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Spanish inquisition

A couple were referred to us by a local independent mortgage broker. They were in the process of raising a mortgage on their UK home to buy a euro 250,000 villa in Spain and had asked about the tax issues.

An increasing number of clients own properties abroad, mainly in Spain. Some of them simply want a holiday home in the sun while others are buying in advance of retiring there. But very few seek tax advice prior to buying.

First, we needed to clarify the clients’ residency as Spain taxes residents and non-residents quite differently. Anyone who spends more than 183 days of the tax year in Spain is treated as being resident. The tax year runs from January 1 to December 31.

The clients planned to use their villa for holidays. As they would be spending less than 183 days in Spain and their only assets there would be the villa and a modest balance in a Spanish bank to meet running costs and so on, we treated them as being non-resident.

We explained that if they retired to Spain, the situation would change and they would need more advice.

Any income from renting out the villa when they were not using it would be taxed at 25 or 35 per cent. Income tax might be due on a deemed level of rental income based on the property value even if the villa was not being commercially let.

On the sale of the villa, realised gains would be subject to a flat rate of tax of 35 per cent. As non-residents, only very limited tax reliefs would be available to the clients.

There is a double taxation treaty between the UK and Spain although this is limited to income and capital gains tax.

Spain also has a wealth tax which is charged annually and varies between 0.2 and 2.5 per cent depending on the value of the assets. Non-residents receive no annual allowance. Our clients would fall into the 0.3 per cent band, cost- ing around £600 annually and increasing in line with the value of the property.

Importantly, tax is charged on the net value of the property after the deduction of any mortgage, unlike the UK where residential mortgages no longer attract tax relief. This means that if clients need to borrow to buy a Spanish property, they should consider carefully whether to borrow against their UK property or benefit from the wealth tax savings by borrowing against their property in Spain.

Inheritance tax in Spain is different from the UK in some very important respects. For non-residents, only Spanish assets are taken into account. However, the liability is on the beneficiary or persons receiving the assets, not the deceased’s estate, and is payable within six months of the date of death. The asset cannot be sold or used as security for loans until the tax is paid. The beneficiary needs to be able to meet the tax liability from other sources.

We recommended to the clients that unless their beneficiaries had sufficient liquidity to meet the potential tax liability or they would be leaving cash in the UK, they might wish to consider using a life insurance policy written in trust to the beneficiary to provide funds to meet the liability on their death.

There is no inter-spousal exemption from inheritance tax, as there is in the UK. The tax allowances depend on the relationship between the deceased and the beneficiary and the wealth of the recipient prior to the inheritance. The basic tax rate can be as much as 34 per cent. This is then sub- ject to a multiplier depending on the relationship.

For spouses and the deceased’s children, with pre- existing wealth of up to euro 402,678, the multiplier is one. If their wealth exceeds euro 4,020,771, it increases to 1.2.

For other beneficiaries, including common-law spouses, same-sex partners, and stepchildren, the multiplying factor starts at two and rises to a maximum of 2.4. Using the available allowances, tax bands and relationship categories, the worst case tax situation is 67 per cent.

There is no double taxation treaty between Spain and the UK for inheritance tax, which means that any tax paid in Spain will not be recoverable in the UK. While tax paid in Spain will be taken into account in the UK, if it is charged at a rate less than 40 per cent, then the couple’s estate will have to pay the difference in the UK. However, as with wealth tax, inheritance tax is calculated on the net estate.

Three important messages arise from this. First, taxation is very different in Spain and any clients considering buying a property there should seek tax advice.

Second, while borrowing against a UK residence may seem simple, inexpensive and convenient, the wealth tax and inheritance tax issues mean they should seriously consider taking out the mortgage on the Spanish property.

Finally, they should make certain their IFA takes into account the international aspects of their estate when calculating and advising them on their IHT planning.


AMI’s view

Like an iceberg, the majority of the costs of mortgage regulation have been hidden from view as they have been swallowed up by internal considerations – IT, staff and management meetings, training, let alone opportunity cost. This is why the AMI has been on the front foot helping members to understand the implications of fee-charging and what a reasonable level of fee looks like.


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