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UK HMRC clamp down on Non-Resident owners of Spanish property

By Malcolm Roach M.I.C.M - Mon 21st Nov 2011

After reading the news story, published on the 10th November 2011 by Tumbit (Click HERE to read), I felt that I should expand on some of the problems that the new HMRC unit is likely to be targeting.

As Spanish and UK tax consultants we have many clients who come to us after they have sold their property in Spain enquiring why they are being targeted by HMRC for CGT when a 3% retention based on the sale price has been deducted from the sale proceeds by the purchaser.

Most people believe that if they have paid the 3% then there is no further liability, this is not correct neither can the 3% retention be used to mitigate UK taxation.

A seller has 6 months to submit a tax declaration in Spain and declare the profit that they have made on the sale, the tax due for a non resident is 19% of the increase in value above the price stated in the deeds. This can seem a very high amount of tax especially if the client was allowed by their Lawyer at purchase to pay” Black Money “and reduce the price in the deeds, a practice that many people are told is normal practice.

This is not legal but classed as tax evasion and the owner now has to pick up the CGT of the previous seller.

As an example, a property purchased for 300,000€ in 2000 with 50,000€ cash and a reduction in the declared value to 250,000€ will now pay 19% of the difference between the 250,000€ and today's selling price of say 325,000€ less the 3% retention. The result is CGT tax of 19% on the profit of 14,250€ less the 3% retention of 9,750€ giving an additional tax of 4,500€.

If we now turn to the UK the problem gets worse! To calculate the amount of UK CGT we must first identify the international exchange rate for the month that the property was originally purchased and calculate the sterling value of the purchase. So, for instance, if the exchange rate in 2000 was 1.5€ to the pound this would give a cost value in the public deed of 250,000€ and a sterling equivalent value would calculate at £166,666. Now we calculate the sterling value on sale, this would be 325,000€ at the current exchange rate of, for example, 1.14€ to the pound giving a sterling value of £285,087.

The profit for UK tax is now the difference between the cost of £166,666 and the sale at £285,087 showing a profit on sale of £118,421. This is subject to personal allowances of £10,800 per person, if the allowance has not been already used in that year, so if there are 2 owners, who have not used any of their CGT allowance, then £21,600 would be allowed for tax purposes. This would give a tax of 28% totaling £27,109 less the tax paid in Spain of £12,500 at current exchange rates. So the final UK tax bill could be £14,609 in the UK on this transaction.

Many clients do not understand the rules in respect of the sale of their holiday home and ignore submitting the required tax declarations. This is now becoming a big problem to people who overlook this requirement. Spanish lawyers may inform the client of the need to submit tax declarations in Spain but fail to inform the client of their obligations in the UK.

A further consideration is the matter of leaving the transfer of a property of a deceased until after 4.5 years as there is a statute of limitations that prevents the Spanish tax office from recovering tax after this period if it has not been claimed by them previously. Many clients are advised by Spanish advisors to not worry about probate and tax as it is usual to evade this tax in this manner. Well there are significant problems should you follow this advice.

In the UK your Executor is required to probate in the UK and declare and pay tax on your worldwide assets, this includes the value of your Spanish holiday home. In many cases the UK estate is finalised and the assets distributed before the Spanish asset is dealt with and the Spanish property is ignored when declaring the estate value. What is not realised is that the executors of an estate have the legal liability to discharge all debts and taxes in respect of the estate and are liable for any debts from anywhere in the world including the UK and Spain if they have distributed all the assets before accounting for the taxes on all of the assets.

So if this was known why would an executor take such a risk and retain the liability to pay the taxes in the future personally?

Under the new EC Regulation No.1896/2006 This directive allows for the collection of cross border EU debts through the debtors court of domicile so it is very dangerous for an executor to turn a blind eye to the Spanish asset as the Spanish tax office may come knocking on your door as would HMRC.

In conclusion both HMRC and the Spanish Tax Office have remedies against tax evasion and foreign property owners should always take advice from a reputable professional with a good knowledge of tax and legal legislation in both their resident and holiday home regions.

Comment on this Blog

Holiday homes always cause HMRC issues. I echo the comments regarding speaking to a specialist. Clients ignoring this means an irritating backward paper trail usually resulting in an unwelcome bill.
Craig Mathieson - Wed, 18th Jan 2012

As I would expect - a really good post by Malcolm Roach!

In addition, readers should be aware that one of the tax increases announced by the new PP Government is to change the Capital Gains Tax for non-residents to 21%. Non-residents are, of course, more likely to have a liability in both countries

David Goodall - Wed, 18th Jan 2012

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