This article was first published by Kreston Reeves LLP and authored by Stephen Metcalf, Private Client Tax Senior Manager.
This article looks at the tax implications of owning Spanish property post-Brexit.
So Brexit does mean Brexit…well in Spain’s eyes at least
Whilst many an hour has been spent (significantly more post the referendum) debating what would happen on the UK leaving the EU, it has mainly been followed by the frustrating statement – “who knows?”!
However in Spain, come 29 March 2019, UK individuals owning Spanish property and assets will be treated differently.
Within Spain’s tax law is a clear distinction between EU/EEA and non-EU/EEA countries, and the way certain taxes are applied varies significantly in some circumstances, as illustrated below.
As an EU/EEA citizen, rental income is taxed in Spain at 19% after allowing certain reliefs for expenses incurred, in a similar way to the UK. However, as soon as Britain leaves the EU/EEA, British residents receiving Spanish rental income will not be able to claim those expenses, instead incurring a flat rate of 24%. Whilst the double tax treaty between the UK and Spain will allow some relief for offsetting tax, it is quite likely that the Spanish tax will be higher than the UK liability; therefore not all of the tax will be relieved.
Spain has a gift tax system which taxes beneficiaries, rather than the estate. EU/EEA residents get to choose between the Spanish State system or the appropriate autonomous region’s system. The various regions’ tax laws vary in this regard greatly, with certain ones giving significant exemptions which can be very beneficial. After Brexit, however, UK individuals will not get this choice, and will have to apply the State’s tax regime, which in many cases is less beneficial.
Capital Gains Tax (CGT)
When an individual leaves Spain, CGT is assessed on their assets on the unrealised gains. If they move to an EU/EEA country this tax can be deferred until the asset is sold, or for 10 years. Again, this option disappears if they decide to move to the UK after Brexit. Clearly for some this could prove very expensive, potentially without cash available to pay the liability.
If you sell your main home in Spain and reinvest the proceeds in a new home in the EU/EEA, then you are exempt from CGT. But (you’ve guessed it) after Brexit, if you buy that new home in the UK, you will suffer CGT on the Spanish property sale.
Given that Spain is the most popular destination in Europe for British expats, we expect these rules will have quite an impact. Ultimately, whatever deal (or no deal) that the UK ends up with, it is clear that Brits who have Spanish connections will have tougher tax implications to face.
Kreston Reeves advise dynamic businesses, not for profit organisations, private individuals and families on all areas of business, tax and wealth. Kreston International network, have access to experts in Spain and around the world to help ensure that your global financial affairs are looked after. For further information please contact a Kreston Reeves adviser on +44 (0)330 124 1399.