Worldwide tax authorities are trying
to increase tax revenue and income from renting is coming under close scrutiny.
If you are the owner of a property that is rented out, whether the property is
in Spain, the UK or somewhere else, you need to ensure that tax is being
correctly calculated and paid.
It’s not hard to make mistakes,
especially if the property is located in one country and you reside in another.
In the UK, HM Revenue and Customs
(HMRC) reckons that some £500 million is lost each year through tax
underpayment on rental income. It has launched a "Let Property Campaign” to
encourage landlords to put their declarations in order, whether errors have
been made genuinely or income has not been declared deliberately. The campaign
covers UK resident landlords, and includes holiday lettings abroad in countries
In a recent press release, HMRC
declared "HMRC will use information it holds about property rental in the UK
and abroad, along with information already held on HMRC’s digital intelligence
system Connect, to identify people who have not paid what they owe. For those
that fail to come forward, higher penalties – or even criminal prosecution –
could follow”. Well, there seems little doubt about HMRC’s attitudes there.
Undoubtedly, there is an
ever-increasing exchange of information, so you can expect UK authorities to
find out about Spanish property and vice versa. Certainly, co-operation with
tax collection will occur between UK and Spanish tax authorities.
So what are your tax obligations if
you are a UK resident who owns a Spanish property? As a UK taxpayer, you
need to declare Spanish property rent on your annual UK tax return. Expenses
can be deducted. Any gains on sale need to be declared and taxed in the UK.
Overseas property must also be declared as part of your estate for UK
inheritance tax purposes.
In Spain, rental income from
property owned by non-residents is taxed at 24.75% (on net income after
allowable expenses for EU residents).
If you do not rent out the property,
or when it is un-let, a notional income is deemed to arise and tax is due on
this. When you sell the property, you will pay tax on the capital gain under
the savings income regime, at rates of between 21% and 27%.
The net equity value of the property
is currently liable to wealth tax if valued at over 700000 euros for
individuals and 1400000 euros for couples owning in joint names. A mortgage can
reduce its taxable value.
The property will be subject to
succession tax, and that can be expensive for non-residents in Spain.
UK and Spain apply their own tax
rules so the taxable amount is different in each country. You do not have to
pay tax twice, however. You can offset the Spanish tax paid, against the UK
liability, to avoid double taxation. If the UK tax is higher, further tax will
be due in the UK. If the UK tax is lower, you do not get a refund for the
This has looked at Spanish rental
income and gains for UK residents, but there will be similar tax considerations
if you are resident in Spain and own a UK property. If that is the case, you
are urged to take advice from an expert who specializes in both Spanish and UK