms, type of insurance policy and other circumstances that should be discurssed with a professional Spanish financial adviser.
Tax planning advice
Tax legislation in Spain has changed substantially in recent years and some of the traditional UK tax planning schemes, such as using an offshore trust or company to hold the property, should be reconsidered under the new non-residents rules and the Spanish tax treatment for offshore entities.
The administration costs and tax involved in these schemes should be considered according to:
· value of the property and other assets;
· plans for transferring the property;
· age of the owner and family status –inheritance tax planning is a must and it should be considered in all cases;
· current residence and domicile position, as well as plans for the future; and
· value of worldwide assets and existing or planned trusts.
It should be noted that the fiscal year in Spain ends on the 31 December. Once the foreign individual becomes resident in Spain, after 183 days in most cases, the principle of "personal obligation" is applied in contrast with the principle of "real obligation" governing the non-resident tax position. Any income received in Spain, or in any other country, is deemed as taxable in Spain, even if the income is not remitted at all. This concept contrasts with the domicile concept in the UK, where a non-domiciled residents is only taxed on remittance basis. It is worth noting that the UK concept of resident but non-ordinarily resident is not recognised in Spain and the UK non-ordinarily resident will be considered non-resident in the UK for Spanish tax purposes.
According to the above "personal principle" the Spanish wealth tax will apply to all the assets owned by the individual worldwide. Here, tax-planining advice should be undertaken and offshore advice considered as a general wealth protection measure.
An offshore scheme may be considered taking into account the Spanish tax treatment of offshore entities. These are highly taxed and the Tax Agency is always very keen to query individuals or companies using offshore entities. Dealing with a tax enquiry in Spain is subject to many administrative requirements and terms, and generally involves high costs for the client.
Considering the above, when advising a British client either owning or thinking of purchasing property, and planning his retirement in Spain, the tax adviser must be aware that tax planning opportunities should always be discussed and analysed with a Spanish tax adviser. |
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