Spanish Property Buying Advice by Romano


Income tax
If you live in Spain for more than 183 days per calendar year you are considered tax resident, regardless of whether you have applied for your Residencia. This means that you have to declare your worldwide income to the Spanish tax authorities and make the same income tax return as a Spanish resident. Income tax in Spain is calculated at between 15 and 39.5 per cent.

As a non-resident who spends less than 183 days per calendar year in Spain you do not have to make this declaration. However, you are still liable for tax on any income arising in Spain and must declare this. Income from letting out your property would fall into this category.

Property
Even if you are not renting out your property you are obliged to pay a tax which is based on the letting value. This is calculated at two per cent of the fiscal value and you pay 25 per cent tax on this every year. Spanish residents are exempt from this tax.

If you decide to sell your property and are non-resident, you have to pay a 35 per cent capital gains tax. This is charged on the net difference between the value of the old escritura (title deeds) and the sales escritura. If you purchased the property you are selling after 1986, you must also deposit five per cent of the new escritura value with the tax office. This acts as a guarantee for your capital gains tax payment.

Capital gains tax for Spanish residents has recently been lowered from 20 per cent of the net profit to 15 per cent, and it is possible to offset the cost of purchasing a new property against any capital gains from selling the old. The charge does not apply to residents if all the profits are reinvested in another property, which must be the main residence, within two years of the sale. Residents are also exempt from the five per cent Capital Gains Tax guarantee, but must declare the sale of the property and any profit in the following year's Income Tax return.

Wealth tax
The Spanish tax system also charges 'Patrimonio' - a wealth tax based on assets, including property, car, bonds, bank accounts and stocks and shares. Non-residents only pay Patrimonio on assets held in Spain. Residents pay Patrimonio on worldwide assets, but are exempt from paying Patrimonio on property if it has a value of less than €108,182.

Buying a car
With so much to see and do in Andalucia, a car is almost a necessity. Depending on your residential status, however, you may find your options restricted.

If you are not resident in Spain, Spanish law prevents you from purchasing a Spanish registered vehicle. But if you live in your property for a considerable part of the year and do not exceed the 183-day threshold, you can apply for an NIE number. This is a temporary national insurance number for Spanish non-residents, but is sufficient for the purchase of a vehicle.

If you are a UK resident with a British-registered vehicle, Spanish law permits you to keep the vehicle in Spain all year without changing it to Spanish plates. From a practical perspective, however, this may not be the best arrangement. The UK will not accept the Spanish ITV (equivalent of the UK MOT), which means that you will have to drive back to the UK for each technical inspection.

If you decide to become a Spanish resident and want to keep your vehicle, the Spanish authorities will allow you six months to legally 'import' it. You will be charged import duty on the value of your vehicle.

Inheritance Tax
Persons that are UK domiciled and/or UK resident are liable to 40% inheritance tax on the total value of their worldwide assets over and above £250,000 in value. With property prices continuing to rise - both in the UK and Spain - most people will find that an overseas property purchase will take them over the nil rate band.

In addition to UK inheritance tax, under Spanish law persons owning property in Spain, regardless of where they are resident, are also liable to Spanish inheritance tax. Depending on the relationship between the deceased and the recipient, the rate of tax varies between 7.65% and 34%. Credit is often not given for tax paid in one country against tax due in another, so without proper planning a double charge on the same asset can and does occur. In extreme cases the tax could actually amount to more than the asset is worth!

Corporate ownership can mitigate these taxes. As a company is considered to be a distinct legal entity, and thus never dies, a Spanish property owned by a company will not be liable to any inheritance tax in Spain. A company also provides you with a number of options for transferring the property on death. It may be possible to establish a discretionary trust to hold the shares of the company, preventing property being subject to Spanish succession rules that dictate how an estate must be distributed. A trust can also provide other benefits, including: avoidance of the considerable expense and delays of probate; asset protection; capital or income tax savings; confidentiality; and flexibility.

Capital Gains Tax
If the property was acquired prior to 31 December 1986 capital gains tax does not apply, but for property acquired after this date the law becomes more complex. The rate of capital gains tax applicable is calculated according to a range of factors, such as whether you are over 65 years of age and whether you re-invest in Spanish property within three years. But regardless of these factors there will be a charge.

Spanish capital gains tax is charged on the net difference between the value of the old escritura (title deeds) and the sales escritura. It is payable irrespective of the tax residency of the owner and is charged at up to 35% for non-residents. To put this into perspective, if property prices on the Costa del Sol continue to rise at 15-20% a year, a property in Marbella valued at €272,450 today may be worth well over €500,000 in five years' time. With a profit of €227,550, the capital gains charge could be up to €79,642.

Capital gains tax may be avoided by using an offshore company - such as a Belize company owning a Spanish company that in turn owns the property. Rather than 'selling' the property, there is a change of ownership in the Belize company by transferring the shares. The capital gain is therefore in Belize, where there is no tax.

For lower value properties purchasing the property directly through a Belize company can reduce the costs of the double structure outlined above. While this will result in an annual property tax calculated at 3% of the 'rateable' value of the property, the advantages of offshore property ownership may still make this a cost- effective option.

Other Taxes
Before a title deed or a deed for a newly constructed building can be registered in a new owner's name, tax has to be paid by the buyer. This can either be transfer tax (ITP), which is levied at 6%, or value added tax plus stamp duty (AJD), at 0.5%, levied when buying from a developer. These taxes are calculated on the declared purchase price stated on the title deeds.

In addition, local municipalities charge a tax on the increase of the value of the previous sale. This tax is known as 'Plusvalia' and is not based on the seller's capital gain but on calculations and values set by the local town hall. By law, Plusvalia is the responsibility of the seller, but it is not uncommon for the liability to be contractually transferred to the buyer.

On a property worth €500,000, taxes, lawyer and notary fees could total up to €43,000.

If you bought your property using a corporate structure it can make re-sale much easier and the property much more attractive to potential buyers. As discussed earlier, corporate ownership means the property can be 'sold' by transferring shares in the company, leaving the title to the property unaltered. This allows the prospective buyer to avoid paying the fees and taxes outlined above and can also bypass the lengthy procedures necessary to register new title deeds in Spain.

The advantages are clear…

Why complicate your life? Plan before you buy and be aware of the tax implications of your purchase. Owning your Spanish property through a corporate structure could reduce your tax bill both during and after your lifetime.