When you purchase a home in Spain as in the UK you have several costs which you must factor in to your total budget. Property purchase taxes, notary fees and other costs are unavoidable in Spain.
If you own, or are thinking of buying, property here in Spain, you need to be aware of all the tax implications and what your tax liabilities are, both in Spain and your home country if you are not resident in Spain. These vary depending on where you are tax resident and what you intend to do with the property: if it is for use as a holiday home, for renting out, as an investment to be sold on, or as a future main home.
On buying the property, there will be purchase tax (ITP) at seven per cent or eight per cent depending on the particular region (8% applies in Catalonia, the Balearic Islands, and in Andalucia on the excess over ‚¬400,000). In the Canary Islands the rate is 6.5%. On new properties acquired from a developer, however, there is no ITP but Spanish IVA (VAT) at 8% is payable. There is no IVA in the Canary Islands; instead, a sales tax (IGIC) of 5% is levied on new property from a developer.
If it is a residential property, IBI tax (equivalent to UK council tax) is paid by the person who occupies it on 1st January in any year (that's you if it is a holiday home or only rented for short lets). IBI is calculated on the basis of the notional rental value (valor catastral) of your property, multiplied by the tax rate fixed in your locality.
There may also be other local taxes raised annually the town hall, which can incur a 20% penalty if unpaid by the due date.
Tax on rental income
Where the property is to be let, the rental income is taxable in Spain, regardless of your residence status. Spanish residents will pay tax on the income and any rental income from abroad at the progressive scale rates from 24% to 45% (from 2011). There is a reduction of 60% available against net rental income applicable to long-term lets which would normally be for at least one year in duration.
Non-Spanish residents are taxed at 24% on the gross income. The tenant is obliged to withhold 24% from the rent and pay it to the Spanish tax authorities.
Where the property is not used as your main home, a purely notional income is deemed to arise for periods where the property is not actually let, normally based on 2% of the valor catastral as shown in the IBI notice for the year, taxed at the scale rates for Spanish residents, and 24% for non-residents.
If you are UK resident, the income will also be taxable in the UK. Both countries will apply their own rules to calculate the tax, so the taxable amount is likely to be different in each country. You can offset the Spanish tax paid against the UK liability to avoid double taxation, but if the UK tax is higher, further tax will be due in the UK.
Capital gains tax
Looking ahead, when you eventually come to sell, your Spansih property capital gains tax will be due on the gains tax will be due on the gain, at 19% on the first ‚¬6,000 and 21 % on the balance. Spanish residents will have to add in other gains and investment income when calculating the tax due.