Posted on April 19, 2008 by Fernando Del Canto

Spanish Wealth Tax Abolished

Friday 18th April 2008 will be remembered as the day when the Spanish Wealth Tax  (Impuesto de Patrimonio) was suppressed by the Counsel of Ministers.

The abolition will be effective for this tax year, i.e. 31st December 2008.

How will this change affect High Net Worth Individuals living or wanting to move to Spain?

This change will make possible for many individuals to stop worrying about paying taxes on worldwide assets and start paying a flat 18% Income Tax in Spain, if their income is coming from investments, dividends or capital gains. Compared with the hectic 43% suffered by most taxpayers, this is an interesting incentive to consider relocation to Spain.

We shall keep informing on the legislative development and regulations on these great news.

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Posted on March 29, 2008 by Fernando Del Canto

Zapatero and the International Property buyer in Costa del Sol

Last 9th of March, the Spanish general elections gave Prime Minister Zapatero a great opportunity to show what he can do for the Spanish Real Estate market. Can the property market be influenced by a wise tax policy? I believe so.

During Zapatero's campaign there was a commitment to abolish some taxes, i.e. wealth and Inheritance which may have historically prevented people to relocate to Spain.  There were often press releases regarding tax breaks and incentives for the developers, buy to let allowances, etc...

The government will be formed in April and we shall see the legal instruments to implement the tax changes, which we will continue monitoring.

In Costa del Sol during the last decades we have seen the rise of the residential property market  and the influx of hundreds of thousand British and Irish property buyers. Originally  many people came to retire to this part of the world, a trend that is still true today. During the last decade, however,  a large wave of investors came, fueled by a buoyant market at home, specially in the UK and Ireland. The off-plan investment opportunities were promoted by 3-4 large real estate companies, which made very popular to invest in Spain.

Now, in 2008,  the market is very different. It would be fair to say that the international demand is still high for residential properties in Costa del Sol, as well as a large offer of such properties, with may have been temperated by a bear sentimento in the international investment market.

The urban plans are not coming to terms with environmental concerns and the construction in Costa del Sol has slowed down too. A natural correction of the frenetic rhythm of construction of the last decades. 

In our professional practice at Konsilia  we are observing a clear trend in the last year, which involves international executives in their 40-50s with their families, moving to Spain primarily for lifestyle reasons. In Costa del Sol, primarily from Marbella to Sotogrande, they find a place to live with English professional services, several international schools and plenty of international flights from Malaga, Gibraltar, Jerez or Sevilla airports to the main international destinations.

These clients want to be genuinely residents in Spain. As a tax adviser I like to think that there are some tax elements in this move:

  1. The new  Spanish expatriate regime allowing international executives to move to Spain with a 24% flat tax rate, excluding international income and wealth from been taxed in Spain during the five years following the move. Please see our article on this topic published in the Tax Journal (UK)
  2. The beneficial Spanish tax treatment of investment income, including interest, dividends and capital gains at 18% rate, which makes Spain a great place to come to live out of the hard made money.
  3. The promises of the Spanish government to abolish Wealth Tax, and possibly Inheritance Tax, at least to reduce the pressure of this last one for residents. Regarding Inheritance Tax we have seen some moves on some regions like Illes Balears, where Palma de Mallorca is located, and its government has reduced the charge for donations made to buy the first residential property (L 6/2007 27 December)
  4. The UK changes on non-dom rules, which is a very suggestive way for some British Tax non-dom to make a move to warmer lands.

Of course there are many other elements to support the continuation of this trend in Costa del Sol. It is true that the Spanish Economy , considering the many challenges in and outside Spain, continues performing at a good rate.

Another interesting data, this one from  the Property Consultants CB Richard Ellis , is the investment opportunities arising from commercial property in Costa del Sol, a market that is reflecting the increase of  businesses in the area.

Summarizing, we believe that these times of stabilization of the residential market in Costa del Sol are a mild correction in a sector reaching now maturity. The future of Costa del Sol, far away from what has been said by many tabloids, is still bright and we are confident that the Spanish government can influence it positively with some tax reforms, as the ones mentioned in this post.
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Posted on March 3, 2008 by Fernando Del Canto

Pension Plan vs Investment Funds in Spain

Pension plan contributions are tax efficient for the contributor if he receive employment or similar taxable income, however very few people consider the tax efficiency for the heirs or inheritors.

It is important to emphasize that pension funds are taxable on death when received by inheritance, according to the rules of Inheritance and Income Tax, one or the other tax will be applicable depending on the heirs position for Spanish Income Tax purposes. 

Therefore, if the fund is exempted from Inheritance Tax,  the heirs will be taxed according to the income tax rules up to 43% if residents and at 24% if non resident, providing the fund is located in Spain. The taxable base will be for the full amount of the fund.

From a estate planning point of view it may be worth considering an investment fund rather than a pension plan. The investment fund will be taxed, on disposal or liquidation, according to the Capital Gains Tax rules at 18% both for residents and non residents.

A no brainer tax saver, as only the gain will be taxable in this case.

As usual it is important to balance estate planning with efficient income tax planning in order to calculate the most advantageous situation.

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Posted on January 6, 2008 by Fernando Del Canto

Spanish company to hold property

I am looking into the possibility of buying some properties in Spain for investment purposes. Is it better from a tax point of view to do this as an individual or as a company? D. Searle, Brighton UK

From an investment point of view the company option must be considered. The main reason is that the company offers the possibility of organising the business in a more professional way, keeping it separate from your private assets. The company will pay corporation tax when disposing of the property of 25-30% which is higher than personal tax at 18%. This is perhaps the only downside of the company option. The company structure is exempted from the annual Wealth Tax and Income Tax for non resident individuals, which means that usually for more than €600,000 it could be more efficient to run the properties using a company. From an Inheritance Tax point of view the company may offer more opportunities to organise your estate planning, if we organise the shareholding efficiently or use international structures and trusts. Another advantage of using a company is that the company will be able to rent the properties and claim the original VAT paid if a proper trading activity is registered for tax purposes. Capital allowances or depreciation can be claimed as a deductible expense in yearly bases if the company files accounts statutorily, which will reduce the capital gains tax payable over time. Management expenses can be also offset against income and the directors can draw a salary too. It is always worth asking your adviser to outline the difference between company and private acquisition in your particular case, before starting a property investment portfolio.

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