By Debbie Franklin, Director of Tax and property tax specialist
Those with investment property in Spain will now be faced with a significantly higher rate of Income Tax as a result of Brexit. In addition, they may lose their right to an exemption from Capital Gains Tax arising from the sale of a former home.
Spanish Income Tax
If you are a landlord of Spanish property, you will be paying some form of Income Tax.
Pre-Brexit, UK residents that let out their Spanish property were taxed on the profit from it at 19%. For example, if you have a rental income of £9,000 from your Spanish property with deductible expenses of £7,000, you would pay £380 in tax (19% of £2,000).
However, now post-Brexit, the same UK residents would be subject to 24% tax on the gross income (24% of £9,000) and therefore a tax bill of £2,160
If your property is not rented out, you will have been paying tax on deemed income (based on the rateable value of the property) of 19%. This tax rate will now be 24% post-Brexit.
You may also be paying UK tax on other rental profits, in addition to those in Spain. Under the terms of the double taxation agreement between the UK and Spain, you get a credit against your UK tax bill for any taxes paid in Spain.
If the tax you pay in Spain is now considerably more than in the UK, you will not receive a refund for the difference.
Capital Gains Tax (CGT)
CGT is the tax on profit made from selling or 'disposing of' an asset where it has increased in value. There are exemptions if the property is your principle private residence.
Following Brexit, there will be little change around the sale of a second/rental property in Spain. You will still pay the Spanish CGT of 19%. However, if the Spanish property is your principal private residence, there could be a significant impact.
Owners who are aged over 65 and have lived in the property for at least three years will still benefit from a full exemption from Capital Gains Tax on the sale. Those under 65 will still have exemption as long as their next home is in the EU. If they relocate to the UK, they will be taxed under Capital Gains Tax rules.
Dealing with the Change
It is likely that for the tax year in which Brexit had taken place, the varying tax rates and allowances pre- and post-Brexit will be taken into account.
It is important to be aware now of the potential increase in tax to help you to make necessary preparations and informed decisions. We can help, please do get in touch.