Tax Implications Expats With Property In Spain Should Consider In A Post-Brexit World

Written exclusively for Expat Network by Richard Bate, Partner at Weightmans law firm

What happens to your property abroad after your death, and how Brexit might affect that, is a question that is front of mind for many expats.

Navigating the tax system in different countries is already a confusing administrative burden, even without the extra questions raised by the UK’s departure from the EU. Here, we’ve looked at three hypothetical – yet commonplace – scenarios for expats living in Spain to illustrate how those with property abroad need to proceed to get their affairs in order.

I own property in Spain. Will Brexit affect my rental income? And if I choose to sell, will I be hit by capital gains tax even though I’m not a resident there?

Leaving aside the question of whether Brexit will affect demand for rental properties abroad, people who rent out property they own in Spain are liable to pay Spanish income tax, regardless as to whether or not they also reside in Spain. That fact is unlikely to change post-Brexit, and indeed the tax burden is likely to worsen. At present, as EU citizens, UK residents with Spanish holiday homes pay a flat rate of 19% on rental income and can deduct reasonable property costs for maintenance, utilities, rental agents and legal fees. By contrast, non-EU citizens are required to pay an incremental rate of up to 24% on rental income, with no allowable expenses – a significant difference.

Those with Spanish properties need to be doing their sums now to work out how they’ll be affected by the post-transition period tax regime.

If, once the sums have been done, you decide it’s not worth keeping your property, beware of the capital gains tax bill. If you are under 65, you will be required to pay Spanish capital gains tax on gains made by the sale of your Spanish property if you invest the proceeds in a non-EU country, such as the UK.

On the other side of the coin, it’s worth remembering that if you are deemed a resident in Spain – meaning you reside there for over 183 days of the year – you will be liable for capital gains tax in Spain on the sale of any worldwide assets. This means any sale of UK property will be chargeable.

As an expat living in Spain, what do I need to consider when it comes to inheritance taxes?

Spanish laws governing taxes on death  are much more complicated than the system in the UK, where it is relatively simple: there’s normally no inheritance tax (IHT) to pay if the value of your estate is below the £325,000 threshold, which rises to £475,000 if you’re giving your home to your children or grandchildren as a gift. But in Spain, inheritance tax is levied at those who receive an inheritance – whether they are resident in Spain or not – and it is progressive based on the amount inherited.

Tax-free allowances also depend on the relationship of the beneficiary to the deceased. For example, the deceased’s children under the age of 21 get a tax-free allowance of more than €47,000, compared with siblings of the deceased who get just shy of €8,000. And unlike in the UK, where there is no such thing as ‘common-law marriage’, unmarried couples may be treated like married couples in some Spanish regions if they were registered as a couple and cohabiting.

Not only that, but each of Spain’s regional governments decides on its own tax rates, including for income tax, capital gains tax and inheritance tax. Generally speaking, regional taxes will only be applicable to those who have lived in Spain for at least five years, whereas national law will apply to non-residents.

Passing on property to family: but what if I want to hand my estate down to my spouse?

Spanish inheritance law dictates that children should receive more than a spouse under forced heirship rules, and it may be sensible from a practical perspective to make a Spanish will which reflects this.

Alternatively, if you are British, you can stipulate in your UK will that UK laws must apply. Spain (as a signatory of the EU Succession Regulation) recognises foreign wills in such circumstances if they concern property and assets in Spain, regardless of the UK’s position within the EU.

If I have property in Spain, does this mean I can be taxed twice on death – once by each country?

If a UK resident with a property in Spain were to die and hand everything down to their spouse, no UK IHT would be incurred on the Spanish property. Simple enough. But while there’s no UK IHT to pay, there could well be a tax to consider in Spain if the property is over the spouse’s tax threshold. ‘Double taxation’ may then occur when the spouse dies later, passing on the inheritance to the children since, according to Spanish law, it’s the beneficiaries who would be taxed.

With various rules at play in different jurisdictions – and even within each jurisdiction, as Spain’s regional tax regimes show – it’s crucial to review your tax planning on a regular basis, not only to confirm it is up to date, but also to ensure that you’re taking advantage of the opportunities available wherever  your property is based. Working with a lawyer can help to paint a clearer picture and ensure you’re doing all you can to reduce tax liabilities for you and your heirs.