Capital Gains Tax on Real Estate in Spain

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Capital Gains Tax on Real Estate in Spain

Spanish capital gains tax is complex. It is paid by residents of Spain on their worldwide assets and by non-residents on property that they own in Spain. The main home of Spanish residents can be exempt depending on the facts. The rate for residents and non-residents is 18 percent.

Assets acquired on or before 31 December 1994

There are certain deductions available for assets acquired on or before 31 December 1994. Details of how these deductions are calculated for each type of asset are given below. The rules are different for real estate, quoted shares and all other assets.

Gains on Property

Where a property acquired before 31 December 1994 was disposed of prior to 20 January 2006, the full gain was reduced by 11.1 percent for every year (or part-year) owned prior to 31 December 1994 - so that property acquired before 31 December 1986, was wholly tax free.

Where the asset was acquired before 31 December 1994 and is disposed of on or after 20th January 2006, the gain needs to be time-apportioned into:

1. the gain arising before 20 January 2006 and 
2. the gain accruing from that date. 

The reduction is only available on the portion of the gain accruing before 20 January 2006. Gains accruing from 20 January 2006 are taxed in full, as are gains on properties acquired after 31 December 1994, as there is then no distinction made pre- and post-20 January 2006.

Main home exemption

In Spain a person is exempt from capital gains tax on the sale of their main residence if they are:

• 65 years or over and
• have lived in the property for three years or more (or, if less, had to sell because of a change of job, marriage, separation or the death of a partner).

If they are under 65, and have lived in the house for at least three years then they can relieve the gain via the acquisition of a new main home. They must re-invest the net sale proceeds (after repaying any mortgage) into a new main residence within a period of two years either side of the sale.

The tax relief is based on the proportion of the total sale proceeds reinvested into the new home. If the new home costs more than the sale price of the old home, then all of the gain is exempt; but if only 50 per cent of the sale proceeds are reinvested, then only half of the gain is exempt. The main residence does not need to be in Spain to qualify for the relief, nor does the new home.

In addition to the cost of acquisition, expenditure on improving or enhancing the property is allowable as a deduction when calculating the net gain and there is an "indexation co-efficient" that increases the allowable costs for inflation, based on how long the property has been owned.

In order for the reinvestment relief to apply, the taxpayer must declare the gain on their Spanish tax return together with their intention to reinvest the proceeds into a new main home. If the required declarations are not made, the relief is likely to be denied by the Spanish tax authorities. In addition, if they have not declared themselves to the Spanish authorities as being resident, and not completed Spanish tax returns, the main home exemption will not be available.

Sale of property by non-residents

When property is sold by a non-resident of Spain, purchasers must withhold three percent of the purchase price (not the gain) and pay it over to the Spanish tax authorities as an advance payment of capital gains tax on behalf of the vendor. If this is not paid, the purchaser can be fined and the unpaid tax becomes a charge over the property itself. If this three percent exceeds the tax due on the gain, a repayment will be made of the excess; however, if the tax due is more than the retained amount, further tax will be due in Spain. The vendor must file a Spanish tax return on the transaction within three months of the sale before any repayment can be made.

If a person is not resident in Spain, tax may also be due in the country where they are resident, subject to any Double Taxation Treaty Relief.

Gains on quoted shares

Where quoted shares acquired before 31 December 1994 were disposed of prior to 20 January 2006, the gain was reduced by 25 per cent for every year (or part-year) owned prior to 31 December 1994, resulting in acquisitions prior to 1992 being tax-free.

Where the shares were acquired before 31 December 1994 and disposed of on or after 20 January 2006, again the gain needs to be time-apportioned into:

1. the gain arising before 20th January 2006 and
2. the gain accruing from that date.

The reduction is only available on the portion of the gain accruing before 20 January 2006. Gains accruing from 20 January 2006 are taxed in full, as are gains on quoted shares acquired after 31 December 1994, as there is then no distinction made pre- and post-20 January 2006.
.
Non-residents may be exempt on the sale of Spanish shares under the terms of a Double Tax Treaty, and would not generally be taxed on non-Spanish shares unless the company predominantly held Spanish real estate.

Other Capital Gains

In a similar manner to the treatment of gains on property and quoted shares, the part of the gain on other assets accruing prior to 20 January 2006 is reduced by 14.28 per cent per year for every year or part year of ownership prior to 31 December 1994, with the effect that assets acquired before 1989 are exempt on that part of the gain.

If the asset was sold after 20 January 2006, then the part of the gain accruing from that date is taxable in full, as is the whole gain on any such asset acquired after 31 December 1994, since no distinction is then made with reference to 20 January 2006.

Main exemptions

• Assets divided on divorce or the dissolution of a community marriage regime
• Gifts to certain charities and non profit making entities
• Main home - as above
• Shareholdings which qualify for wealth tax exemption in the hands of the donor.

Plusvalia

In addition to any mainstream capital gains tax on the sale of property there is also a local tax in urban areas levied by Spanish town halls commonly known as the Plusvalia (which literally translates as "gain") on the growth in the value of urban land (excluding the buildings).

The real growth in value of the land is reflected by the allowance of a realistic allowance for inflation, unlike the token allowance in Spanish mainstream capital gains tax.

The tax rate varies depending upon the size of the local population and the length of ownership. For a town of more than 100,000 inhabitants the minimum tax rate is 20 per cent and the maximum 30 percent, with the town hall fixing a rate within this.

Any Plusvalia tax paid is allowed as a cost of disposal in calculating the mainstream capital gains tax.

Related Information

• The Spanish Government Tax Offices website
• See AngloINFO INFOrmation page Spanish Tax & Taxation in Spain
• See AngloINFO INFOrmation page Personal Income Tax Regulations in Spain
• See AngloINFO INFOrmation page Tax Regime For Employees in Spain

Information by Blevins Franks Tax Advisory Service
Blevins Franks is a pan-European financial advice group providing services to expatriates.
Spanish offices are located in Costa Brava, Costa Blanca, Costa de Almeria, Costa del Sol, the Balearics, the Canary Islands.
See here to find a local advisor
In the UK please contact Jane Hayward: Tel: +44 (0)20 7015 2126
Website: www.blevinsfranksinternational.com / email
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