Brace for Brexit 19: Higher taxes for Brits owning Spanish homes
UK resident landlords of Spanish properties will pay more tax on rental income and on gains from any former Spanish home sold after the end of the transition period on 31 December 2020.
Alistair Spence Clarke founding partner of Spence Clarke & Co spoke Rebecca Cave about the surprising affects that Brexit will have on the taxation of properties in Spain which are owned by UK residents.
Why does the UK leaving the EU make a difference to the tax treatment of Spanish properties held by UK residents?
Alistair: It’s all tied up with the Spanish non-resident tax law. There are different tax rates and treatments based on the residence status of taxpayers – whether they are EU/EEA residents or not. Once the transition period comes to an end on 31 December 2020 all UK residents immediately lose their status as EU residents for Spanish tax purposes.
How much extra tax will UK landlords have to pay?
Alistair: The tax rate on rental income jumps from 19% to 24%, for non-EU residents, but the big problem will be the loss of the right to all deductions from rental income. In other words, tax will be charged on gross rental income, not net income.
|Example Sam lets an apartment for €1,200 per month. The mortgage and running costs of €800 per month are currently deductible. Currently Sam pays Spanish income tax at 19% on €4,800 per year, being €912. From 2021, after the end of the transition period for the UK leaving the EU, letting the same apartment would be taxed at 24% on the gross rent of €14,400 creating a tax bill of €3,456.
As Sam is UK resident, she will also pay UK income tax at her marginal rate on the net income from the apartment, but with a credit for the Spanish tax paid. Using an exchange rate of €1 = £1, Sam will pay UK income tax at 40% on £4,800 = £1,920 less Spanish tax paid of £912, leaving £1,008 to pay in the UK.
From 2021 Sam’s UK income tax bill will be fully covered by the Spanish tax paid, but she can’t claim a refund for the extra Spanish tax.
It's the partial loss of tax credit in the UK that will be the real problem, and this will affect basic rate taxpayers even worse than higher rate tax payers.
Could the landlord avoid this tax hike by leaving the apartment empty?
Alistair: That’s a bit like cutting the nose off to spite the face! Especially because one of the strange things about Spanish tax is that all second homes are deemed to generate imaginary rent equal to 1.1% to 2%, usually the latter, of the valor catastral (rateable value) of the property. This deemed rental income is also taxable at 24% for non-EU residents instead of 19%.
Should UK residents be advised to sell their Spanish properties if they can?
Alistair: I don’t think that Brexit should be the trigger to sell property in Spain. After all the sun will keep on shining and it’s a wonderful place to live. However, whether the property has been used as a second home or let out, any gain made on the sale is taxable at 19 %. This tax rate will not be affected by Brexit.
The gain will also be taxable in the UK at 28% with a tax credit for any Spanish CGT paid. However, the UK gain is calculated differently as any exchange rate gain will also be taxed.
What is the tax position if the property has been the owner’s principle private residence and they sell up to return to the UK?
Alistair: Owners who are aged over 65, and who have lived in the property for at least three years, will still benefit from a full exemption from capital gains tax on the sale. Under 65s can claim exemption from capital gains tax if they acquire a new home within the EU or EEA. From 2021 there will be no exemption where the replacement home is located in the UK.
It looks like Brits will suffer serious disadvantages once the transition period comes to an end. How can this be justified?
Alistair: It’s not that Brits in particular will be discriminated against, as the same rules will apply to residents of all non EU/EEA countries. However, it is absolutely true to say that Spain’s income tax system is discriminatory against ‘third country’ residents. The Supreme Court ruled recently that Spanish discriminatory tax rules for non-residents go against basic EU freedoms. The tax office issued a ruling in late 2019 that inheritance tax law was discriminatory and a change to inheritance tax that will favour Brits will become law in 2020.
I think it is just a question of time before the same thing happens to the non-resident rental tax system but, in the meantime, Brits will have to pay tax on gross rental income according to existing tax law. Once the law changes, tax repayments can be applied for.