For years, the British have escaped the gloom and purchased property in Spain, in order to improve their quality of life and secure their dream home. However the attitude of the Spanish has changed throughout the years, not least with the financial crisis that started in 2008. Money laundering rules have made the old practice of cash in paper bags being passed over the table in front of non-observing notaries to be a thing of the past. Spanish authorities are now tightening up on the tax that should be paid (and may not have been) by foreign nationals purchasing property.
ITPI Capital Gains Tax
There are two aspects of tax that rise from a property purchase in Spain. The first is the equivalent of our stamp duty, and is known as “Impuesto de Transmisiones Patrimoniales” (ITP). The significance of this is that this is based on a percentage of the value of the house. Not only does it give revenue to the government at the time that the property is purchased, but it also provides the basis for setting any increase in the property when it is subsequently sold, which would then give rise to CGT liability to the seller. Very approximately, “ITP” is around 7% of the property value although regional authorities may vary this. Due to the financial crisis in Spain, some property values have dropped considerably. In addition, in the past some vendors seeking to avoid payment of any CGT have agreed an artificially low legal price on the property, to a willing purchaser. These practices have stopped - as well as avoiding tax there would also be an example of money laundering. The Spanish tax authority has four years to query transactions. Where they think a property has been sold at an artificially low price, thereby limiting the ITP paid by the purchaser, they are seeking to query that value. Furthermore, as historic transactions they could also make a claim to CGT if they think there should have been again. That has resulted in some unsuspecting Britons being faced by unexpected tax demands, relating to property transactions that happened some time ago.
If this happens to you what should you do?
- Make sure that you get all of the original documentation. Keep the details of the estate agent and the seller. If there is going to be a dispute with the revenue, you would need expert advice from a surveyor/architect, that the price you paid/sold for was a fair price in the circumstances at the time. Therefore evidence that the property has been on the market for some time and could not sell, evidence of active marketing, and full copies of all the transactions that took place, would help vindicate your position.
- At the end of the day you may have to take a commercial view as to whether it is worth arguing. Subject to the level of extra tax determined and requested, it may be a commercial decision as to whether you chose to dispute the Spanish revenue, because in doing so it will incur costs that may not be recovered. You will need to instruct a surveyor, to provide a valuation, they will call a surveyor and there will be an adjudication. Inevitably, that is going to incur costs and time.
- The most important thing is not to ignore any requests. Get in contact with us and we can source a tax accountant/representation who can make immediate contact with the Inland Revenue, seek to challenge the position initially, and then discuss with you whether it is worthwhile pursuing the matter further if they do not back down.
The other form of tax that is being pursued by the Spanish authorities now is the deemed income tax. Many ex-pats are not aware that they have to serve tax returns based on their income in Spain. Obviously if somebody is resident in the UK, works in the UK, incurs their tax in the UK, and only uses their Spanish getaway as a holiday home, filing extra tax returns in Spain would appear to be unnecessary. However even if there is no income earned from your holiday home, there will be a deemed income imputed to you, from the value of your home, and a tax will be levied on that. If you have not completed these tax returns, there is a real possibility that at some time in the future the authorities will be contacting you. The difficulty is that with non-completed tax returns there can be fines and penalties which can often work out to be more than the actual tax itself. It is known that the Inland Revenue in Spain is starting to focus on ex-pats particularly as a group of non-paying tax payers, as well as their Spanish residence.
What do you do if you receive such a demand?
- Let us have it immediately. We can then explain what the demand is and check that you have not filed those returns.
- If you have not filed the returns, then we will put you in contact with someone that can deal with them on your behalf, quantify your liability and seek to mitigate on any additional costs and penalties that may be incurred.
- Taxes in Spain are mandatory. The most we can do is to mitigate against any position and seek to clarify that the taxes are properly due. However ignoring the demands is not an option for you. Ignore them at your peril! The tax authority can apply penalties and costs, if the demands are ignored, punitive interest rates and charges would be levied. The Spanish tax authority can register these debts as charges on your property, and ultimately, seek to enforce those payments of debts, by the requesting the sale of the property if the debts remain outstanding. At the very least, at the point that you chose to sell your property, you will find that you will have to satisfy the tax authority before you are able to transfer ownership as a new purchaser would wish to receive the property free of any charges.
Therefore the best advice is:-
- Be proactive. If you have an interest in Spain or a property in Spain contact us so we can do a health review to check whether you are filing the correct documents.
- If you get one of these letters from the Spanish Inland Revenue or you know of somebody, get them to come and see us.
- Be proactive. Ensure your tax returns are filed and paid. The actual tax return itself may well be a modest amount, and once the tax returns are filed each year, you should not have anything to worry about.