A tax shock may await UK resident Spanish holiday homeowners and investors after Brexit.
As they will no longer be residents of the European Union (EU) or European Economic Area (EEA), UK resident individuals and companies will lose a valuable tax position.
And whilst there is an existing UK/Spanish double tax treaty offering some protection, significant tax problems can still arise.
Pre Brexit, there is no Spanish withholding tax when a UK parent company holds at least 5% of a Spanish subsidiary’s share capital, or the cost of the shares exceeds €20m.
Post Brexit, the UK/Spanish treaty requires the parent to hold at least 10% of the Spanish subsidiary’s share capital to avoid a 10% withholding tax applying to dividends from Spain.
Pre Brexit, UK residents with Spanish holiday homes can deduct from rental income any reasonable property costs covering maintenance, utilities, local taxes, loan interest, depreciation, rental agents and related legal costs. Tax is then payable at 19% on the net income.
Post Brexit, however, the tax rate rises to 24%, and property costs are not allowed.
In addition, second homes are deemed to produce rental income that is assessed on the owner for income tax purposes. This income is computed at either 1.1% or 2% of the rateable value of the property, the higher rate applying where the rateable value has not changed in the previous 10 years.
Post Brexit, UK residents will pay 24% tax on this income, instead of the current 19% as EU/EEA citizens.
Post Brexit, the UK/Spanish tax treaty does not cover Inheritance tax, potentially creating serious tax issues for UK residents with Spanish assets.
The Spanish inheritance/gift tax (IGT) system taxes the beneficiary rather than the estate, so a non-Spanish-resident individual will be taxed on the inheritance of real estate or other Spanish assets.
To add to the complication, the 17 regions of Spain each have the power to collect and regulate IGT, and on top of that there is a state system applying only to non-resident beneficiaries.
Spain gives EU/EEA residents the choice of the state IGT system or the appropriate region’s IGT where a property is located. UK residents do not have this right once they cease to be EU/EEA residents.
Spain imposes Capital Gain Tax (CGT) on individuals leaving Spain with investments worth more than €4m. The maximum rate of tax is 23% on the unrealised profits of investments, as valued on the last day of the last year of assessment. The limit is reduced to €1m when the individual holds more than 25% of a company. Any capital losses cannot be set off against any gain.
Where an individual relocates to another EU/EEA jurisdiction, payment of the tax can be deferred until the asset is either disposed of, or 10 years, whichever is sooner. Individuals moving to the UK will not have this right of deferral.
Principal private residence
Whilst the sale of a Spanish principal private residence is not ordinarily exempt from CGT, those over the age of 65 can benefit from a general exemption as long as they have lived in the home for at least three years before disposal.
There is an exemption available to other owners if they roll over the net proceeds of sale into a new home. Partial reinvestment gives a pro rata exemption.
Where an individual sells a Spanish home to move to a country outside the EU/EEA, the exemption is lost.
Post Brexit therefore, individuals moving to the UK from Spain will not be entitled to any exemption from CGT on the sale of their Spanish homes.
What does the future hold?
With the Brexit date put back to 31 January 2020, there is time to consider the tax consequences for owners of Spanish holiday homes.
If you would like to discuss any of the issues raised in this article, please contact a member of our tax team or your usual Bishop Fleming advisor.