Brexit bombshell for owners of Spanish homes
UK-based landlords of Spanish properties will pay higher income tax after Brexit and may lose the right to an exemption from capital gains tax arising on the sale of a former home.
Alistair Spence Clarke, founding partner of Spence Clarke & Co, spoke to AccountingWEB’s consultant tax editor Rebecca Cave about the surprising effects Brexit will have on the taxation of properties in Spain which are owned by UK residents.
Rebecca Cave (RC): Why does the UK leaving the EU make a difference to the tax treatment of Spanish properties held by UK residents?
Alistair Spence Clarke (ASC): Its 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. When the UK leaves the EU all UK residents immediately lose their status as EU residents.
RC: Does non-EU residence status affect the income received in the entire Spanish tax year, or is there a split-year treatment so the income in the period before Brexit is taxed more favourably than income after Brexit?
ASC: Great question! Fortunately, the Spanish system has previously allowed a split (calendar) year tax treatment in similar circumstances so I think it very likely that tax filings for the Brexit tax year will take account of the different tax rates and allowances pre and post Brexit.
RC: How much extra tax will UK landlords have to pay?
ASC: 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 benefit of all deductions from rental income.
Sam lets an apartment for €1,200 per month. The mortgage and running costs of €800 per month are currently deductible. Sam pays Spanish income tax at 19% on €4,800 per year, being €912. After Brexit, 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 a 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.
After Brexit, 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 taxpayers.
RC: Could the landlord avoid this tax hike by leaving the apartment empty?
ASC: That’s a bit like cutting your nose off to spite your 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 at 19%.
RC: Should UK residents be advised to sell their Spanish properties if they can?
ASC: 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.
RC: 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?
ASC: 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. After Brexit, there will be no exemption where the replacement home is located in the UK.
RC: Will all of these tax changes be mitigated or postponed under the withdrawal agreement with the EU?
ASC: The Withdrawal Agreement I have read makes no provision at all treating UK residents the same as EU residents during the transition period. However, it’s quite possible that the Spanish administration will extend favourable treatment unilaterally to UK residents and I have read Spanish press articles that say that this will happen, but I can’t say this with any confidence.
The detail of what Spanish tax charges will be applied to UK residents in the transitional period has yet to be negotiated, let alone agreed.