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Possible change in Spanish tax regime for Brits

After Briexit, Spain may stop Brits using expenses incurred against rental income.

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Hi All,

Looked everywhere (that I know of), but can't seem to find a definative answer.

Background

After Brexit and if there is 'no deal', it is possible that Brits who own and rent out their Spanish property will no longer be able to deduct expenses incurred against rental income. Of course this will increase the profits for tax purposes. Also, at the moment Brits suffer Spanish income tax at a rate of 19%, and this could go up to 24%. At the moment, when completing a tax return, the Spanish income is declared, and the fact that income tax was paid at 19%, an additional 1% has to be suffered against this income in the UK (assuming a tax rate of 20%)

My questions are:

If 24% tax is paid against the rental income, would this additional 4% be taken into consideration when completing the tax return , which would then allow a 'decrease' in the tax laibility to the UK?

Also, is there a mechanism that the expenses incurred can be set against the rental income for calculating the profits for UK tax purposes?

I guess these are 'long-shots', but if the additional tax paid is not factored in and/or the expenses cannot be used for UK tax purposes, I suspect there are going to be a lot of Spanish properties going up for sale.

Thank you all in advance

Replies (10)

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By Tax Dragon
07th Mar 2020 20:04

Profits for UK tax purposes are (or at least should be) calculated under UK tax rules.

Not sure that answers the question. Not fully sure I understand the question.

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Replying to Tax Dragon:
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By CardiffAccountant
07th Mar 2020 20:24

Thanks for coming back so soon Tax Dragon.

I guess I’m asking if the additional 4% paid can be used against any UK tax liability.

As for the expenses; can a further calculation be made using the these expenses, and thus maybe lower the UK tax liability.

As I said, I know this is a bit of a stretch - but tax rules can often offer some surprising ‘benefits’.

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Replying to CardiffAccountant:
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By Not Anonymous
07th Mar 2020 20:28

CardiffAccountant wrote:

Thanks for coming back so soon Tax Dragon.

I guess I’m asking if the additional 4% paid can be used against any UK tax liability.

As for the expenses; can a further calculation be made using the these expenses, and thus maybe lower the UK tax liability.

As I said, I know this is a bit of a stretch - but tax rules can often offer some surprising ‘benefits’.

Threads like this are always better if you say which jurisdiction the expenses you are talking about not being able to claim refer to.

It isn't clear to me if these are expenses claimed on the Spanish tax return (or equivalent) or the UK tax return.

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Replying to Not Anonymous:
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By CardiffAccountant
07th Mar 2020 20:51

Hi Not Anonymous,

Please see my reply to Matrix.

Thanks for looking at this.

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Replying to CardiffAccountant:
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By Matrix
07th Mar 2020 20:32

Why are you currently calculating the UK tax on income instead of profits?

If the foreign tax suffered is higher than the UK tax then there may be no UK tax, I would make sure you understand double tax relief.

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Replying to Matrix:
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By CardiffAccountant
07th Mar 2020 20:49

Thanks Matrix.

I have used the double tax relief in the past, and hence had to pay an additional 1% in the UK to bring the total income tax paid to 20%.

At the moment Spanish income tax (at 19%) is paid on the rental profits made in Spain.

I am now saying income, as Brits may no longer be able to to deduct ANY expenses.

The expenses include Spanish management fees, Spanish electricity bills, Spanish everything.

No expenses are incurred in the UK.

Can these same expenses be used in some way to reduce the UK tax liability.

Also, as UK would charge only 20% income tax, can the additional 4% paid in Spanish taxes, be used to help reduce the UK liability ie against tax incurred against dividend income or maybe even PAYE.

Thanks again.

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Replying to CardiffAccountant:
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By Matrix
07th Mar 2020 20:57

You need to make sure you understand double tax relief as I said or refer to someone who does.

UK tax is computed under UK principles - on profits.

No you can only deduct the foreign tax suffered against that source of income, not against others sources.

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Replying to Matrix:
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By CardiffAccountant
07th Mar 2020 21:08

Hi Matrix,

Thanks.

Just found the HMRC guidance. Maybe should have looked harder.

Seems that a lot of Brits are going to be very much out of pocket.

Guess there’s not much we can do with the disallowable expenses either.

Thanks for taking the time to look at this.

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By Tax Dragon
07th Mar 2020 23:40

I agree the premise and your conclusi0n.

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By Montrose
09th Mar 2020 11:52

There seem to be three questions here

1] How will Spanish tax be assessed ?

2] On what will UK tax be chargeable?

3] How much will that UK tax be?

On question 1 the suggestion is that the taxable income will be increased because of dis-allowable expenses and a possible higher applicable tax rate.

On question 2 the answer will be on the income computed on a UK basis regardless of Spanish deductibilty rules

On question 3 the UK will compute the tax due on the income calculated as per question 2 [if required as the top slice of income] and from that liability the tax will be reduced by whatever tax is due in Spain under 1. If the Spanish tax under 1 exceeds the UK tax assessable under 2, then the excess is not available for any UK purpose.

Additional question:- If Spanish property counted for UK tax purposes as a furnished letting, will that treatment still apply when Brexit is completed?

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