- October 1, 2016 at 1:56 pm #192786
I’m looking to buy a property and rent it out for most of the year to offset costs, make some money and have a place in the sun to use. A well worn path, I know.
Whilst looking and considering different types of places etc, I’ve been getting more alarmed about the tax consequences. So far I’m trying to get a definitive answer to my first question:
Is mortgage interest only allowed as a deduction, or is the capital repayment element also allowed. I suspect it’s only the interest element, but would greatly appreciate any precise advice in this matter. (This is probably an easy question for current owners.)
My bigger concern, and the title of this thread, is what happens post Brexit.
U.K. Residents won’t be part of the EU and therefore no longer entitled to take the deductions and will, in theory, have to stump up the flat tax of 24.75% of the gross income. Back to the ‘good old days’ for the Spanish taxman.
If this happens and you have a property with a sizeable mortgage, surely this will all but destroy your profits. Even a mortgage free property will still incur sizeable expenditures if rented throughout the year and the marginal rate will be nearer 33% of your net rents. (10k income, 25% expenses, a net rent of 7.5k, tax of 2.5k = 33%)
The figures, if you have a 4K annual mortgage payment, giving a net rent of 3.5k and a tax bill of 2.5k which is…… 71%.
Maybe the Spanish will do a ‘sweetheart’ tax deal to continue to allow these deductions, perhaps to avoid a stampede to the exits with Brits with grossly over leveraged properties trying to get out of them fast (everyone knows how that story ends). But any such deal could be challenged by other interested groups such as Hotel groups (already mightily upset by AirBnB operators) Spanish resident landlords ( good old fashioned nationalism / anti competition) or the French! (world champions at taxation – plenty of UK owned holiday homes to feast upon).
I’m sure this scenario, possibly in less than 3 years, will make current owner/renters very uneasy. I’m sure no one will want to believe it. As I haven’t bought anywhere yet, I have to assume this will happen.
Does anyone out there have good grounds to say this won’t happen? What would be the alternative?
From where I am sitting (in the UK), Spanish property ownership, from an investment point of view, is not really viable and very possibly a disaster waiting to happen.
I really want to buy somewhere but everywhere I look I see big problems.
Can anyone cheer me up?
- October 5, 2016 at 4:15 pm #192823
Nope. You can expect the EU to go out of its way to tax the British to provide clear evidence of the danger of exiting the EU.
- October 8, 2016 at 11:18 am #192885
There is no real basis for your fears.
Start with the current regime now
Homeowners who let their properties can claim expenses including mortgage interest but not all the expenses you will incur are going to be capable of being set off against your rental income. The reason is a good bulk of your expenses will likely be incurred in cash and so you will not have an ‘official’ receipt acceptable to the taxman. I believe the income tax rate is currently 19.5% but the effective rate will be a lot higher after excluding the cash expenses.
There is another issue, You need to be registered if you are going to let your property (the rules vary from region to region but now include Andalusia Barcelona and Madrid etc.) Registering means adding your name to database with the regional government. Nobody has suggested as far as I can see that this database will be used by the Spanish tax authorities, but use your imagination and you can see the direction of travel.
The overarching points about Spain for a foreigner is that the country despite it’s many appeals is dysfunctional in many administrative ways . There is a tax system that discourages ordinary Spanish people to work and declared all their income which leads to a large black economy and broadly there is oodles of corruption from national government down to the town hall and into the big corporations. The net result is the average Spanish citizen has no faith in the system because it is grossly unfair. As a consequence, much energy is expended on working around it. This is the issue that foreigners have to grapple with so yes, in your case is entirely likely your plans will not add up as a viable economic venture through letting your home as a holiday let, the question will be, do you all the advantages of owning in Spain outweigh the burden of the tax system and hopeless bureaucracy.
I would not worry about a post Brexit future – it is too early and there are many deals to be done, even direct arrangements between Spain and the UK (as a starter I suugest they give us Marbella and we give them Doncaster in return!)
- October 8, 2016 at 2:44 pm #192895
They can’t have Doncaster. We are saving that as a going away present for Scotland if they eventually break away.
Thanks for the advice. I have pretty much got to the same view. Only buy where you want to spend a lot of time yourself, any rental is just to offset costs some of the running costs. I doubt it’s going to be a commercial proposition.
Just to clear, it’s the mortgage interest only allowed as a deductible, not the capital repayment element of the mortgage payment?
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