The first tax returns for non residents is approaching and all UK tax resident owners of real estate in Spain (dwelling, apartments, premises, etc. who obtain income derived from immovable property, that is rentals, will see how their tax bill in the Non-Resident Income Tax (IRNR) from their the tax return model 210 will be two or even three times more expensive because of BREXIT.
This is due to the fact that the status of English citizens will treat them as of January 1, 2021 as “non-EU”. The measure implies strong tax increase then the Spanish tax legislation establishes differences in this tax between tax residents of in the EU or the European Economic Area – that is, the European Union EU plus Norway and Iceland and those of the rest of the world:
- First, the tax rate will raise from 19% to 24% for non EU tax residents . These increase also applies to fictive income (that is Non residents that have a property in Spain that is not rented; the Spanish legislation presumes a 1,1% o 2% from the cadastral value as fictive income) .
- Second, also a devasting consequence for UK landlords in Spain after BREXIT will be that that they will be taxed on the gross income (without deducting any kind of expenses). Spanish legislation distinguishes EU tax residents to be taxed at 19% just on net income – that is income less all kinds of deductible expenses such as depreciation, council taxes as local ground tax (IBI), repairs, community expenses, interest, etc – whereas non EU are taxed at 24% on gross income, that is the full amount obtained without possibility of deducting expenses. We show with an example the different tax treatments of in Non-Resident Income Tax (IRNR) for EU and non EU tax residents:
Although the figures are approximate you can clearly see that the taxation is increased in more than 300%!
In order to avoid this huge new burden for rentals there is the possibility of becoming resident for tax purposes in Spain – in this case as resident for tax purposes in Spain you would have the right of a 60% tax reduction if the rental derives from a property destined to habitual and permanent dwelling – or to vest the properties in a Spanish Sociedad Limitada as we explained in our last article. In this case the taxation would be as follows:
Summarizing due to the new situation Non-Resident Income Tax for rentals for UK tax residents:
- increase from 19% to 24% tax rate
- no deductible expenses
we strongly recommend to analyse, review and readjust your real estate portfolio and your tax residence situation taking in account of course any other sources of income and net wealth. That requires a specific and accurate study and tax planning.