Taxation on buying and selling a Spanish property is significantly higher than in the UK. Eddie Parker of Wellers Accountants stresses the importance of understanding these taxes and also gives some useful hints on minimising tax paid, whether the Spanish home is for personal use or investment purposes.
Firstly, when purchasing the property it is important to consider whose name is on the deeds. If the property is for private use, then it is suggested that the purchase is in individual names. Whereas, if the purpose of the purchase is investment it may be better to set up a company.
There also needs to be consideration at the outset of the possible future destination of the property as there are not the same inter-spouse exemptions, such as capital gains and inheritance tax, available on transfers of property situated in Spain as there are in the UK. For example, in the UK, spouses can transfer a property between themselves without paying tax. However, in Spain a Gift Tax would be applied.
If you plan to live in your property, income tax is payable on all income arising in Spain. Separate returns are required for husbands and wives and filing deadlines apply. Taxes are calculated on a calendar year basis, pro rata for the year of acquisition and sale.
If you are renting your property, tax is payable at 25 per cent on the gross amount of rent received before deductions. In the event that the property is not let, there is still a tax on the deemed rental income at the rate of 25 per cent on the real estate tax value of the property.
Other Spanish property taxes include Patrimonio and IBI. Patrimonio is a wealth tax of 25 per cent, which is based on capital assets with the property valued for this purpose at between 0.2 per cent and 2.5 per cent of the real estate property value. Patrimonio is paid on an annual basis. IBI is an annual real estates tax, which is based on the official assessed value of the property. The tax varies from region to region and from property to property.
Capital Gains Tax also applies in Spain. When selling a property to a non-resident purchaser the vendor is required to deduct 5 per cent of the sale price and hand this over to the tax authorities. A calculation is subsequently prepared identifying the capital gain arising (the profit made on the property since its’ purchase), which is dependent on things like improvements and period of ownership. The capital gain is then subject to tax at 35 per cent and in the event that this is less than the 5 per cent retention, then a refund can be obtained or if it is more then a debt may attach to the property. The 35 per cent rate is being challenged in the European Courts as excessive and may be reduced in due course.
If retiring to Spain, it is important to understand how Inheritance Tax works in Spain. It is the recipients of any inheritance that pay the tax and whilst there are small exemptions (personal allowances) for family relationships, i.e. husband to wife and to children etc, these are small (16,000 Euro) in comparison to the UK exemptions. The inheritance tax liability is calculated by determining the asset value, the relationship with the recipient and any personal allowance available. The ‘net’ figure is subject to tax on a sliding scale at rates between 7 per cent and 34 per cent (on values between 8000 and 800,000 Euros). This amount is then multiplied by a minimum of one and a maximum of two, depending on the relationship with the recipient. A husband and wife relationship is subject to the least tax of 1 x the asset value.
Eddie concludes: “It should be noted that although taxes are national, some such as inheritance tax are devolved to the regional governments, where they may in turn modify exemptions. As such regional variations will apply dependent on where the property is sited.
“It should also not be overlooked that overseas income and gains may need to be reflected in UK tax returns although there is credit available under the double taxation agreement”.
Always seek professional advice on this and any other financial matters as this information could be subject to change. To contact Wellers Accountants please call 020 7630 6665 or visit www.wellersaccountants.co.uk.
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DEMAND FOR FRENCH MORTGAGES GROWS AMONG HOLIDAY HOME BUYERS
People buying holiday homes in France, the most popular overseas destination for British second home owners, are increasingly taking out French mortgages rather than buying with cash, reports Assetz Finance.
Traditionally, the majority of British purchasers of French holiday homes to use personally have purchased their property outright, without any loans, using savings, inheritance or equity release on their UK property to finance the purchase. On the contrary, investors buying buy to let apartments or French leaseback properties would rarely consider financing their purchase in this way, intending instead to maximise their returns through the use of bank gearing and a minimal 15-20% deposit.
However, over the last twelve months, Assetz Finance has noted a rise in the number of British holiday home buyers opting for a French mortgage, from approximately 33% in 2005 to 50% in 2006, as people begin to recognise that they are both readily available and easy to use as a viable method of finance.
Katy Hepworth, Overseas Mortgage Manager at Assetz Finance comments:
"In the past French mortgages were less widely available and were renowned for being difficult to secure, meaning most holiday home buyers did not even consider using them and instead struggled to finance a cash purchase from the UK.
"This is no longer the case, however, and a considerable number of British purchasers in France are starting to take advantage of French mortgages which are consistently 1 - 1.5% cheaper than in the UK."
The Euribor base rates used by French lenders range from 3.3 - 3.8%, whereas the Bank of England base rate is currently at 5.0% and expected to continue on its upward trend with a further rise this week. Therefore it is cheaper to borrow money in France to buy a property, than to release equity from a UK home.
A large number of holiday home buyers in France intend to rent the property out for a number of weeks every year. By securing a Euro mortgage that is paid via Euro rental income, if the value of sterling gains against the Euro, only the small amount of equity injected into the purchase (normally 20 - 30%) would lose value in currency terms. However, if the property had been purchased in sterling without a French mortgage, the full purchase price would lose value.
From a tax perspective, mortgage interest can be deducted from any French income tax liability if the property is making rental income, presenting another advantage of using a loan to finance a French property purchase. Furthermore, any outstanding mortgage can be deducted from any French wealth tax liability calculation.
Katy Hepworth continues:
"In the past British people buying holiday homes in France have missed out on low interest rates, tax and currency advantages, often because they are daunted by the language barrier. However, buying with French finance is now a path so well-trodden by investors, that a considerable number of holiday home owners are now following suit and taking advantage of overseas mortgages."