The tax implications of owning a property in Spain remains a tricky issue for many people. Particularly when it comes to income tax, many second home owners think that they only have to file a tax return in their home country, but that is not quite correct.
It is true that the main rule is that the country where the taxpayer resides is entitled to levy tax on the worldwide income (i.e. not only income generated in the home country but also income generated outside that country), but there are exceptions to this main rule, mainly in the international double taxation treaties. In the Tax Convention between Spain and the Uniteed Kingdom, Article 6 states that Spain is entitled to receive from UK citizens tax on “income from immovable property” located in Spanish territory.
The main income taxes levied are the so called “Impuesto de Renta de No Residentes” (IRNR), or income tax for non-residents, and the “Impuesto de Incremento patrimonial” also known as “Capital Gains Tax“, a tax levied by the “Agencia Estatal de Administración Tributaria” (the Spanish National Tax Office). The version of the latter levied by municipalities is known in more technical terms as the “Impuesto sobre el Incremento de Valor de los Terrenos de Naturaleza Urbana” (IIVTNU) or popularly as the “Plusvalia“. The Impuesto de Bienes Inmuebles (IBI) is not included here because it is not an income tax, but a use tax, a kind of payment for municipal services (street lighting, road maintenance, etc.).
Let’s take a closer look at these taxes.
IRNR is a tax based on either a lump sum (a fiction, an estimated amount), or the actual income (for example when the property is rented out). If you are a (partial) owner of not more than 1 property, which is not rented out, the IRNR has to be declared each year before the end of the following tax year. Owners must, for example, have filed their returns for the 2020 tax year before 31/12/2021.
If the property is rented out, the return must be filed quarterly.
Tax must be paid over the rental income received in that quarter. To calculate this tax, you must first identify the homeland of the owner.
Owners from the European Union and the European Economic Area may deduct all costs related to the rent in that period. These costs include (pro rata allocation of) IBI, maintenance and service costs, insurance, gas/light/water bills, interest on a mortgage established in Spain, contribution VVE etc.. The applicable rate of income tax 2021 is 19%.
All owners from other countries cannot deduct any cost related to the rent, so they are levied over the total rental income without deduction. The applicable rate of income tax 2021 is 24%.
The capital gains tax is levied when the property is sold. If the seller is not a resident of Spain, the buyer must withhold 3% of the purchase price and deposit it into an account of the AEAT, the Spanish Tax Authority. If no profit has been made, in other words, if the difference between the purchase and selling price is negative, then this 3% can be claimed back, provided that the IRNR has been declared and paid for at least the 4 tax years prior to the sale.
If a profit has been made, the tax calculation is the same as explained before regarding rented property.
The plusvalia is a tax levied by the Municipality on the increase of the value of the land. The legislator has come up with a complicated formula to calculate this tax as a lump sum. This formula is based on the Council Tax Value of the land on which the property is built (valor catastral suelo), multiplied by a variable factor between a maximum of 3.0 and 3.7 percent, depending on the number of years of ownership, and again multiplied by a maximum percentage of 30%. Municipalities can determine the percentages themselves and only have to abide by the legal maximums.
In opposition to the national capital gains tax, the plusvalia is also levied if a loss is incurred when selling the property, something that meets with a lot of resistance. However, municipalities do not want to give way. They therefore force owners to state formal opposition and – in the end – to start legal proceedings against the municipality. Despite the fact that most higher courts in Spain agree with the taxpayers, municipalities continue to impose unjustified plusvalia assessments and few people take action. The amounts involved are often too small to bother with, or people simply do not trust the independence of the administrative courts.
Roeland van Passel