What is Rental Income Tax?

As the name suggests, whenever you rent out your Spanish property, you become liable for tax on the income that you have received.

 

As a non-resident in Spain, where do I pay the tax - Spain or the UK?

If you generate income from your Spanish property, you are required to report this income to both the Spanish  AND UK tax authorities. However, you will not pay tax twice, as if you pay tax in Spain, you are allowed to offset this in the UK.

 

 

What are the tax rates?

In Spain the tax rate for the non-resident property owner is  fixed at 24% of the gross income received. For example, if you receive €1,000 in rental income, then you should pay €240 in tax.

 

In the UK, however, the tax rate will depend on whether you are a lower or higher rate taxpayer.

 

Can you offset any expenditure?

In Spain, you cannot offset any expenditure - therefore the costs of cleaning, laundry, maintenance, mortgage interest payments etc cannot be deducted before tax is calculated.

 

In the UK, you can offset all relevant expenditure, before tax is calculated.

 

Remember, the Spanish system is a tax on  INCOME received, whereas in the UK the tax is based on PROFIT generated, a somewhat subtle, but significant difference.

 

How do I pay tax?

In Spain, you are required to submit rental income tax returns on a quarterly basis throughout the year, whereas in the UK, you should include any Spanish income as part of your overall annual tax return.

 

If, in the UK, you have not previously submitted a tax return, you should contact your local tax office and explain that you are now receiving income from an overseas property.

 

Can you provide an example?

If during the summer months you generated €10,000 in income from your Spanish property, you would be liable to pay  €2,400 (i.e. 24%) in Spanish tax.

 

For UK purposes, you may have expenses of €3,000 to offset, which means that you have actually made a profit of €7,000 . As a higher rate taxpayer, you would pay tax at 40%, which equates to  €2,800 . But as you have already paid €2,400 in Spain, you would only be liable for a further  €400 in the UK.

 

If, however, your expenses were higher and/or you were a lower rate taxpayer, then you would probably have nothing further to pay to the UK tax authorities, i.e. if you made a profit of  €6,000 , as a lower rate taxpayer you would pay tax at 22%, which equates to  €1,320 - as you had already paid more than this in Spain, you would have nothing further to pay in the UK.

 

The downside?

As per the latter example, you can only recover up to the amount of your UK tax liability - i.e. €1,320, and cannot always recover the full amount, i.e. €2,400. This means that the effective tax rate, in this example, will still be 24% of the income and not the profit.

 

What happens in practice?

At the moment the majority of non-residents tend not to declare their rental income in Spain, but will declare any profits, and therefore pay tax, in the UK.

 

The Spanish tax authorities are, however, looking more closely at this situation, as demonstrated by many recent press articles.

 

We know that it is still only August, and you are no doubt still enjoying your summer(!) holidays, but another reminder from us about getting your Spanish tax returns in order.

 

We know from experience that it can take a while for you to get all the information together to allow us to sort out your tax returns, so why not start now - set yourself a target to get the information in by the end of August, and then we can then do our work and get the returns back to youby the end of September !

 

 

Remember , you can still ask us to hold the submission of the returns until December, and therefore delay the payment of the actual tax, but at least everything is then in order for December.

 

Remember tax does not have to be taxing!

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