As you consider purchasing a property in Mallorca (Spain), it is important to be mindful of the expenses that go beyond the asking price and regular maintenance fees. Understanding the tax implications of owning a property can save you from unexpected surprises.
Investing time to understand the tax implications can yield significant benefits. You could encounter several taxes, including purchase taxes, annual wealth tax, capital gains tax, or succession tax.
Being well-informed about these tax considerations in advance is crucial to avoid unexpected financial burdens for you and your heirs. By taking proactive measures, you can optimize the advantages of property ownership while mitigating potential liabilities.
Consider the purchase and local taxes
When purchasing a property in Mallorca, Spain, it is important to understand the various taxes that you will be required to pay. The type and amount of tax to be paid will depend on whether the property is a new build or pre-owned, as well as its value.
For new build properties, you will be required to pay a value-added tax (VAT) of 10%, known as ‘Impuesto sobre el Valor Añadido’ (IVA), as well as stamp duty, or ‘Actos Jurídicos Documentados’ (AJD).
On the other hand, pre-owned properties are subject to a Real Estate Transfer Tax (RETT), or ‘Impuesto sobre Transmisiones Patrimoniales’ (ITP). The tax rate in the Balearic Islands ranges from 8 to 13%.
Once you have purchased your property, you will be liable for the ‘Impuesto sobre Bienes Inmuebles’ (IBI), which is the Spanish equivalent of council tax. The amount you’ll be required to pay each year is based on the official value of your property, or valor catastral.
Consider rental and notional rental income tax
If you decide to rent out your Spanish property, it is important to be aware of the taxes you will need to pay on the income. The amount payable will depend on whether you are a resident or non-resident, as well as other factors.
For residents, income tax is calculated using general scale rates. However, if you are renting out your property on a long-term basis, you may be eligible for a 60% tax reduction against the net rental income.
Non-residents have different tax obligations depending on where they live. EU/EEA residents are subject to a flat 19% tax rate on the net income after certain deductions, while non-EU/EEA residents (including UK residents) are required to pay 24% on the gross rental income without any deductions.
It is worth noting that if you own a Spanish holiday home or property that is not used as your main home, you may still be required to pay tax on what is known as ‘notional rental income’ during the periods when the property is not rented out. This is generally calculated as 1.1% of the ‘valor catastral’ (or 2% if the value has not been revised within the last ten years) and is then taxed at income tax rates which differ depending on your residency status.
Consider tax on capital gains
If you plan to sell your property in Spain, you should be aware that you may have to pay taxes on the gain you make from the sale.
If you are a resident in Spain, any gain from the sale will be added to your other investment income and gains for the year and taxed using the ‘savings income’ rates, which currently range from 19% to 28% depending on the amount of the gain.
However, if you are over 65 and the property you are selling is your main home, you may not have to pay tax on the gain if you meet certain requirements. If you are younger than 65, you could also qualify for this relief if you use the full proceeds to purchase another main home within the EU/EEA within two years.
For non-residents of Spain, the capital gains tax will be charged at a flat rate of 19%.
You may also have to pay ‘Plusvalía municipal’ when selling a property. This local land tax is payable on the increase in the value of the land (excluding buildings) and the amount may vary according to the size of the local population and length of ownership.
Consider wealth and solidarity tax
In Spain, an annual wealth tax is levied based on the total value of your assets as of 31 December of the calendar year. This tax applies to worldwide assets if you are a resident in Spain, while non-residents only have their Spanish assets assessed.
In the Balearics, every individual is eligible for a €3,000,000 personal allowance, and residents receive an additional €300,000 home allowance.
It is always important to take this into consideration when purchasing Spanish property, especially if it is a high-end property or if you have substantial wealth. The same applies if you are a Spanish resident purchasing property abroad.
Spain’s solidarity tax on large fortunes, or ‘impuesto de solidaridad a las grandes fortunas’ is a temporary tax that was introduced to help with the current cost of living crisis. It is to be abolished after the 2023 tax year if no further extension takes place.
Solidarity tax is only applied to large fortunes of above €3 million, and although it is extra to Spain’s regular annual wealth tax, those affected by this temporary measure will not pay tax twice. When calculating an individual’s net wealth, worldwide assets will be considered for Spanish residents, while non-residents will only have assets they hold in Spain taken into account.
Consider Spanish inheritance tax
Planning for the future includes not only managing your assets while you are alive, but also considering what happens to them after you pass away. In Spain, inheritance and gift taxes are always due on Spanish property, regardless of the residence of the deceased or heirs. It is, therefore, important to factor in the potential tax implications for your beneficiaries when planning your estate.
In Spain, the rates for inheritance and gift taxes vary depending on what region you are living in, who the beneficiary is, and the value of the inheritance or gift.
Fortunately, there will be a significant reduction on the value of the main home for spouses, descendants, and ascendants who keep the property for at least five years after receipt of the property. In the absence of direct family, a more remote family member over the age of 65 who has lived with the deceased two years prior to death would also be eligible. This reduction helps alleviate the tax burden on beneficiaries.
In addition, there are some personal reductions available to close relatives, other extended family, and even non-family members.
Considering the potential tax implications of inheritance and gifting can help ensure that your loved ones receive the maximum benefit from your estate. It’s essential to seek professional advice and plan your estate accordingly to minimise tax liability and ensure that your wishes are carried out.
Consider the advice of Tax Experts
Navigating the Spanish tax system can be challenging, especially when you need to consider how it interacts with the tax regime in your home country. The rules and regulations surrounding taxes can be complex and they often change over time, making it difficult to stay up-to-date.
That is why it’s essential to seek the advice of a specialist, cross-border private wealth advisor to help you establish a tax strategy that works for your unique circumstances. By doing so, you may discover ways to lower your tax liabilities and ultimately reduce your overall tax bill.
At Lullius Partners we provide market-leading advice to individuals from around the world, groups of companies and family businesses in need of joint tax and legal advisory and compliance services, including Spanish, cross-border and international taxation as well as business and legal issues which may affect their global wealth. We field an expert multi-disciplinary team to address all of our clients’ legal needs.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice
