A Taxing problem once again.
 

I’ve done a ‘search’ on the forum and read just about every relevant thread possible – thank you to all contributors – but I’d still like to run the following scenario past you experts.

I have owned two beautiful apartments in a leafy suburb of Torremolinos for the last 20 years. When I say ‘beautiful’, I’m not talking super luxury, nor penthouse glamour – just lovely apartments which folk clamour to rent from me, and yes, I know I’m very fortunate.

Situated some 100 metres from the prom, 450 metres from the Benalmadena marina and established amongst a myriad array of bars, cafes and supermarkets, it is an oasis of calm and tranquillity behind it’s secure gates. Shangri-la .... then I go and get myself a heart attack!!!

Okay, I’m aged 63, have paid all the statutory Spanish taxes and declare my rental income here in the UK. I am not a Spanish Resident. My wife is co-owner of one apartment, I am the full owner of the second – acquiring ownership almost by default (de fault of de relative who wanted to sell his share just after we’d bought it between us!!). My wife and I have Spanish Wills.

My query – queries – at last. If I pegged it, I’m assuming that the Capital Gains Tax rate of 18% would be applied to 50% of the Capital Gain on the shared apartment and 100% of the other – which would present my family with a CGT bill of over £40,000. This would have been covered by a Life Insurance Policy – but that has now expired and will not be renewed for obvious reasons.

So, I’m contemplating selling the smaller apartment, the one shared with my wife, which we bought in March 1989. I believe the Capital Gain (profit) on that will be circa £100,000. I also understand that that could be portrayed as a little less by applying the relevant coefficient to allow for inflation over the 20 years, but, for convenience of mental arithmetic, am I right in thinking that I/we will still be ‘hit’ for £18,000 tax on this profit. Bear in mind, I’ll be retaining the other apartment (making a new Will) but will still be wanting to bring a fair proportion of the sales money back to the UK.

Hope I’m not causing boredom by quoting my specifics – we each have a different scenario so forgive me if I appear to be hogging the stage.

Thanks.

Re: A Taxing problem once again.
 

I think you are confusing your taxes here.

If you die, then Inheritance Tax will be due on the whole value of the properties that you own - ie 50% of one and 100% of the other.

The tax is paid by the beneficiaries, not by the "estate" as in the UK and must be paid before you are free to sell the assets.

If you sell the properties, CGT will be payable on the gain at 18%, less some indexation allowances and deductions for the costs of buying and selling. in fact, they will make a retention of 3% from the proceeds of the sale but you will still be liable for the full amount, less the 3%.

Incidentally, you are liable for Spanish tax on the rental income and it should have been declared.

It looks like you (or your successors) are in for some large tax bills. If you had been a Spanish tax resident much of this could be avoided or reduced significantly.

You can reduce IHT liability by leaving the property to as many beneficiaries as possible as they each get a basic allowance of about 16k and start paying at the lowest tax bands. If you leave it all to your wife she will get a very large bill.

Take some professional advice before you make a new will.

Re: A Taxing problem once again.
 

Please note that when Fred says "your beneficiaries will be due IHT in Spain" he really means that they will owe Succession Tax which is not to be confused with UK IHT. They are very separate taxes which is why the 'double taxation treaty' does not apply.

The rates of succession tax are very high if you leave property to non-residents but can be reduced if you leave it to a Spanish resident.

Re: A Taxing problem once again.
 

Thanks for the clarification(s). I know the rental income should have been declared in Spain however, being a self-employed retailer in the UK, and having to prepare annual accounts for both the retail business and my property rental income, I chose to go the lazy-man's/simplistic route and pay all the income tax to the UK taxman (being a retailer and very much in the Taxman's eye, I have indeed declared my rental income, much to the amusement of my fellow apartment owners who rent out but pocket the cash).

I guessed there would be a substantial tax bill to pay, and the very thing I'm trying to avoid is my wife/beneficiaries being faced with a substantial tax bill before they could take over the ownership of the properties. Fortunately, I have recovered enough to handle all this now, and it's unlikely my demise will be imminent (something none of us can foretell) so I'm hoping I will have time to (a) diminish the tax liability (b) provide the funds to enable the IHT to be settled immediately, but had a feeling deep down that the number of year's ownership and the contributions paid to the local economy offered some allowances against the 18%. Evidently not.

Never mind - the huge appreciation in value of my initial investment will more than compensate for the taxes due and I will still have a nice property to pass to my family.

Thanks for your advice re the will - I have tax consultants in the UK, I guess I'd better find one for Spain :) - and thanks to all contributors who respond or have previously posted elsewhere.

Because of my work regime in the UK and the brief, albeit frequent, visits to Spain, I never felt it appropriate or viable to become a Resident, although I believe that the rules have been relaxed in recent years.

Re: A Taxing problem once again.
 

Did your UK consultant did not advise you to do that?

Re: A Taxing problem once again.
 

Many UK consultants are useless when it comes to Spanish tax law. I found that out to my cost.

Re: A Taxing problem once again.
 

That is not a big surprise to me, I found it difficult enough to find one competent in UK Law:rofl:. However my point was most professionals should know their limitations and advise you accordingly.

Re: A Taxing problem once again.
 

I'm totally disillusioned by my Tax folk here - the 2009 Budget announced a change to the tax rules re rent from overseas properties, there was a deadline (July 31st 2009) applied for those needing to back date their application to change their property status. When did I discover it ? August 5th!

Re: A Taxing problem once again.
 

Perhaps it is time for a change? I suggest you speak to some others in similar trade to yourself. A good accountant can save his fees and a bad one could cost you a lot a lot of heartache :eek:.

Re: A Taxing problem once again.
 

Very true - Now that I'm in a position to 'prioritise' - i.e. waking in the morning and surviving until bedtime was a priority for several months - I am slowly making changes - hence the original post.

Thank you again everyone.

Re: A Taxing problem once again.
 

It is said that "A little knowledge is a dangerous thing" - sadly, my knowledge is very little hence my need to post these queries.

I am now confused by the level of Inheritance Tax levied in Spain - reading that it is 40%, then 16% or anything up to 80%. Can someone please advise me as to the current (2009) level?

Doing what homework I can now, before embarking on my next trip to Spain to set the wheels in motion.

Re: A Taxing problem once again.
 

There is NO IHT in Spain, only succession tax - this is quite different.

In valencia, if you pass on your estate to resident, family, members then I believe you can get 99% allowance. that is, you only pay 1% tax.

Leaving it to non-residents is a whole new ball-of-wax!

Re: A Taxing problem once again.
 

It may be called a succession tax but it is IHT in all but name. Which ever way you look at it, it is a tax on inheritances - simple as that.

Yes, the way it is calculated and the way it is paid is different from UK IHT but it's still an inheritance tax.

What you haven't mentioned is that it is also a gift tax - the difference from UK gift tax being that there is no 7 year rule - all gifts are taxable at the time the gift is made.

It is an extraordinarily complicated tax. There are nationwide allowances combined with many different regional allowances and they are changing all the time.These special exemptions/allowances usually only apply to residents and often only to residents of the same region.

The tax rates are the same across the country and the basic rates go up to 34%. However the rates also increase based on the family relationship between the deceased and the inheritor and also the wealth of the inheritor. The maximum rate (leaving it to a rich non relative) is 81.6%

It's an area where timely professional advice can potentially save your beneficiaries a whole load of money as there are many ways to avoid it completely or at least reduce it.

Re: A Taxing problem once again.
 

Thank you for that - Fred James - I guess I'll probe a little further but will then leave it down to my Fiscal Representative, who has already been briefed as to what I need, in readiness for him to tell me what I will have (not always the same thing :) ).

Yes, there are, or were, ways I could have diminished the liability - but how many would have bought an apartment and put it into their children's names when the elder was 19 and the younger 15? And becoming a resident? Impossible as well as impracticable for many - my elderly/sick mum had curtailed any visit to my apartments for two years through no fault of her's. Life is not a very predictable affair - except for death and taxes.

Thank you again for all contributions. I'm surprised that a certain advocate of Limited Companies has not appeared - he seems to have most forums monitored and is conspicuous by his absence.

Re: A Taxing problem once again.
 

Should I wish to change ownership of my property from myself as sole owner to joint ownership with one or more of my family what taxes and costs would be due on the partial transfer?
Many thanks in advance.

Re: A Taxing problem once again.
 

There are two potential taxes here.

The first is on the transfer of the property and the transfer tax is 6% plus other fees etc. There may be some relief from this tax under certain circumstance, for instance if a couple own a property jointly then it is possible to put it in just one name and not have to pay the 6%. I don't know if it works the other way or with children.

However the second tax liability will be the Spanish "IHT" tax. As I said earlier it is a tax on "Inheritances and Gifts". The correct name is "Impuesto sobre Sucesiones y Donaciones." ISD for short.

If you transfer the ownership of an asset it is a gift so tax is payable at the same rates as an inheritance. There are allowances against it and they are even more complex than the allowances against inheritances. They also vary by region.

There are other ways of doing it by"giving" the property to the children while you retain a right to live there (a usufruct). As the property is worth less with a sitting tenant that reduces the value of the gift and reduces the tax.

It is a hellishly complicated subject and, as I said before, there is no substitute for good professional advice.

Re: A Taxing problem once again.
 

Absolutely agree with Fred. This is why it is so important to get property put into the 'right' names with the correct 'structure' when it is first purchased.

Don't simply buy it in one name thinking it can be altered later - it can, but at a cost!

Re: A Taxing problem once again.
 

Oh ... how I wish I had a crystal ball to determine whether a 15 year old lad would be a reliable co-owner 20 years down the line, then I too could have placed the properties into the 'right' names.

I think that neither I nor Dick Dastardly is seeking to have something for nothing, or expecting anything to be done as our 'right' - we have property in a foreign country and accept their rules and regulations, but we ask because...? Well because a forum like this gives us the spring board to make our enquiries.

Re: A Taxing problem once again.
 

The only thing I would add is that the law is changing rapidly in the regions and the move is away from any IHT apart from on large amounts of money between wealthy people - which probably rules out most of us:)

Re: A Taxing problem once again.
 

Oh boy - now I REALLY need that crystal ball :) :) .

Re: A Taxing problem once again.
 

Again as part of my preliminary research, I paid 35 euros for an Abogado to give me some advice on this very aspect, asking about the retention of the usufruct - and this is a quote from her response.

"If your heirs are all non resident, maybe you can simulate a sale of your property to your heirs and keep your right of use for you (it is named usufruct), the tax for sale of your property would be 7% of the value of your property minus the value of your right of use that you would keep."

Note that final portion of that last sentence - by becoming a 'sitting tenant' (via retention of the usfruct) you are diminishing the value of the property.

I am about to go back to the same lawyer (I'm allowed two clarifications under the terms of contact) to ask what percentage would the value drop by (because of the sitting tenant) and wouldn't ISD and/or CGT also play a part.

Re: A Taxing problem once again.
 

Calculation of the value of the usufruct is actually quite simple (for a change).

Take your age and deduct 20. Take that figure and deduct that from 70.

That gives you the value of the usufruct as a percentage of the value of the property.

For example :- age 65 deduct 20 = 45. Take that away from 70 = 25.

So if the property is worth 200k the value will be reduced by 25% ie. 50k.

Re: A Taxing problem once again.
 

That is brilliant - thank you so much.

Hey, who needs a 35 euro Abogado when we have Fred James to hand? :) :)

Re: A Taxing problem once again.
 

Update if I may - re the apartment to be sold - it was purchased in March 1989 and is obviously worth considerably more than the price paid. Hence an exposure to the 18% CGT, however, I now believe that there is an 11.1% allowance for every year, or part year, of ownership of properties purchased before December 1994. In my case - a 66.6% allowance :thumbsup: .

I am waiting, with almost bated breath, to be assured that this allowance is applicable to non-residents as well as residents. It makes a huge difference to the net receipt, however, it's also good to know that our long term 'loyalty' to Spain is being recognised as such, that we are not seen and taxed as speculative :fingerscrossed: .

There is also a knock-on effect on the apartment to be 're-structured' (ownership wise) as that was also purchased pre-1994 - but the savings won't be quite as significant. How does the Tesco advert go ;) .

Re: A Taxing problem once again.
 

You are about right. It applies to non resident as well as residents.

You only get the 11.11% after the first 2 years but it applies up to 1996 so in your case that is 5 years at 11.11%.

You also get another indexation allowance of 1.2162 for a property purchased before 1994 but it is applied to the original net cost. The 11.11% is applied to the actual gain.

Remember that you can deduct the legal/tax/selling/commission costs of buying and selling to arrive at the gain, before you apply the correction factors.

It's very complicated and I won't bore you with the maths but you will pay a much reduced sum!

Re: A Taxing problem once again.
 

Thanks again - these calculations are turning out to be far more 'taxing' than I had thought (ouch, that pun was so obvious) but as you say, they do pull the final payments down substantially.

I'm off to Spain on Tuesday so I'll update you all when I get back (a 10-day stay).

Thanks Fred James - you are a mine of information :) .

Re: A Taxing problem once again.
 

Hi Fred,..many thanks for reply, Ref. Post 16...... Another idea,....
I added my Daughters name to one of my Spanish accounts a while back making it a joint account.
Other than a copy of her signature and passport, nothing else was required.
Could I,....
1,-Buy a property with those funds in joint names?
2,-Buy a property with those funds soley in her name?
3,-Buy a property directly from an offshore account in her name?

Other than the normal property taxes, is it likely that the Spanish taxman would need to be involved?

My Daughter is at present non resident.
I have over many years varied from time to time between resident and non resident,depending on time spent in Spain, without to date any undue hassle.
Many Thanks in advance for your words of wisdom.

Re: A Taxing problem once again.
 

Your current "cunning plan" is a lot better than the last one as it is so much easier to get round IHT by sensible planning at the time you buy a property rather than down the line and then trying to change ownership.

I can't see any obvious problems with any of the options but please do get some proper professional advice before you do anything - I'm sure there may well be other options that you could consider.