Capital Gains Tax (CGT) - Spain
Capital Gains Tax is a tax based on the gain you make over time on your property - in essence the gain is the difference between what you paid for the property and what you received upon the sale of the property.
Which country do I pay CGT - Spain or the UK?
As a non-resident you need to account for your capital gain in both countries. As the property is in Spain, you need to account for the gain in Spain, and as you are a tax resident in the UK, you also need to account for the gain in the UK, along with any other capital gains you may have made in the UK.
Does that mean I pay 2 lots of tax?
Not necessarily - you first need to work out how much tax is payable according to the Spanish system of CGT, and then submit your return and pay the appropriate amount. You then need to work out how much tax is payable according to the UK system of CGT, submit your return, but this time offset any tax already paid in Spain. Therefore, you may have nothing more to pay in the UK - although this will depend on your individual circumstances.
When do I pay?
The Spanish system requires that you need to pay your CGT within 2 months of the sale of your property. The UK system requires that you would disclose this gain on your annual tax return for the tax year in question, and then pay the tax up to 10 months after the tax year. Therefore, in reality, you would always pay the Spanish CGT before any UK CGT.
How is Spanish CGT calculated?
In order to work out the "gain" that has been made on the property, you are allowed to offset all your purchase expenses (i.e. legal costs) and all your selling costs (i.e. agent fees), plus you can offset any "capital" improvements that have been made to the property during your years of ownership (i.e. air conditioning, gardens, pool). In addition, an inflationary allowance is also available. This results in a "net" gain which will then be chargeable to Spanish CGT.
What is the Spanish CGT rate?
The rate is now 18% for both residents and non-residents in Spain.
Is any amount withheld upon the sale?
As you are a non-resident in Spain, the buyer of your property should withhold 3% of the sales value and pay this over to the Spanish tax office within 1 month of the sale. This is, in effect, an advance payment of any potential capital gains tax on behalf of the seller.
What if the amount withheld is more than the tax due?
Regardless, the seller is required to submit a tax return within 2 months of the sale to demonstrate their calculations of the gain subject to tax, and then should either pay an additional amount in tax or claim a rebate as the 3% was more than the tax due.
If I am buying another Spanish property, does this mean I do not need to pay the Spanish CGT?
No - this "rollover" relief is only available to Spanish residents - non-residents have no such relief, regardless of the number of properties they own.
How is UK CGT calculated?
In a similar way to the Spanish system - the only key difference is that there is now no inflationary allowance in the UK, and instead there is "taper relief", a similar concept, although this is only available if you have owned the property for more than 3 years.
What is the UK CGT rate?
This will depend on whether you are a lower or higher rate taxpayer, and so your gain would be taxed at either 10%, 20% or 40%, depending on your other income (see budget note below)
Are there any other allowances?
Yes - in the UK each person is entitled to an annual exemption for CGT, and for 07/08 this exemption is £9,200 per person.
In summary
As a non-resident property owner in Spain, you are required to account for any capital gain on the sale of your property in both Spain and the UK. The returns, however, are required at different stages. Your Spanish return will always be first, and as such any CGT paid in Spain can be offset against your UK return. Given the annual exemption in the UK, you therefore may not need to pay any additional amount in the UK.
Remember - for both Spanish and UK CGT, you will need evidence of all expenses that you wish to claim against, so please ensure that you keep all your invoices and receipts.
Budget Change
The UK capital gains tax rules are also sent to change from 6th April 2008, as it has now been announced that a new flat rate of 18% will apply. This should be good news for any UK higher rate taxpayers! (see next months newsletter for more details)