Brexit. UK tax residents owning a property in Spain. Spanish taxation on properties. Spanish income tax.
The United Kingdom formally left the European Union on 31st January 2020 and became a third country to the EU. On February 1st, 2020 a transition period started which is due to end on December 31st, 2020.
As no extension of this transition period has been requested, it shall end as expected by December 2020. Therefore, without prejudice to the ongoing negotiations on a possible agreement to rule the relationships between the UK and the EU on all different subjects, BREXIT will have an imminent tax impact for those UK residents with a property in Spain.
This document has been prepared considering the latest news that will affect this tax since the 1st of January 2021.
Entering the subject the income derived from Spanish properties, no matter is rented or not, is subject to non-resident Spanish Income Tax.
However, the tax treatment is different depending on whether these properties are rented or not.
Urban properties NOT RENTED.
Taxes accrued since the 1st of January 2021.
Non resident taxpayers owning urban properties, which they use for themselves and not involved in economic activities, or that are left empty, are subject to Non Resident Spanish Income Tax. To this effect, the owner must calculate as income an amount of 2 % of the property's assessed value (“valor catastral”) as a general rule or 1,1% if the assessed value has been reviewed or modified with legal effects on the tax period or within the 10 previous tax periods.
Tax rate: 24,00% while the tax rate applicable to the EU tax residents is 19%.
Deadline: 31st of December of the following year.
Therefore 2020 tax payments that will be filed before the end of 2021 will still be subjected to 19% tax rate. From then on, 24% will apply unless we have additional changes derived from any bilateral or multilateral agreement or even EU Court of Justice Resolutions.
RENTED or sub-let properties
As a general rule the tax basis is the gross income. However, EU taxpayers since 2010 and Icelander and Norwegian taxpayers since 2015 can offset all costs related to the incomes that are listed in the Spanish Income Tax Law (LIRPF). To cut a long story short all costs are deductible as long as they are related to the incomes for UE residents. This is the consequence of the EU Court of Justice Resolution (2007/4129) concluding that Spain has given a discriminatory treatment to non residents.
Therefore UK residents will not be able to benefit these tax rules and will be taxed on their gross income derived from the rentals of their properties without any legal possibility to offset any costs related to those incomes.
Again the tax rate will be 24% instead of 19% so the total tax liability will be extremely higher in comparison to previous years as a result of a higher tax rate on a higher tax basis.
In this case, you will see the impact on your finances sooner rather than later as the 2021 rental’s incomes must be declared quarter by quarter during 2021.