What are the tax implications of owning a property in Spain?
Client A: I own a house in Spain and have a small flat in London. My investments are managed in London along with my company pension scheme. The children live in Oxford and Southampton and we spend about 3 months each year visiting them and living in the London flat. When we are not using the flat we let it out on holiday lets such as Airbnb. I want to be buried in the graveyard in Kent near where I lived for much of my working life. When I die I presume that I will not pay inheritance tax in the UK as I am no longer normally resident.
This scenario is extremely common and raises a number of issues:
Under the UK residence rules it is arguable that you would be deemed to have both UK domicile and residence. This means that all your worldwide assets and income are subject to UK tax. However, you may also be regarded as having normal residence status in Spain meaning that the Spanish authorities may want to tax you as well.
The UK works on the old common law principle of Domicile where the premise is in essence: “home is where the heart is”. This is overlaid with the statutory principle of “Deemed Domicile” which requires that you must have been out of this country for at least 5 whole tax years in the last 20 before you can be considered as non-domiciled. New tax residency rules that have come into effect recently are designed to prevent people claiming to be non-domiciled for income and capital gains tax purposes.
It can be seen that steps could be taken to claim that you are no longer resident and domiciled in the UK. One example would be to change your lifestyle and reduce the number of visits you make to the UK. However, as this is a discretionary point, there is no guarantee that this would exclude your liability and the reality is that although you could limit your tax implications, it is unlikely you will be able to avoid them all together. The above example could be caught on multiple occasions by UK tax liability. This means that you are likely to be paying income and capital gains tax in the UK and be subject to inheritance tax on both your UK and Spanish house upon your death.
English Property and Investments
The London flat and the investments in England will be subject to UK Inheritance tax in addition to the flats rental income. Further to this should the property be disposed of, you will pay UK Capital Gains tax on it. There may be the possibility of differentiating any income and Spanish assets to alleviate further UK taxes. On the one hand there are double taxation conventions that do mean that you may be able to offset some tax in Spain against tax in the UK or visa versa. On the other hand if you don’t want to be susceptible to UK taxes and be bound by Spanish taxes, this is a possibility. There are no assurances however that the tax you pay in Spain will be less than that you are paying in the UK. In addition to this, you may also find yourself in a position where by you are subject to paying Spanish Inheritance tax.
In order to be bound by one country’s tax laws, there are a variety of aspects that need to be taken into consideration. It is not just the simple decision of choosing one country’s tax rules over another. Moving abroad brings with it many potential complications and it is always best to gain advice on these matters to secure your assets moving forward. If you require further advice on this or any of the matters raised in the Expat Series, please do not hesitate to get in contact with a member of our Private Client team.