The UK tax authority HM Revenue & Customs has issued another warning against hiding assets offshore, and this includes overseas property. Many British residents own property in countries like Spain, but not all of them fulfil their tax obligations in the UK and/or here in Spain. Both countries are now taking a closer look at property ownership to ensure they receive all tax due.
If you own property in Spain but are a UK resident, you need to comply with both the UK and Spanish regulations.
As a UK taxpayer, you need to declare the rent on your annual UK tax return. Any gains on sale need to be declared and taxed in the UK. Overseas property must also be declared as part of your estate for UK inheritance tax purposes if you are UK domiciled.
Here in Spain, rental income from the property is taxable under the local rules, with special regulations and tax rate for non-residents. If you do not rent out the property, or for times when it is unlet, a notional income is deemed to arise and tax is due on this.
If you sell the property you will pay tax on the capital gain under the savings income regime (if held for less than a year, any gain is likely to be taxed at the scale rates from 2013).
It is subject to succession tax when you die or give it away as a gift. This can be expensive for non-residents as you cannot benefit from the more favourable local rules.
Spain and the UK apply their own rules to calculate the tax due in each case, so the taxable amount will be different in each country.
You do not however have to pay tax twice. In the case of rental income, capital gains and succession tax you can offset the Spanish tax paid against the UK liability to avoid double taxation. If the UK tax is higher, further tax will be due in the UK. If the UK tax is lower, you do not get a refund for the difference.
It can be hard enough getting tax planning right in one country; getting it right when it involves two countries is even more complicated. You should seek professional advice from Blevins Franks which specialises in both Spanish and UK taxation and how the two interact.
The UK Treasury warned that the government is going after tax dodgers to make sure they pay their fair share. It is targeting wealthy Britons who own property abroad as it has concerns that owners are failing to declare millions of pounds of rent.
HMRC had announced that it was targeting wealthy individuals who own property abroad last autumn. It applies sophisticated data mining techniques to public information to identify people own property abroad, and uses risk assessment tools to compare the information to that supplied on tax returns.
This highlights people who do not appear to be correctly declaring the income and gains, and those who do not have the means to purchase the property.
HMRC can use the internet to spot “anomalies”, “lifestyle indicators” and “unexplained inconsistencies” – any discrepancy between information provided on tax returns and reality.
Much of this work is being done by HMRC’s Affluent Unit. Its remit has been expanded to cover people with assets over £1 million – previously the threshold was £2.5 million. It is also hiring 100 additional staff.
Here in Spain
The Spanish Tax Authority, Agencia Tributaria has linked up with the Land Registry to receive property ownership information and also gets electricity usage data for every property in Spain. It then compares these records with tax returns, including non-resident returns.
For advice on Spanish and UK tax law, and effective tax planning in both countries, speak Blevins Franks which has decades of experience advising British expatriates in Spain and helping them legitimately lower their tax liabilities.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.
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This article was written on the 05th of November, 2012.