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.

18th Dec 2020
Tax Writer Taxwriter Ltd
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Residential buildings in Seville, Spain.
istock_Seville-home_MarioGuti

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.

Replies (13)

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Caroline
By accountantccole
18th Dec 2020 12:45

French rules updated this week saying you can't have new branches controlled from the UK .
But hey, blue passports.....

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By 0098087
18th Dec 2020 13:26

Love it..we got our country back..and the most likely people to own these properties are the older residents who hate foreigners, voted to leave and vote Tory..just love it..so so funny..How's your Daily Mail and Hitler poster?

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Replying to 0098087:
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By Rgab1947
04th Jan 2021 12:55

Oh really.

Are you a Stalinist reading only the Red Flag?

Silly comment as would be the above comment and disrespectful to valid held views democratically expressed.

No I was and am not a Brexiteer. Just respect that others may hold another view and the democratic process.

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By jonharris999
18th Dec 2020 14:07

Thanks for this info. Will this also apply to Spanish citizens who are UK residents?

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By Paul Crowley
19th Dec 2020 15:50

Fair play to them
Stick it to the foreigner

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blue sheep
By NH
20th Dec 2020 11:17

If you are no longer a club member and no longer pay the club fees you don't get the same benefits as members, simple as that

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By Shafeen
21st Dec 2020 20:27

Shouldn't that be 31 December 2020, not 2021.

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Replying to Shafeen:
rebecca cave
By Rebecca Cave
22nd Dec 2020 12:06

I've corrected that year.

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By Dspate
04th Jan 2021 11:14

Is the position any different if you are an EU Citizen as well as a UK citizen (i.e. dual citizen) but resident in the UK? i.e. is it residency rather than citizenship that matters? I thought a principle of EU law was that all EU citizens must be treated equally?

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Replying to Dspate:
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By Rgab1947
04th Jan 2021 12:57

Interesting question. Would be keen to hear an experts opinion on that.

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By JOHNB10
04th Jan 2021 11:38

What happens those with Irish passports resident in Northern Ireland who are still EU residents?

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By Kentwillumsen
04th Jan 2021 13:56

The issue will sort itself out; supply and demand rules:
Spain still have in excess of 2-3mill empty properties they hope to sell, mainly to Britsh citizens.

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By pradous
10th Jan 2021 12:32

Hello. The "old" Spanish law allowed qualified expenses in excess of income to be carried over for up to 4 years. Will it still be possible for UK tax residents to deduct expenses that were incurred prior to the end of the transition period in their quarterly returns starting 1Q21?

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