Property tax in Spain is notoriously high, both on purchase and during ownership. But, what if it were possible to reduce that bill? And if so, how would you go about it?
In this article, we address these questions. We also look at reducing your liability for non-resident, wealth or inheritance tax as a UK resident on your existing Spanish property. And the possibility of transferring existing ownership to a company.
You’re probably aware that taxes on property in Spain tend to be onerous, particularly when you purchase, donate or inherit. For example, transfer tax on resale properties and VAT on new homes can be as much as 10%. However, there are taxes applicable to owning property, such as the annual Non Resident and Wealth Tax. How do you get round an eye-popping bill on property tax in Spain and save you and your nearest and dearest thousands of euros at the same time?
“High taxes are a hard fact of owning property in Spain,” said León Fernando del Canto, Head of Chambers at Del Canto Chambers. “But, we know that with the right legal advice from experts in the Spanish and English legal systems, you can reduce your bill and avoid problems with the tax authorities.”
Can I save on purchase property tax in Spain?
Your first tax is when you purchase because all Spanish properties come with a hefty tax bill, either as Transfer Tax (ITP in Spanish) or VAT (IVA).
Resale property (i.e. you’re not the first owner): Transfer Tax applies at rates from 4% in the Basque Country to 10% in Catalonia and Costa Blanca. Sitting in the middle are Andalucia, where it’s 7% and the Balearics with 8%.
New property (i.e. you’re the first owner): VAT applies at 10% across the country. Note also that if a company buys a property, new or resale, it could be liable for VAT.
Unfortunately, if you’re a private buyer, there are no possible savings on this tax. However, if you bought through a company and paid VAT, you may be able to recover it if you let the property. Your lawyer will be able to advise you on the circumstances that apply.
Can I save tax if I buy through or transfer my property to a company?
As we’ve just seen, there’s the possibility of claiming back VAT on a buy-to-let property if you buy through a company. Expenses are also deductible; losses can be carried forward; and you can apply capital allowances for tax purposes.
Buying through or transferring your existing property to a company may also lead to savings on other property taxes such as wealth, non-resident or Inheritance taxes. In fact, purchasing through a UK-based company could remove all liability for taxes such as wealth, non-resident income and inheritance in Spain.
But, again, you should only take the decision to buy through a company after careful consideration and advice from your lawyer. The transaction must always be carefully planned and carried out according to Spanish and British tax and legal regulations.
Find out more about owning a property with a company in Spain
Can I save on property tax in Spain if I buy through a trust?
Many a tax advisor will tell you that you can’t use a trust to buy property in Spain, but this isn’t quite true. While Spain doesn’t recognise a trust in the same way as the UK does, you can use a UK-based trust to buy property in Spain through a Special Purpose Vehicle such as a Spanish company.
Again, this involves careful setting up and rigorous legal planning. Plus, you should put the drafting of the legal documentation for the trust in the hands of an expert in English law.
Can I save on property tax if I finance my purchase with a mortgage?
If you buy with a mortgage, you automatically reduce the net worth of the property for wealth and inheritance tax purposes. For example, if you take out a mortgage for 60% of the property’s value, you are only liable for 40% of its value for wealth and inheritance taxes. This is true for both private buyers and companies.
You may also wish to consider using other assets you own as collateral in structured lending and Lombard Loans. These, too, could reduce your bill for property tax in Spain.
Your lawyer and tax advisor will do the Maths for you to work out which system is most beneficial, both now and further down the line.
At Del Canto Chambers, we’re on hand for personalised advice on buying property in Spain to ensure you purchase using the means that suit your personal and financial circumstances.