Representatives of the Spanish government visited London recently as part of a drive to encourage overseas investors to purchase property in Spain. Several foreign governments have already begun to undertake larger scale investments, and it is hoped individuals will follow suit in a boost to Spain’s holiday housing market.
If UK resident individuals do regain an interest in buying property in Spain, they will need to be aware of the potential exposure to Spanish and UK taxes in respect of both the property itself, and any associated Spanish assets, such as bank accounts held overseas in connection with the property.
What are the pitfalls?
Would-be vendors will first need to consider how to structure property ownership. The most straightforward route may well be to hold the property personally, but ownership through a company is also a popular option to help manage Spanish inheritance rules.
Spanish companies are taxable at rates varying from 20% to 30% on their profits, and individuals who own another UK-resident company need to be aware that owning an active company overseas can also affect tax rates in their UK company.
There is no taxable benefit-in-kind for the UK resident individual who has a Spanish company for the sole function of owning the overseas home, but companies with mixed use (ie with other activities) can give rise to complex benefit-in-kind issues if not managed properly.
Investors considering the use of trusts should note that these and other forms of separating beneficial from legal ownership are generally not recognised in Spain, although there may be scope to operate a company which itself is held within a trust.
Generally, on acquisition of a property overseas, no UK taxes arise on the purchaser, although the pre-owned assets tax should be considered where gifts of funds from parents, for example, are involved.
Spanish taxes on acquisition include IVA (the Spanish VAT) on newly constructed property, or property transferred between companies; and property tax, which is generally payable by individuals not subject to IVA. Either way, individuals should be prepared to face a charge of 8% on acquisition.
In addition, other costs, such as Spanish stamp duty at 1.5% to 2%, notary fees, land registry fees and legal fees should be taken into consideration. All receipts for the cost of purchase should be retained, as evidence will be needed when calculating the UK tax position in the future on sale.
Generating revenue
Alongside the idea of holding a place in the sun as a long-term investment or family holiday retreat, many purchasers will naturally be seeking to generate a revenue stream by renting out the property. Rental income is taxable in Spain at 24% and non-resident owners who use intermediate vehicles such as companies in third countries without a double tax treaty may be subject to an annual cadastral tax of 3% of the property’s value. Local council tax is relatively low in Spain, and varies depending on the location of the property.
UK-resident owners will also be liable for income tax on the income received from letting the property, net of various allowable revenue expenses. A credit will be available in the UK in respect of Spanish rental tax paid, but adjustments will need to be accounted for, including for example, the non-alignment between the UK and Spanish tax years.
The relatively beneficial furnished holiday letting (FHL) treatment is still available for those actively operating the rental business with a view to realising a profit, although the criteria for eligibility are tightening significantly with effect from 6 April 2012. For some though, capital allowances may remain available in respect of heating equipment, swimming pools and so on.
Owning through a company
Ongoing ownership via a company brings additional issues. Where a company-owned property is available for personal use, a charge to UK tax on any benefit arising can apply on company directors (or those deemed to be a director). This charge can be bypassed, but this is difficult if the individual wishes to retain some control of the property.
Purchasers should also consider what taxes they may face further down the line, such as inheritance tax, capital gains tax, gift tax or transfer tax, depending on circumstances.
In many cases, a credit is available in the UK for UK residents in respect of equivalent taxes suffered twice. Those who have opted for company ownership should note that gains on sale or transfer of the property, or on liquidation of the company will often be attributed up to the shareholders for UK purposes.
Understanding the immediate and future tax and other consequences of owning a property overseas is essential before anyone commits to a purchase. It also enables consideration of the right vehicle for ownership to be decided on and set up beforehand and prospective buyers should seek joined-up professional advice before undertaking the investment.
