People who are living in excess of 183 days per year in Spain are automatically considered residents in Spain, having the same tax treatment as Spanish citizens.
For non residents the simple fact of being an owner of a property means that you have to pay, whether you have it rented or not. But for residents it is different, you do not have to pay taxes for your property which is used as main residence. You will only have to pay taxes for other properties if your income rentals are over the limits established by the Spanish Inland Revenue.
1. PERSONAL INCOME TAX (IRPF)
You are liable to pay Income Tax in Spain on your worldwide assets and income including pensions obtained from your home country. This is a progressive income tax and is different to Non Residents Income Tax that is a flat rate tax. The more you earn the more you pay.
In order to avoid paying income tax in two countries, Spain has a Double Taxation Treaty with the UK (as with many other countries). This means that you are able to apply for a UK tax exemption. By informing your country’s tax authorities (the Inland Revenue) about your tax residence in Spain, you do not have to pay taxes in both countries and declare your income in Spain.
The period assessed by the Tax Authority is from January to December, and taxes are paid the year after the incomes were generated. For example, incomes obtained in year 2011 are taxed in year 2012.
It includes any income earned from a third party (i.e an income paid by an employer), unemployment payments or pensions.
For incomes earned from a third party, the payer (i.e. employer) has to withdraw part of your wage every month and pays another part to the National Health Service (Social Security). Both deductions will reduce the figure used on your annual tax return. There are other deductible expenses, such as retirement contributions, payments to labour unions or to Professional Associations.
You also have to include any other income arising from bank savings and investments or auctions.
Every property in Spain is identified with an alphanumeric code (The Rateable Value) like a license plate for the car. You may find this code on the local tax bill (IBI) and it can be checked at The Cadastre site http://www.sedecatastro.gob.es
This code has to be given for any property on your tax declaration.
If you are renting out your property and your yield is over 1.000 Euros, you will have to declare the entire amount received from the tenant. In this case you may deduct some costs, such as interest and financial costs of the mortgage, local taxes (like IBI), amortisation, property insurances and fees paid to the community owner.
Property amortisation is calculated as 3% of the largest of the following amounts: the purchase price or the rateable value, excluding the land value for both cases.
As a tax incentive, the law allows some reductions to the amount declared: 60% for property rentals to be used with a residential purpose and 100% if the property is rented to younger people (18 up to 30 years old).
There is also a special taxation if the property is rented to close relatives. For those cases the amount to declare will be 1.1% or 2% for rateable values before 01.01.1994.
SALE OF BUILDINGS
Capital Gains will be a taxable income calculated as the difference between the cost price (including all costs and taxes paid in origin, excluding interest, paid by the transferee) and transfer value of the property (less any costs or taxes paid by the seller). The cost price has to be amended by a coefficient depending on the year of purchase.
The resulting amount will be taxable up to 27% depending on the amount of the capital gain.
WARNING: DECLARATION FOR MOVEMENTS OF WAY OF PAYMENTS (Mod. S-1 AEAT)
You must seriously consider the Spanish legislation if you intend to bring cash or bearer cheques in or out of the country. The limit to declare is for quantities higher than 10.000 euros per person and per journey.
You also have to declare if you travel within Spain carrying cash or bearer cheques in excess of 100.000 euros.
2. WEALTH TAX (IMPUESTO DE PATRIMONIO)
This is the taxation of all the accumulated household holdings including owner-occupied housing, cash, bank deposits, money funds, and savings in insurance and pension plans, investment in real estate and unincorporated businesses, corporate stock, financial securities, and personal trusts.
This will be applied to residents with a total assets value above 700.000 euros excluding your residential occupied house with a maximum value of 300.000 euros.
Some Local Governments such as Valencia Region has applied to this tax a 100% bonus, invalidating the tax effect. However, there is an obligation to declare if your properties and rights are valued in more than 2 million euros.
3. LOCAL PROPERTY TAX (IBI)
There is a local tax called IBI and it has to be paid by property owners. The Councils have registered and assigned a value (Rateable Value) to all the properties in the area. This tax is calculated by applying a tax rate to this value. An invoice is issued annually for payment of this tax and it may be paid by direct debit from your bank account, avoiding possible surcharges for late payments.
This tax is raised by a local tax office who is in direct communication with The Catastral Office. Occasionally mistakes on rateable values occur when an incorrect catastral reference has been assigned to the property. We are able to help with this and are experts with litigation.