Spain is so beautiful and the Spanish lifestyle so much fun so why do they have to spoil everything with TAX? But as my uncle says there is nothing more certain than death and taxes! Taxes in Spain are higher than in the U.K. but less than in France. There are four main areas:- Property Taxes, Income Tax, Capital Gains Tax and Local Tax.

Property Taxes

As mentioned previously you will have to pay 7% transfer tax (Impuesto de Transmisiones Patrimoniales) of the contract price of any private sale payable within 30 days. If the property is bought new from a developer this is 7% VAT (IVA) payable on the day of completion. 1% stamp duty is payable on all transactions. This is reduced for resident people under 35 by HALF.

Another property tax is the arbitrio sobre el incrementodel valor de los terrenos (known as plus valia). This is a municipal tax on the increase in the land value since its last sale. This amount will vary tremendously, depending on the length of time since the last sale, but you can find out how much from the Town Hall. A private contract can state who pays this tax, but normally it would be the responsibility of the seller. Like most of the other bills make sure this is paid by the seller, and you see a receipt for it, or deduct the amount from the sale price.

Under declared sale prices, with the balance paid in cash (black money, b money). If you and the seller declare an amount considered too little, then the Spanish Tax Agency can bill the buyer of the property for the amount they deem underpaid. If they find that this is greater than 20% and 12,000 euros then they can levy heavy penalties on both buyer and seller. Another tax affected by black money is:-

Capital Gains Tax

If you resell the property then you are charged capital gains on the profit you have made. There have been some new changes to capital gains tax due to pressure from the European government. These changes came in on the 1 st January 2007 throughout Spain. If you are a resident then this tax is paid as part of your income tax and is was at a rate of 15% but now has been increased to 18% average rate but this can be significantly as the top rate of income tax is 48%. If you are a non-resident this Capital Gains Tax was at a rate of 35%, but has been reduced to 18%, so as not to discriminate between residents and non-residents. Either way the tax is based on profit, so if you under declared at purchase your profit will be higher than it really is. This also applies for any improvements you make on the property. If you pay for your builders in cash to save VAT (IVA), currently 16%, then you will not have a receipt to claim against Capital Gains Tax. The notaire will retain 3% of the sale price for all non residents ( reduced from 5% as of Jan 2007) as a deposit against capital gains due against the seller for which he can submit full accounts at a later stage complete with receipts if they think they are due a refund. If the Spanish tax authorities hear nothing from you they will keep the money.

Annual Taxes for Property owners

Property owners Imputed Income Tax 

For residents this no longer applies on their main residence, but does apply on additional properties where it is calculated as an invisible income at the rate of 2% of the rateable value (valor catastral) and added to your income for tax purposes. Non-residents do not have this main residence exemption and have a blanket tax rate of 25% applied.

Wealth Tax (Impuesto Extraordinarion Sobre el patrimonio)

For residents this is a tax on their world wide assets declared with their income tax. For non-residents it is a tax on their assets in Spain and is declared on Form 214. The tax rate increases on a sliding scale from 0.2% to 2.5%. There are some deductions for residents.

Annual Property Tax (IBI Impuesto Sobre Bienes Inmuebles)

This equivalent to Council Tax can be paid by standing order (domiciliado), which is the best way to avoid any late payment fines.

Rental or Business Tax

Any rental or business income received should be declared on Form 210 and paid when earned, or by arrangement with the tax office (hacienda) every quarter. For all non-residents you must quote your fiscal identification number (NIE- numero de identificacion de extranjero) which you will have applied for when you bought the property. This is obtained from the nearest Police Comisaria which has a foreigners' department and you will need with you your passport, several photocopies and several passport sized photographs. Fill in the form and wait several weeks for your number to be assigned. You will need this to complete your house purchase. For the Costa Tropical this Police Comisaria is in Motril. It is worth noting that the Spanish government want their share of rental income and it is law to register any property rented out for short stay holiday lets with the council. Thus you can expect inspections, health and safety checks etc . If you are doing longer lets then tenants must declare your landlords name address and tax identification number. 

Off shore tax havens.

You may purchase your property using an offshore limited company, thus benefiting from anonymity and avoiding various Spanish taxes (purchase tax and capital gains tax) as only the offshore company is sold and not the property. If the offshore company and its owners are fiscal residents of non tax haven countries and produce identities and proof of tax payments to a government with a tax treaty with Spain, they are exempt from this tax, which is 3% of the catastral value each year. If the company is in an offshore tax haven then they pay the tax. these companies are now often being broken up as there is no fiscal advantage any more and also these properties prove difficult to sell in this form as they can not be mortgaged by the purchaser as the buyer is not buying a Spanish property for sale but rather shares in an off shore limited company which owns the property as part of its assets.

Income Tax

The tax year runs January - December and taxes are payable the following May.

If you are employed and earning under 22,000 euros inside Spain, the tax agency will send you Form 105 in April and there is no need to make a formal declaration. If your money is from different sources or outside Spain you will need to complete a declaration. The easiest way to make a declaration is by using the PADRE computer programme, which either your bank, gestior or local tax office will do for you.

Income tax becomes payable to Spain when you spend 183 days or more in any one year. If you pay tax in another country you may be credited that tax under any Double Taxation Agreements, thus avoiding paying tax twice. This applies in reverse on tax paid on any Spanish income with your home country tax office.

Self employed (cuenta propia or autonomo) must apply for permits to start up and supply accounts every three months for tax purposes. We have specialist gestiors we can recommend for this type of work.

Inheritance Tax

Although a foreign Will will be accepted in Spain you should make a separate Spanish Will disposing of assets in Spain. This avoids expensive and lengthy delays for your heirs.

Your estate will be subject to inheritance tax, but you do not have to follow Spanish Inheritance Law (Article 9 Spanish Civil Code) if you are a foreigner. You follow the inheritance law of your country of citizenship.

There are few ways around Spanish Inheritance Tax and it has little financial exceptions or allowances, (ie, no spouse to spouse exception, no first £275,000 exception etc.)

There is a sliding scale of inheritance tax payable from 7.65% to 34%, but this can be greatly enhanced depending on existing wealth of the beneficiary and their relation to the deceased. For example, an unrelated person who owns over 4 million euros and inherits 797,555 euros will pay top rate tax of 81.6%. Not many of those people around you might say, but you get the idea. The Spanish system favours the poor and hammers the rich.

Again this information is a very brief overview and you will need the assistance of an accountant or specialist gestior fiscal in the early days. This subject is also well covered in my favourite book, "You and the Law in Spain" by David Searl.