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Owning a property in Spain through a company
When purchasing a property in Spain, choosing the appropriate ownership structure is an important and often overlooked decision.
There are some key differences between the UK and Spanish tax systems to consider.
Any person domiciled in England and Wales for tax purposes is obliged to declare their worldwide assets, including those based in Spain, on their tax return.
How are English and Spanish taxes different?
A UK estate is liable to Inheritance Tax due before being distributed to beneficiaries. In Spain, beneficiaries are liable to pay any Inheritance Tax rather than the Spanish estate. Their liability will depend on their relationship to the deceased, with close relatives being liable to pay less than distant relatives and unrelated beneficiaries.
If a UK estate is not liable to Inheritance Tax but the beneficiaries to the deceased’s Spanish assets are liable to Spanish Inheritance Tax, the beneficiaries will need to find the cash to pay their inheritance tax bill, either from their own pocket or from cash released from elsewhere within the deceased’s worldwide estate.
Practical difficulties can arise if both a UK estate is liable to inheritance tax and the beneficiaries to the Spanish Estate are liable to Inheritance Tax. One issue is the level of credit, if any, obtainable from the UK tax authorities when Inheritance Tax has already been paid on the Spanish estate.
Can I set up a company to avoid Spanish Inheritance Tax?
Certain Spanish property industry organisations have actively promoted ownership of Spanish property through a UK Limited Company to avoid Spanish inheritance tax, even for relatively low value properties.
In recent years, it may have made sense to own Spanish property through a UK Limited Company for higher value property. However, the disproportionately high set-up and maintenance costs involved in owning a Spanish property of more modest value through a UK company would only usually suit the interests of the ‘professionals’ involved with setting up the companies.
The current economic climate makes it less attractive to own Spanish property through a company. Tax authorities worldwide are taking a keener interest in company ownership of property and closing tax avoidance loopholes. For example, the double taxation Treaty between the UK and Spain means that any profit from share sales in a UK company, with assets mainly in Spain, is subject to Spanish Capital Gains Tax. Recently, there have also been a number of UK companies based in Spain that have been subject to investigation by Spanish tax authorities involving strict scrutiny of filing and registration.
Spanish property owned through companies registered in offshore tax havens now attract a hefty ownership cost from an annual 3% tax on the property’s Catastral (capital) value.
A double taxation treaty between the UK and Spain covering Inheritance Tax, maybe imminent given the increasing scrutiny of corporate structures by tax authorities.
Since January 2015, non-resident beneficiaries in many regions of Spain enjoy the same inheritance tax relief as Spanish residents. This often means that UK-resident Britons inheriting Spanish property will pay much less Inheritance Tax than previously.
Overall, the current climate is moving in favour of personal ownership. However, circumstances remain in which corporate ownership of Spanish property may make sense. The key is to balance long term tax savings with the relatively high set-up and maintenance costs of running the company.
Owners of non-resident companies should appoint a Spanish based ‘Fiscal Representative’ to act as the company’s official ‘postbox’ in Spain, and deal with the filing of annual returns and accounts.
How about transferring my Spanish property into a corporate structure when I already own it personally?
It currently costs no more to purchase from an arms-length Seller as a company or as individuals. However, if you have already registered the Spanish property in your personal name/s, then the re-registration of a Spanish property into a Company name will attract another set of transfer expenses as well as triggering tax on any capital gain. Both factors make doing so an expensive exercise.