As people are selling their properties both in Spain and the UK they are wanting to know what the tax implications might be. The rules around capital gains tax (CGT) can cause confusion.
Capital gains tax is applied in most countries when you sell a property. The idea is that you pay tax on the profit you make. There have been a number of changes in relation to capital gains tax that have caused some confusion amongst foreigners living in Spain.
With the property slump many people will not actually have made a profit from the sale of their home in Spain. However, if you have been in the fortunate position of selling your home for more than you bought it for then Spanish CGT can be a big issue.
If you are a non-resident you will pay 19.5% capital gains tax in Spain in 2015, lowering to 19% in 2016 as a standard levy. The Spanish Tax Authority withholds 3% from the sale of your property. This is taken directly from the purchaser so that you only receive 97% of the amount the property was sold for. The 3% is a safeguard so that non-residents do not ‘disappear’ before they have settled their CGT account.
If more CGT is needed than is covered by the 3% then you will need to provide the extra, if not you will receive a refund. In order to collect any refund you need to complete a form 210H. This should be submitted within three months of the sale along with the last four years of non-resident income tax. From the date that it is presented you should allow around a year to receive the refund.
If you are a resident you must declare CGT on your annual tax declaration. You will be charged capital gains tax according to your overall annual income. There are possible exemptions from capital gains tax if you are a resident.
If you are over 65 years old and have been living as a tax resident in the same, permanent home in Spain for more than three years then you are exempt from paying Spanish capital gains tax on it.
You can also be exempt from paying CGT if you have been a fiscal resident in Spain for three years and reinvest your money from your principal home in another principal home. However, you must continue to live in this new property for the next three years.
The permanent property you buy can be in any member state of the European Union but you must reinvest all the money. If you do not then you will be liable to capital gains tax in Spain on the difference.
If you haven’t quite made the three year threshold and there is a compelling reason why you have to sell, the Spanish Tax Authority will take this into account. So, for example, if you have become disabled and can no longer manage to live in a high-rise property or if you have to move because of work-related reasons.
You might also be exempt from paying CGT on a second property in Spain if you are over 65, have been a tax resident for more than three years and invest all the money from the sale in an annuity.
How is it calculated?
Capital gains tax is the purchase price (as written on the Title Deed) with some costs added to it including VAT, Land Registry fees, notary fees, transmission tax and legal fees. This is then deducted from the final sale figure less costs incurred during the sale including legal fees:
Final sale figure – true purchase price = net profit
Although purchasing and selling expenses can be deducted you should note that this does not apply to any mortgage or other debts that you have.
Until January 2015 it was the case that some account was taken of inflation when calculating capital gains tax. However, this is no longer the case and means that some people are paying significantly more CGT.
If you are selling property in another country within the EU and you are a resident in Spain, you must declare the CGT in Spain when you make your resident tax declaration in June. This declaration covers your income from the previous year.
Improvements to your property
A frequent question we are asked is what happens if you have made substantial improvements to your property and it has increased in value. Firstly, it is important to ensure that you have the correct building licences for any changes that you have made. These will also need to have been registered at the Land Registry.
When you register the changes there will be a revaluation of how much the property is worth that should bring it more in line with your selling price. As with most taxes, being aware of what to expect helps you plan accordingly.