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Has slashed Spanish capital gains tax brought hidden costs?

2nd March 2007 | back to article listings BACK    print this article PRINT

Investors looking for property in Spain may wish to do some research on the capital gains tax system in that country before making a purchase. Recently, Spain enacted laws that lowered the capital gains tax a non-resident owner of Spanish property would pay on selling the asset. The tax was lowered from 35 to 18 per cent, seemingly a huge boost for the shrewd overseas property investor.

However, closer analysis reveals that the tax cut may not deliver such straightforward benefits as first appearances would suggest. Under the double taxation agreement in place between the UK and Spain, the capital gains tax payable domestically by the non-resident investor may actually be higher. Double taxation agreements vary from country to country, but essentially work as outlined below.

Anyone making a profit from their activities in another country, such as acquiring a property portfolio for buy-to-let or resale purposes, may find that they are due to pay tax in both their country of residence and the country in which the profit was acquired. As this is quite unfair, countries will often enter into a double taxation agreement that allow the person to pay their local tax but pay no tax in the country in which the business was conducted. To take advantage of such a treaty, the person must be a declared non-resident in the foreign country.

However, the terms of the double taxation agreement with Spain mean that capital gains tax is still payable in both countries. So, while a UK resident selling a Spanish property will pay less capital gains tax in Spain, they may be in line for a higher capital gains tax payment in the UK. This is because the net tax paid in Spain is deductible from the amount that tax is to be paid on in Britain. As less money is being paid in Spain, less money is tax-deductible at the UK end. This isn't likely to present a huge problem for most property owners or buy-to-let investors in the Spanish property market, but it is something that they may wish to look into.

Research conducted by Mintel last year found that over 800,000 Britons owned property abroad, with just under half of those investing in Spain. The country is especially popular with retirees and under current rules, anyone over the age of 65 who has lived in their Spanish property for three years or more is exempt from Spanish capital gains tax.

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