Make The Most Of Your Investment: Purchase Spanish Property Through A Company And Lower Your Tax Bil
When buying a property overseas there is more to consider than just finding the right property in the right location at the right price. More and more British residents are purchasing second properties in Spain, but not many are fully informed of the best way in which to purchase their property and the effect that may have on their investment. Purchasing Spanish property may increase liability to either inheritance tax or capital gains tax, or even both, producing a hefty tax payment on top of the purchase costs, which are considerably larger than those in the UK.
Using a corporate structure to buy Spanish property can help get rid of these tax liabilities. Corporate purchasing does also provides other advantages, including lower legal fees and stamp duties, therefore making the resale of your Spanish Property that much easier. Let me begin to explain.
Spanish Inheritance Tax. People that are domiciled in Britain and/or British resident are liable to 40% inheritance tax on the total value of their global assets which have a value greater than £250000. With Spanish and UK property prices still on the rise many people are finding that purchasing an off shore property will take them over the nil rate band.
On top of British inheritance tax, under Spanish law people owning a property in Spain, regardless of where they are domiciled, are also liable to Spanish inheritance tax. The tax rate ranges from 7.65% to 34% depending on the relationship between the deceased and the recipient. Also there is no Double Taxation Agreement (DTA) meaning that in general no credit is given for tax paid in one country against tax due in another. Therefore lack of proper planning could mean getting charged two sets of tax on the same asset. In some cases the tax could actually amount to more than the total value of the asset in the first place!
Corporate ownership can help to reduce these taxes. Because a company is considered to be an individual legal unit (which can never die) a Spanish property owned by a company cannot be charged any Spanish inheritance tax. In the event of death a company also offers you a selection of options for transferring the ownership of the Spanish property. It is also an option to setup a discretionary trust to keep the shares of the company, not allowing the property to be subjected to Spanish succession laws which say how an estate must be distributed. Forming a trust also provides other advantages, including avoiding considerable overheads and delays of probate, capital or income tax savings, asset protection, confidentiality and flexibility.
Capital Gains Tax. Capital gains tax does not apply if the Spanish property was bought before 31st December 1986. However if the property was acquired after this date capital gains tax does apply. The rate of Spanish capital gains tax differs according to a range of factors, such as whether you are over 65 years old and whether you re-invest in Spanish property within three years.
Spanish capital gains tax is decided by the difference in value of the old title deeds and the current sales price. It is applicable regardless of which country the owner is domiciled and is charged at up to 35% for non-residents. Putting this into perspective, if property prices on the Costa Blanca continue to rise at 20-25% a year, a property in Alicante currently valued at €200,000 could be worth well over €600,000 in six years time. With a profit of €400,000, the capital gains charge could be up to €105,000.
Capital gains tax can be avoided by using an offshore company - such as a Seychelles company owning a Spanish company that in turn owns the property. Instead of 'selling' the property, you are making a change of ownership in the Seychelles company by transferring the shares. The capital gain is therefore in Seychelles, where there is no tax.
For Spanish properties that are of a lower value, purchasing the property directly through a Seychelles company can lessen the expenses of the double structure outlined above. While this does result in an annual property tax of 3% of the 'rateable' property value, the benefit of an offshore property ownership can still make this a cost-effective choice.
Other Taxes. Tax has to be paid by the buyer prior to a title deed or a deed for a newly constructed property can be registered in a new owner's name. This can either be transfer tax (ITP), which is levied at 6%, or value added tax plus stamp duty (AJD), at 0.5%, levied when buying from a developer. These taxes are worked out on the stated purchase price stated on the title deeds.
Local municipalities also charge a tax on the increased value of the property from previous sale. This tax is called 'Plusvalia' and isn't based on the vendor's capital gain but on calculations and values set by the local town hall. By law, Plusvalia is the responsibility of the seller, but it is not uncommon for the liability to be contractually transferred to the buyer.
On a property worth €600,000 all taxes, lawyer and notary fees could add up to €53,000.
If the Spanish property was bought using a corporate structure it can make the re-sale a much easier process which in turn makes the property a lot more attractive to potential buyers. As previously outlined, corporate ownership means the property can be 'sold' by transferring shares in the company to the buyer, leaving the title to the property unchanged. This means that the prospective buyer will not be required to pay the fees and taxes mentioned before and can also sidestep the extensive procedures required to register new title deeds in Spain.
The advantages are obvious. A little planning prior to purchasing could save you a large sum of money. Buying your Spanish property using a corporate structure could significantly lower your tax bill both during and after your lifetime.
About the Author
SpanishInvest.com is a property website specialising in Off-Plan properties to be bought for investment purposes. See http://www.spanishinvest.com for the best investment properties in Spain!!
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