A guide for foreign property owners in Spain, who have properties available for rent
So you wish to purchase or have already bought a property in Spain that will
provide a decent rental yield and perhaps one day will allow you to retire to it? Or
you want to build up a portfolio of properties in Spain? This
remains the number one choice for UK buyers and investors. Foreign property
owners are drawn to Spain thanks to the great climate and relative low cost of
living. It’s a trend that continues strongly, despite Brexit.
The popular UK TV show A Place in the Sun wrote earlier this year that “property searches were up 27% in 2021 over 2020, with enquiries increasing 34%.”
“But the biggest surprise is that the average property enquiry price is £196,713 –
up from £156,091. The top five locations,” says the show, “are Torrevieja, Estepona, Villamartin, Marbella and Mojacar – no bombshell revelations there,”
they added.
This is after Brexit, where so many more hoops need to be jumped through
when it comes to red tape.
But whether you are coming from the UK, elsewhere outside the European
Union (EU) or from another member state; there are still questions that need
answers.
Not least, how will it affect you in terms of tax?
Table of Contents
Rental income tax in Spain
For tax purposes, the hacienda or tributaria – Spanish tax authorities – treat any
money you receive from letting a property as part of your taxable income. As a result, you must declare this income annually and are liable for tax on it. However, you don’t pay tax on the full amount; first, you deduct eligible expenses and then, if applicable, apply further deductions, as outlined below. This is the case for those who are tax resident in Spain.
What happens if you live off rental income?
If your full-time earnings come from rental income, it is considered property
capital income and a different tax regime applies. But be aware that you must
fulfil a series of conditions for this regime such as having a full-time employment
contract for the management of your rental property or properties.
Will I have to pay VAT (IVA)?
There is no IVA (VAT) on rental properties in Spain if the tenant uses them exclusively as a home. The same exemption applies to furniture, fittings, garage and any annexes. Though be aware that if the property has a mixed-use – for example, a home and an office – IVA becomes applicable.
What about IVA on holiday lets in Spain?
If you have a holiday let in Spain, you are not generally liable for IVA unless you
offer services and charge holidaymakers for them. Examples of these include
cleaning and laundry. You must apply IVA to the commission charged by booking platforms, for instance Airbnb, for letting your property.
What are deductible expenses?
The good news is that the list of deductible expenses runs long, althoughthere are certain exceptions (see the next question below). Expenses that you
can deduct from your rental income include:
– Mortgage interest on loans for the purchase or refurbishment of the
property
– Costs associated with the purchase of the property, for example, transfer
tax and legal fees
– Non-national taxes, e.g. local council rates (IBI)
– Upkeep and repair costs
– Community fees
– Insurance policy payments
– Utility fees, namely gas, water and electricity costs if you pay them, and
not the tenant
– Marketing costs if you promote your property on letting platforms.
What can’t I include as an expense?
The Spanish tax authorities don’t allow you to include the costs associated with
upgrades or improvements to a property. You also cannot claim for expenses
involved in an extension, e.g. adding another room or a swimming pool.
What is the maximum amount I can claim in expenses?
The maximum deductible cannot be higher than your total income. So if, for
example, your rental income is €12,000 for the year, you cannot claim more than
€12,000 in expenses.
However, if your expenses are higher, you may deduct the excess amount over
the next four years providing that the amount does not exceed your total income
over that period.
What happens if I only let my property for part of the year?
If your property isn’t rented for the entire year, you apply the proportional
amount to your expenses. For example, if you let it for six months, you divide
your expenses by 50%.
Are there any deductions for taxes on long-term rental properties in Spain?
Yes, there are generous incentives for this type of rental. If the tenant is living in
your property as their permanent home, you may deduct 60% from your taxable
amount (income minus deductible expenses). However, this deduction only
applies to long-term rentals for properties used as homes, not holiday
accommodation.
What are the tax rates on rental income in Spain?
Spain applies the same taxes to rental income as the regular income you earn
from employment. The rates vary depending on your residence status, as
follows:
Residents in Spain – tax rates range from 19% to 47%, depending on your
overall declared income.
EEA non-residents in Spain – a flat rate of 19% is applied to your rental
income.
Non-EEA non-residents in Spain – if you are not an EEA citizen, you’re liable
for tax at a flat rate of 24% on your rental income.
Can I own and rent out property in Spain if I am a tax resident overseas, including the UK?
So the situation explained above is for those who are a tax resident in Spain or are
residents of an EU or EEA country with reciprocal tax arrangements with Spain.
But what if you are from a non-EU or EEA country such as the UK, now Brexit has been a reality for nearly two years? We spoke to Marc Sotriano at Singes, a Valencia-based specialist in tax arrangements for foreign property owners. He clarifies:
Income tax for non-EU/EEA residents
Purpose: private use
Tax liability: annual filing of Form 210
Tax base is 1.1% or 2% of the property valor catastral, which is a value calculated by the tax administration; this value is also used for the IBI (local property tax). The difference in the percentage is based on the fact that the valor catastral has been updated since 1994 (1.1%) or not (2%).
A 24% tax rate is applied to the resulting tax base.
A Form 210 must be filed for each of the owners.
Taxation is proportional to the ownership of the property in the tax year (in Spain the tax year is each calendar year)
Purpose: refurbishing for rental
Tax liability: quarterly filing of Form 210
Tax base is the gross rent.
A 19% tax rate is applied to the resulting tax base.
As long as the flat is not rented, the tax liabilities are the same that in the previous apartment. If within a year, the apartment is rented only for a few months, then it will be required to file the two versions of Form 210:
• Annual for the non-rented period.
• Quarterly for the rented period.
A Form 210 must be filed for each of the owners.
And what about wealth tax?
Tax liability: annual filing of Form 714
For real estate properties you own in Valencia, the tax base is calculated taking the higher of the following values:
• Valor Catastral
• Purchase Value
• Value calculated by the Tax Administration in other tax procedures.
At the moment, the tax rate starts at 0.20% and increases up to 3.50% (for tax base over €10,695.996,06
Wealth Tax is calculated individually, so you should have a “wealth” valued over
€1.400,000 to meet the obligation to file and pay this tax.
Taxation is proportional to the ownership of the property in the tax year (in Spain, as we have said, the tax year is per calendar year).
As you will know now, the tax situation varies widely between those who are a tax resident in Spain or overseas.
Valencia is a rapidly growing market, and opportunities exist for investors. Make
sure you are familiar with any and all liabilities you enter into.
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