Another day, another deadline. Brexit continues to have a dizzying effect on British businesses – so much so, in fact, that it can be hard to keep track of possible implications. However, there are two confirmed changes that will affect UK landlords letting abroad.
Specifically, landlords letting out properties in Spain will soon be faced with a much higher rate of Income Tax after Brexit. In addition, they are likely to lose their right to an exemption from Capital Gains Tax arising from the sale of a former home.
So, to help prepare those of you who might be affected by the above changes, we’ve provided a guide on what potential effect Brexit will have on the taxation of Spanish properties for UK landlords.
Spanish Income Tax
If you currently own Spanish property, you will be paying some form of Income Tax.
As a member of the EU, UK residents that let out their Spanish property are taxed on the profit from it at 19%. For example, if you have a rental income of £8,000 from your Spanish property with deductible expenses of £6,000, you would pay £380 in tax (19% of £2,000).
However, post-Brexit, UK residents would not be regarded as part of the EU and would, therefore, be subject to 24% tax on the gross income. This would result in a tax bill of £1,920 (24% of £8,000).
If the property is not rented out, you are currently being taxed on deemed income (based on the rateable value of the property) at a rate of 19%. Post-Brexit, the tax rate will increase to 24%.
In addition to the Spanish tax, you may also be paying UK tax on the rental profits. Under the terms of the double taxation agreement between the UK and Spain, you get a credit against your UK tax bill for any taxes paid in Spain. This is generally OK at the moment, but post-Brexit, you’ll likely pay significantly more tax in Spain than in the UK.
So, let’s assume in our example on profits of £2,000 that you’re liable for UK tax at 40% on the profits. That would be £800. Having already paid £380 in Spain, you would need to pay a balance of £420 in the UK.
However, your post-Brexit UK tax bill would still be £800 but you will have already paid £1,920 in Spain. The good news is you will not have any further tax to pay in the UK – but the bad news is you will not be able to get a refund of the £1,120 overpaid (that is, £1,920 minus £800).
Capital Gains Tax
Capital Gains Tax is the tax on profit made from selling or ‘disposing of’ something (an asset) that has increased in value. You’re taxed only on the gain you make, not the entire sum.
Post-Brexit, there will be no major changes around the sale of a second/rental property in Spain. You will still pay the Spanish Capital Gains Tax of 19%. However, if the Spanish property is your principal private residence, then there will be changes that you need to be aware of.
Owners who are aged over 65 and have lived in the property for at least three years will still benefit from a full exemption from Capital Gains Tax on the sale. Those under 65 will still have exemption should their next home remain in the EU, but if they’re relocating to the UK, they will be taxed under Capital Gains Tax rules.
When will these changes take effect?
The Spanish system has previously been seen to allow a split calendar year for circumstances similar to Brexit. Therefore, it is possible that the tax year in which Brexit occurs will take into account the varying tax rates and allowances pre- and post-EU exit.
There is no intention at this stage by the Spanish government to provide a transition period for UK residents. However, that’s not to say that some provision will be put in place in the future to support those affected.
These changes shouldn’t deter you from investing in Spanish property. Simply put, UK-based landlords (with properties in any EU country) should stay conscious of any and all impending changes and be sure to plan accordingly for a potential impact on earnings.
The reality is that the impact of Brexit is likely to further complicate your accounts. That’s why we here at GoSimpleTax endeavour to make submitting Self Assessment tax returns effortless.
As a landlord, our software enables you to stay on the right side of the taxman without having to rely heavily on an accountant. So, if you’d be interested in a solution that gives you complete autonomy, get in touch with our team today.
Last updated on 20th November 2019.