| | | | | | | Spanish Property - The Tax Issues |
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| | | | | | | The Spanish residence rules are broadly similar to those in Ireland. Like Ireland, Spain operates a calendar tax year. An individual may be treated as a resident in Spain if:
(a) he spends 183 or more days in Spain during a tax year, for example, the tax year 1st January 2004 to 31st December 2004;
(b) he arrives with intention to reside indefinitely in Spain; or
(c) his or her spouse is Spanish resident and they are not separated.
A resident of Spain is liable to Spanish income tax on his worldwide income, and he is liable to Spanish capital gains tax on his worldwide gains. He is also liable to Spanish inheritance tax on worldwide assets he receives. |
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| | | | | | | Income Tax
The Spanish income tax rates for 2004 are as follows:
15% - Nil to 4,000
24% - 4,000 to 13,800
28% - 13,800 to 25,800
37% - 25,800 to 45,000
45% - over 45,000
The make up is broadly two-thirds national income tax and one-third community (State) tax. The income tax return must be filed between 1st May and 20th June following the end of the tax year, and the taxpayer can choose whether to file an individual or a joint (married couple) return. A tax return that gives rise to a refund can be filed up to
30th June.
A non-resident is taxed on Spanish rental income at the rate of 25% without any deductions for expenses or interest. The tenant must withhold and pay over the 25% tax to the tax office. The non-resident landlord should get a receipt from the tenant in respect of the tax withheld as he may need it as proof of Spanish tax paid when including the Spanish rent in his Irish tax return. He can claim a credit for the Spanish tax up to the amount of the Irish tax on the same income.
If a non-resident owns two or more Spanish properties he is also caught for notional letting income, even though the property may not be rented. The deemed letting income is 2% of the propertys fiscal value and this figure is taxed at 25%. For example, the deemed letting income for a villa worth 200,000 is 4,000, and the 25% tax is 1,000 (25% x 4,000). |
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| | | | | | The Spanish capital gains tax rates for 2004 are as follows:
As low as nil - Gains on assets acquired before 31st December 1994
Nil - Disposal of home by resident aged over 65
15% - Disposals by residents
35% - Disposals by non residents
Income tax rate - Gains from assets held for less than one year
If a Spanish resident has a capital gain on the disposal of his home, he can avoid tax by reinvesting the sale proceeds into a new home. This option is not open to non-residents. In other words, a non-resident will be caught for 35% capital gains tax on the disposal of a Spanish property.
Depending on the type of asset, the tax arising on disposals of assets acquired after 1st January 1987 and before 31st December 1994 is reduced by 11.11%, 14.28% or 25% for each year the asset was held before 31st December 1994. Allowance is also made for inflation. No capital gains tax arises on disposal of assets acquired before 1st January 1987.
Where the seller is a non resident, the purchaser must withhold 5% of the purchaser price and pay this amount to the tax office using Form 211. Provided he obtains a receipt from the purchaser for the 5% tax withheld, the seller can claim credit for the tax withheld when paying his capital gains tax.
Property transfer tax is payable at 7% on the transfer value of second hand property. |
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| | | | | | | | This is charged by the local authority on property owners (including non-resident owners) and the money raised is used for local street cleaning and public amenities. It is charged on the propertys fiscal value. The rate varies with the municipality, from 0.3% for rural properties to between 0.5% and 1.7% for the urban areas depending on the level of services provided. |
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| | | | | | | The Spanish wealth tax rates are as follows:
Exempt business, pension rights, intellectual property
0.2% - Nil to 167,129
0.3% - 167,129 to 334,253
0.5% - 334,253 to 668,500
0.9% - 668,500 to 1,337,000
1.3% - 1,337,000 to 2,673,999
1.7% - 2,673,999 to 5,347,998
2.1% - 5,347,998 to 10,695,996
2.5% - Over 10,695,996
A Spanish resident individual is liable to wealth tax on the value of his worldwide assets, after deducting the individual allowance of 108,182 (216,364 for a married couple). He can also deduct an own home allowance of up to 150,253 (300,506 for a married couple with jointly owned house).
A non resident is liable to wealth tax on the value of his Spanish property. He gets no deductions. |
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| | | | | | | | Spain taxes gifts and inheritances at the following rates:
7.65% Nil to 7,993.46
8.50% 7,993.46 to 15,980.91
9.35% 15,980.91 to 23,968.36
10.20% 23,968.36 to 31,955.81
11.05% 31,955.81 to 39,943.26
11.90% 39,943.26 to 47,930.22
12.75% 47,930.22 to 55,918.17
13.60% 55,918.17 to 63,905.62
14.45% 63,905.62 to 71,893.07
15.30% 71,893.07 to 79,880.52
16.15% 79,880.52 to 119,757.67
18.70% 119,757.67 to 159,634.83
21.25% 159,634.83 to 239,389.13
25.50% 239,389.13 to 398,777.54
29.75% 398,777.54 to 797,555.10
34.00% over 797,555.10
The person who pays the tax is the recipient of the gift or inheritance. The tax also applies to assets located in Spain that are received by a person who is not a resident of Spain.
The amount of tax payable depends on:
(a) The net value of the property transferred i.e. the value after taking into account deductible charges, debts and expenses.
In the case of an inheritance, assets transferred to the recipient in the five year period prior to the death must be included when determining the tax band applicable. The value of a deceaseds estate must be increased by 3% to take account of chattels, unless a lower value can be proved to apply.
(b) The relationship between the transferor and the recipient:
Group 1 (a) direct issue and legally adopted children aged under 21. The tax free threshold is 15,956.87 plus 3,990.72 for each year by which the beneficiary is under 21, up to a maximum of 47,858.59. If the beneficiary is a child (under age 18 ) of the deceased, then the tax rate on the assets is reduced by 5%.
Group 1 (b) direct issue and legally adopted children aged 21 or more, spouses, parents and grandparents.
Group 2 brothers, sisters, uncles, aunts, step-parents, step-children. The tax free threshold is 15,956.87.
Group 3 other relatives and strangers. The tax free threshold is 7,993.46. | | | (c) In the case of a property which was the main residence of a deceased resident in Spain, a 95% reduction (limited to 122,606.46 per recipient) may apply to the value of the share acquired in the residence, where the recipient:
(i) is the deceaseds spouse, issue, parents, grandparents, brother or sister aged over 65,
(ii) has lived with the deceased for at least two years up to the date of death, and
(iii) does not transfer the residence for at least 10 years.
(d) The level of the recipients pre-existing wealth. This will invoke a multiplier which increases the effective rate of tax. Pre-existing wealth means, in the case of Spanish residents, the recipients worldwide net worth for wealth tax purposes. For non resident its means the recipients property located in Spain. Therefore, a child inheriting a Spanish property would have a no pre-existing wealth unless he already owns some Spanish property.
In general, the tax declaration and payment must be made within:
(a) 30 days of the date of the gift, or
(b) six months of the date of death if the deceased dies in Spain (up to 16 months if the deceased dies abroad).
Example
Q, who is resident for tax purposes in Ireland and is not resident in Spain, buys a villa in Marbella, at a cost of 800,000 and rents it out at an annual rent of 60,000. The interest cost in the first year is 33,266. Qs marginal Irish tax rate is 42%.
What are the income tax consequences?
As a non resident, Q is caught for Spanish income tax at 25% of the gross rent, i.e. 15,000. The tax is withheld by the tenant and Q should get a receipt from the tenant to provide he has paid the tax. He is caught for Irish income tax at 42% of the net rental income i.e. 42% x 26,734 = 11,228. Under the Ireland/Spain tax treaty, the Spanish tax withheld (15,000) can be credited against the Irish tax (11,228) leaving no net Irish tax liability. He is not entitled to a refund of the excess (3,772).
What if he decides to sell after five year, for 1,200,000?
As a non resident, Q is caught for Spanish capital gains tax at 35% of the difference between the sale price (1,200,000) and the acquisition cost (800,000), adjusted for inflation. Assume this amounts to 35% x 400,000 = 140,000. The purchaser must withhold 5% of the purchase price (60,000) and pay the amount withheld to the tax office. Q should get a receipt from the purchase to prove he has made a payment on account of capital gains tax. Q must pay the balance of 80,000 (i.e. 140,000 - 60,000) to the tax office. No capital gains tax would arise if Q was aged 65 or over, Spanish resident and the villa was his residence.
What if he decides to sign it over to his daughter after five years (when she is aged 30 and the property is worth 1,200,000 and the mortgage balance outstanding is 570,000)?
Assuming she has no Spanish assets, the daughter is caught for gift tax on the transfer value of 630,000 (1,200,000 less 570,000) less the tax free threshold of 15,957. The tax rate is 29.75%.
What if he dies and leaves the property to his daughter?
Doesnt make a Spanish will.
Assuming she has no Spanish assets, and that the mortgage balance is paid off by an insurance policy, the daughter is caught for gift tax on the transfer value of 1,200,000 less the tax free threshold of 15,957. The tax rate is 34%. Assuming the daughter is tax resident in Ireland, she would also be caught for Irish inheritance tax on the difference between transfer value (1,200,000) and the threshold (456,438) at 20%.
What steps could Q have taken to reduce tax?
When buying the property he could have bought it in his daughters name. However, if his daughter predeceased him, he would end up inheriting the property back from her and paying substantial tax on that inheritance. He could have put the property in his own name for life, with the future interest to his daughter. |
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| | | | ( Reproduced with kind permission of Alan Moore, Tax World Limited: www.taxworld.ie ) | | |  | If you would like to receive more information on overseas property investment,
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