Spanish tax clampdown

The Spanish Government is tightening up on tax offenders…and foreign property-owners are under close scrutiny.

The road to buying and owning property in Spain can be lined with potential pitfalls where taxes are concerned. Be aware that the Spanish taxman is actively on the hunt for non tax payers and you would be wise indeed to arm yourself with the property tax laws if you are thinking of owning a holiday home in Spain or if you are contemplating moving there.

For years many Brits have not been paying the tax due on their Spanish property, either through ignorance, difficulty with the language, or because ‘no one ever pays’. Approximately 500,000 Britons are living in Spain, the largest number from any EU country, and many have not registered with the tax authorities. Now the tax department, the Hacienda, has cottoned on to this and is introducing laws which will flush out the non payers along with the tax due, the back tax and possibly interest and penalties too.

The Hacienda has been losing out on wealth tax, capital gains tax and income tax on rental income all payable by Spanish residents and non residents alike. In an all out attack on tax dodgers the Hacienda hauled in an extra 9.5% in unpaid taxes last year alone, much of this coming from the property sector.

When purchasing property in Spain it used to be common practice to under-declare the purchase price to lower the capital gains liability, mainly for the vendor’s benefit. Once a purchase price was agreed between the vendor and purchaser a reduced ‘official’ price was notified to the authorities and the rest was paid in cash as a ‘back-hander’ to the vendor by the purchaser. This illegal practice was losing the tax department a huge amount of revenue every year.

In a drive to stamp out this scam, the Spanish government is passing laws this year whereby the purchaser must declare in the purchase documentation how the property is to be paid for i.e. by mortgage, cheque or cash. The taxman can then check the purchaser’s bank account to ascertain if the payments match up. Any cheque drawn around the property purchase date not conforming to the declaration and any large cash withdrawals – and the tax man will smell a rat.

The ‘black money’ scam as it is known has been a huge pitfall for unsuspecting purchasers who have found that when they come to sell the property they not only have to pay capital gains tax on their own gain, but that they are also effectively liable for tax on the undeclared capital gain made by the previous vendor, because their declared base cost is lower than their actual base cost.

Spanish capital gains tax is levied at a rate of 35% on non-residents of Spain, which can make a significant dent in your financial calculations. For a Spanish resident, the capital gains tax rate is 15%. It is worth remembering, however, that from 2007, a rate of 18% is proposed for both residents and non residents. This follows the European Commission referring Spain to the Court of Justice over the unfair gap in the capital gains tax rate on property between residents and non residents.

The new laws will also stipulate that the tax identification number should be logged on the property register to help the authorities to check that taxes have been paid. If not, the property owner will be tracked down and brought to account.

This follows a law passed in 2005 calling for the property registry number to be noted on income tax returns. This unearthed an amazing 100,000 ‘new’ property owners, 8.6% more than the previous year, raising the tax from rental income alone from €862 million to €10.2 billion.

In its assault in unearthing tax defaulters, the Hacienda is not just focusing on all new property transactions but those from the recent past will also come under the spotlight. As well as undeclared capital gains, wealth tax and rental income, many property owners aren’t even paying local property taxes. Unpaid Spanish tax can be charged against the property and so some unfortunate owners caught unawares could lose their life’s worth of investment to the taxman.

If you are renting, or intend to rent out, your holiday home then pay particular attention. Often in the past owners would declare that their property was unoccupied but the Hacienda has boxed clever. Part of the new laws require tenants to include the property registry number on the electricity bills. It is yet another tool for the taxman to track down a landlord’s undeclared rental income.

Now the Hacienda has started a new tack. It is scrutinising the classified adverts in the local newspapers, scanning property agents’ rental listings, searching the internet and talking to local businessmen and hoteliers to root out owners who are renting out their properties whose names are then checked for tax registration. Taxmen are also examining property firms who sell apartments off-plan on the premise of guaranteed rental income. The rental adverts on the internet are proving particularly profitable and a relatively easy way to source out offenders.

A Spanish tax resident will pay tax on 50% of net rental income which is the taxable amount after deductions for daily running costs, repairs and maintenance. A non resident is liable to tax at the fixed rate of 25% on the gross rental income without any allowance for expenses and maintenance. There is also a notional tax levied on deemed rental income on property that is not your main home or not rented out.

In Spain it is the tenant’s obligation to retain the resident’s 15% withholding tax on rental income or the non resident landlord’s 25% tax liability and pay it to the tax authorities (where practical). The landlord should get a copy of the tax return to prove that the tax has been paid in Spain and also as evidence of any tax paid on the rental income for their home country.

Rental income in Spain has to be declared in the UK by a UK tax resident although the double tax treaty allows for any Spanish tax paid to be deducted against any UK tax liability. UK residents who have not been declaring Spanish rental income to the UK Inland Revenue, or the Hacienda, could be in for a shock if the Hacienda discover them and notify them to HM Revenue and Customs.

A Spanish tax resident is liable for income tax, capital gains tax, wealth tax, and succession (inheritance) tax on their worldwide assets. A Spanish non resident is liable for tax on rental income, and capital gains, wealth tax and succession tax on property only. The Hacienda is catching tax defaulters through the property they own. To ignore or be ignorant of your tax liabilities can lead to punitive penalties.

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