Forbes Dawson Tax Bite - Spanish property tax traps
Many UK individuals own Spanish property and for many this has been a dream, the realisation of which proves that they have ‘made it’. Unfortunately some of the tax aspects can be closer to a nightmare! One key issue that is often missed is the interaction between UK inheritance tax (IHT) and Spanish inheritance and gift tax (IGT). There are no specific double tax treaty provisions relating to these taxes and this can lead to some ambiguity in treatment.
Tax trap 1 – Spouses are subject to Spanish IGT
From a UK IHT perspective one spouse can leave assets to the other free from IHT. However there is no such exemption in Spain which means that a spouse can be left with a significant Spanish tax bill in respect of an inherited property. For example a €3.2M villa would typically give rise to Spanish IGT of around £330,000, although the precise calculation will depend on the region of Spain that the property is situated in. As there is no UK IHT on an inter-spouse inheritance, there is no way of relieving this.
Tax trap 2 – IGT on gifts
When a property is gifted to another family member, not only will the donor be subject to capital gains tax at 28% in respect of the disposal but the recipient will be subject to Spanish gifts tax. The rates vary and depend on the relationship between the donor and donee but I have recently seen a case where an adult son was subject to a flat 7% tax on the value of the property received.
Tax trap 3 – Doubt around creditability of Spanish IGT against UK IHT
Anecdotally there have been some reports of HMRC resisting relief against IHT for Spanish IGT paid on death. This would be very serious and would be likely to push the effective rate of death taxes to over 50%. The argument which may be used by HMRC is that IGT is not a similar tax to IHT on the basis that IGT is paid by the recipient whereas IHT is payable by the estate. Although I believe that Spanish tax should be creditable in these circumstances (based on an analysis of the legislation) the uncertainty in this area is unhelpful and some clarity from HMRC would be gratefully received.
There are a number of advisors around who are advocating putting Spanish properties into UK companies on the basis that this will shield the owners from Spanish IGT. In certain circumstances (eg on purchase) this may make sense although great care should be taken in considering all of the tax implications. For example a transfer into a UK company after a significant period of ownership may be a very expensive proposition. As well as potentially triggering capital gains tax on getting the property into the company, any future capital gains will be subject to a double layer of tax (there will be tax in the company in addition to tax on extraction of the profits). Costs like Spanish stamp duty would also need to be considered.
If you really have your heart set on that Spanish property in the sun then you should take advice at the outset to avoid your holiday home dream turning into a tax nightmare.
You shoudl in the first instance contact your normal financial adviser/planner.