The Spanish System of Capital Gains Tax

Calculating the tax

The profit on a property transaction is the difference between the purchase value and the sale value.

Purchase value

Is assessed by totaling the purchase price plus the amount of expenses and taxes paid when you originally purchased the property. Typically this figure is established by taking the price on the title deed and adding: IVA or Transfer Taxes, plus valia (if applicable), notary fees and land registry costs. This total value is then multiplied by an inflation correction factor corresponding to the year of purchase (established annually by the Spanish budget).

Sale value

Is assessed by totaling the declared sale price minus the amount of the expenses and taxes you pay to sell the property. Typically this figure is established by taking price on the title deed and deducting: the real estate commission, lawyers fees, plus valia and notary and registry fees (if applicable).

The difference between the ‘purchase value’ from the ‘sales value’ equals the profit; this final figure is what you will pay capital gains tax on.

Current tax rate for residents and non-residents

As a resident you will pay your capital gains tax as part of their income tax declaration in May or June of each year. The official rate of the tax for the profit made on selling your property is 15%. As a non-resident you currently pay a flat rate of 35%.

Capital gains tax scenario for non-residents

If you are a non-resident the person who purchases the property from you is obliged to withhold 5% of the sales value and pay this amount directly to the Spanish tax office (Hacienda). The payment is considered as an advance on pending your capital gains tax bill. The purchaser (or his lawyer) must send a copy of Form 211 (the withholding order) to you so that you can deduct this from the amount you have to pay. The notary will demand see a paid up Form 211 at the signing of the deeds, to ensure the tax is collected. You must then file a Form 212 within 30 days and pay the rest of the tax. If the 5% deduction exceeds the tax due then you may request a refund.

Capital gains scenario

You bought your resale apartment property in 1995 for 90,000€ and paid the following costs:

1. Transfer tax @ 6% = 5400

2. Notary @ 1% = 900

3. Lawyers fees 1% = 900

4. Sub Total = 8200

Your total cost or Purchase Value = 98,200€

You then apply the inflation coefficient for the year 1995 at 1.2350 to bring the amount you paid to today’s value of 121,277€.

You sell the property today at the declared price of 330,000 €

You reduce the selling price by justified expenses

1. Plus valia @ 1,000€ (aprox.)

2. Estate agents commission @ 15,000€

3. Lawyers fees @ 3,000€

4. Sub Total = 19,000€

Your total cost or Sale Value = 311,000€

Sale Value (311,000€) – Purchase Value (121,277€) = Profit (189,723€)

Resident tax payment

As a resident with a modest income the rate begins at 15% or 28,458€ in the above scenario.

Total profit after tax = 161,264€

Non resident tax payment

Currently as a non resident your overall capital gains tax would be 66,403€ but there would be an immediate 5% retention by the buyer’s lawyer or 16,500€. You would still be liable for remaining 49,903€ within one month of the sale.

Total profit after tax = 123,319€

Minimising capital gains

Here are some of the things you can do to minimise the impact of capital gains tax.

Become a Spanish resident three years prior to sale

There are quite a few advantages to becoming a resident in Spain both in terms of owning and selling property. Anyone thinking about reselling should seriously consider this option for the following reasons (read article: The Benefits of Becoming a Resident in Spain)

If you are resident and more than 65 years of age, and you have lived in your home for three years, you will not be subject to Spanish capital gains tax when you sell it, no matter how great your profit.

If you are a resident, your minimum capital gains tax liability is 15% and you also avoid the hassle of paying the withholding tax mentioned above. Also if the property is your principal residence and you have owned it for a minimum of three years you can claim part or all of the tax back if you buy another principal residence within two years.

Using a company structure

Using a Spanish company to own a property is discussed in the article ‘Using a company to buy Spanish property’ and is open to both residents and non-residents. Recent changes in legislation have closed many of the tax loop holes that used to avoid capital gains tax.

Special exemptions

There are certain exemptions that are currently available to you if you have owned your property in Spain for a long time:

1. If you bought your property prior to December 31 1986 you will not have to pay capital gains.

2. If you bought your property prior December 31st 1994, the taxable amount will be reduced by 11.11% annually for each year of ownership prior to this date.

Spanish tax law updates

There are some important updates to Spanish capital gains tax that are currently being discussed in the Spanish parliament. If this new legislature is implemented the new laws will take effect from the 1st of January 2007. The proposed changes are as follows:

Non-residents who own property in Spain

1. Capital gains tax may be lowered to 18%. NB. Its is likely that the tax rate will be lowered incrementaly over time (possibly five year)s

2. Withholding taxes on the sale of property may be reduced to 3%

3. There will be no withholding tax on properties bought before 1986.

4. The 11.11% per annum tax break for properties owned prior to 1994 will continue to apply until 20th of January 2006.

Residents

1. Capital gains tax may be raised to 18%.

In view of the importance of the proposed changes and in an effort to keep you up to date we will update this chapter with the approved final draft legislation. To get an insight into the taxes you will pay when you sell your property use this calculator

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