What to Know About Spanish Property Tax

Key Spanish Property Tax Considerations

Natasha Meah Layland of EBF Consulting highlights all you need to know about Spanish property tax, and the benefits of investing in the Canaries and in Spain.

The Canary Islands are riding a wave of popularity from both tourists and property hunters as year-round sunseekers look to find somewhere easy to reach, safe and affordable.  But the Canary Islands are just one of Spain’s 17 autonomous regions so don’t assume that the rules of another area of Spain will automatically concur.  Yet despite wherever you are thinking of buying in Spain, as the UK post-Brexit economy unfolds, it is crucial to stay informed of the opportunities and choices you have.

Brexit and business in the Canaries 

As an autonomous community of Spain, the Canaries are fully integrated with the European Union (EU) and although the taxes applied are similar to those of mainland Spain, there are several tax incentives to promote investment in its territory making them the perfect location for any British business to remain in Europe.

1. Canary Island Investment Reserve (RIC) – is a corporate and income tax benefit allowing businesses to invest up to 90% of their undistributed profits in fixed assets that will be used for their economic activity.

2. 7% general rate of IGIC (VAT), compared to 21% in the mainland

3. ZEC regime, applicable to newly incorporated businesses that carry out permitted activities.  Minimum investment of €100,000 and creation of 5 jobs on Gran Canaria and Tenerife but €50,000 and 3 jobs on the other islands. The rate of corporation tax is 4% as opposed to the general rate of 25%.

Tax obligations when purchasing property in Spain

If you are buying a holiday home for private use then you will need to ensure you contact a reputable tax adviser. Purchase tax is based on the catastral (book) value of your property assigned by your local town hall; in most cases, this is 19% of 2% of the catastral value.

Tax on rental income is paid per quarter at 19% on the profit but 24%  on rental income if you are not an EU resident i.e. you may not offset any expenditure.  The obligation is to pay tax in Spain on income derived from property in Spain, even if you receive the income in your country of residence.

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Selling property in Spain

In order to comply with EU non-discrimination regulations, capital gains tax rates for both residents and non-residents were equalised from 1st January 2007 onwards, currently 19% tax on the gain. If you are a non-resident then 3% of the sales price is withheld from the vendor at the point of sale.  This is paid by the purchaser to the Tax Authorities by submitting Form 211, within one month of the sale.  The balance of tax payable/ reclaimable ( the difference between the 3%  of the sales price withheld and the 19% tax on the gain) is settled by the vendor on submitting Form 210, within a further three months. 

If you are a resident then you are not subject to the 3% withholding tax, but instead declare the gain in your annual income tax return presented in Spain. A rollover relief is available when the proceeds of the sale are reinvested, within two years of the sale, in the taxpayer’s main residence (the taxpayer must have lived in the property for 3 years, or had to sell because of change of job, marriage or separation).  

Absolute relief is available for resident taxpayers over 65, who have live in the property for at least 3 years. A 50% reduction is applied if the property was purchased between the 12th May 2012 and 31st December 2012.

Inheritance tax in the  Canary Islands

The Spanish inheritance tax law that applied to residents and non-residents used to be different in Spain. A modified law was passed on the 28th November 2014 and applies to all bereavements and donations occurring after January 1st 2015. According to this new law, the Spanish inheritance tax for non-residents must not be discriminatory.  Although inheritance tax in Spain is considered high and differs in different regions, the Canaries currently offer a 99.9% allowance between spouses as well as parent and child both for inheritance and donations.

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