Changes in property taxes for UK owners: (2) Spain

In the second of an occasional series, our resident financial correspondent Patrick Reynolds reviews the changes to tax for Brits who own property in Spain. We will update these guides periodically, as and when we are notified of changes.

  • Do you own a house in Spain?
  • Do you rent it out?
  • Your personal bill is on its way!

Under EU regulations, a member state is not allowed to tax citizens of other member states more heavily than it taxes its own citizens. There must be a level playing field in the taxation of all EU citizens.

Now that you are no longer an EU citizen you are not able to benefit from the protection that the European Court of Justice gave you against tax discrimination.

And your Spanish tax bills will go up

In Spain, there are different tax rates and treatments based on the residence status of taxpayers – and now that  you have lost your status as an EU resident the rate of tax payable on your rental income will rise from 19% to 24%.

But there is more, and worse. Probably more costly will be the fact that you have also lost the ability to deduct expenses from your rents and tax will now be payable on your gross rental income.

If you want to look on the bright side, there is Double Tax Relief. Great? Well, actually not so much. You will be liable to UK tax on the net income from letting your property – the amount of rent received less relevant expenses and possibly mortgage interest. That income will be taxable in the UK at the basic rate of 20%, or at 40% or 45% if you are a higher rate or additional rate taxpayer.

As an EU resident citizen, you were liable to Spanish tax at 19% on the net income and, if you are a basic rate taxpayer, UK tax at 20% on the same amount; and you could set all of the Spanish tax against the UK tax. This meant a total tax bill of 20% of which 19% went to the Spanish authorities and 1% to HMRC.

Now your Spanish Tax bill, at 24% of the gross income, will be more – possibly considerably more -than your UK tax charge. That UK tax will be wholly covered by the Spanish tax and so HMRC will get nothing. You will have paid quite a lot of tax to the AEAT (the Spanish tax authority) and you will not be able to recover any of it.

Perhaps you have borrowed heavily to buy your property, and maybe it is set in a beautiful well maintained estate with high service charges. Possibly your expenses are a large proportion of your rental income. Please do not tell me that they are 77% of that income because if they are you will be losing money (and cash) each year.

Depending on the level of expenses relating to the property, those who are higher or additional rate UK taxpayers could also be worse off. But basic rate taxpayers will be affected more severely.

However, there is a possible glimmer of hope on the horizon, in that there has fairly recently been some change in Spanish tax law to remove discrimination against non-residents. That may happen with tax on rental income.

Perhaps you are holding your hands up in horror at all of this. Let us hope this is only because you are not happy it is going to cost you a bit more and not because you have let your property in Spain for many years and have no idea what any of this is about.

If that is the case, go and find an accountant and get some proper professional help, and do so now. But even if you have paid all your taxes in both the UK and Spain you should find out exactly how this will affect you in your particular circumstances.