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Capital Gains Tax in Spain

publication date: Nov 20, 2007
 | 
author/source: Mike Beattie
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spain taxNon-residents are subject to IRNR (Income tax on Non-Residents) on their Spanish-source income and capital gains. The current law for non-residents is the Income tax on Non-Residents Act 2004 as amended in November 2006 which has effect from January 2007.

Before January 2007 non-residents had paid capital gains tax (CGT) at 35% whereas Spanish residents paid at only 18%. This discrepancy caused a lot of resentment and EU pressure resulted in a harmonisation of the rates for both residents and non residents at 18%.

Spanish law also requires that the purchaser of a property from a nonresident must withhold 3% of the price which the purchaser then pays over to the tax office on account of the potential CGT liability of the nonresident vendor. This withholding tax is not required if the Spanish property is held by a Spanish company.

As an anti-money laundering measure, The Tax Fraud Prevention Act requires the purchaser to provide details of his tax ID number and the means of payment for the property when registering the purchase with the Land Registry.

Only when he has he complied with these formalities will he receive a property reference number which he will need to obtain basic utilities like water, gas and telephone services.

Spanish capital gains tax calculation

The gain is calculated after taking into account the costs related to the purchase and sale (like agents and lawyers fees), as well as improvements made to the property during your ownership, so long as they are properly substantiated with invoices. And, unlike the UK, the purchase price of the property is adjusted for an inflation index published by the Government. In the UK this indexing method was replaced in 1998 by a scheme known as Taper Relief which reduces the gain according to how long the property has been owned.

Making a Principal Private Residence (PPR) election

UK tax residents who own more than one home can choose which of those homes is their Principal Private Residence and save considerable amounts of Capital Gains Tax. How this works was explained in detail in the November issue but essentially the election will ensure that the last three years of the ownership of a home (in this case a home in Spain) is capital gains tax free.

Let us consider the case of Jack and Jill who have just sold their villa in Spain for 2million having bought it five years ago for €1million. In their case, the extra tax to pay if they if they had not made a PPR election would be very significant indeed. The following table sets out what is at stake.

Because of the substantial tax that can be saved, we believe that a PPR election should always be made by those with more than one home.

Mike Beattie FCA is a Director & Juan Carlos Venegas ITT(Dip) is a Senior Consultant with TaxSavingsLimited which provides an on-line tax service to the owners of second homes details of which can be found at www.taxsavingslimited.com