Historically, property has always been a sound investment. People like bricks and mortar (including me!) … but is it the right route to generate income when you live in Spain?
As with all investments there are benefits, drawbacks and risks. If you are wondering whether a rental property is right for you, read on …
IncomeTax
Unfortunately, when it comes to creating a tax efficient income, rental income is not likely to be the best solution. If you are resident in Spain but receive rental income in the UK, you need to declare your income to both the UK and Spanish tax authorities. A dual tax agreement exists between Spain and the UK to ensure you are not taxed twice on the same income, but the rental income will always be taxed initially in the UK as it is a UK sited asset and the income should then be declared in Spain and any difference in tax due paid to the Hacienda.
If you live outside of the UK for 6 months or more per year, you’re classed as a ‘non-resident landlord’ by HM Revenue and Customs (HMRC) - even if you’re a UK resident for tax purposes. You cannot use HMRC’s online services. Instead, you need to send your tax return by post or employ an accountant to act on your behalf. You can use your UK personal allowance to reduce the UK tax paid, but when you’re not a UK resident you have to claim the Personal Allowance at the end of each tax year in which you have UK income.
Spain applies the same taxes to rental income as the regular income you earn from employment, with the tax rate payable ranging from 19% to 47%. If the tax rates in the 2 countries are different, you’ll pay the higher rate of tax. Remember also that the tax year starts on different days in different countries. The UK is 6 April to 5 April each year, whilst Spain is 1 January to 31 December each year, which adds to the tax complications.
THIS MAKES UK RENTAL INCOME FOR RESIDENTS OF SPAIN VERY NON-TAX EFFICIENT IF THE PURPOSE OF THE RENTAL PROPERTY IS TO PROVIDE AN INCOME WHEN YOU LIVE IN SPAIN. Not only because of income tax, but also other potential tax issues. Read on …
Capital Gains Tax
Here’s the sting in the tail … DOUBLE TAXATION AGREEMENTS DO NOT APPLY TO TAX ON GAINS FROM SELLING UK RESIDENTIAL PROPERTY.
There is an annual exempt amount for individuals (£6,000 for 2023/2024 UK tax year) on which no tax is payable. The rates payable to HMRC on the sale of a residential rental property in the UK are 18% for basic rate tax payers and 28% for higher rate tax payers.
Capital gains tax is then payable to the Hacienda at 19% on the first €6,000 gain, 21% on the next €44,000, 23% on the next €150,000 and 26% on the remainder!
Modelo 720
Any assets with a value of more than €50,000 held outside of Spain when you are a resident of Spain must be declared on the Modelo 720 return. Whilst the Hacienda do not use the Modelo 720 for income tax purposes (yet) … typically, they do use the Modelo 720 to calculate any inheritance tax liability. As a resident of Spain any inheritance tax liability is calculated on your worldwide assets, not just assets held in Spain. So the value of any rental property would be included in this calculation.H
Lack of Liquidity
You have to wait to sell your property, finding a buyer isn’t always going to fit in with your need for cash. Even when you do sell, the sale of a property can be a slow process.
The cost of buying and selling property, including stamp duty, legal fees and agents commission can be relatively expensive.
When the property market is slow, it can be virtually impossible to sell, except at a greatly reduced price in relation to normal values.
It isn’t possible to sell a property in ‘bits’ to boost your income as you would an investment ... it’s an ‘all or nothing’ scenario!
Management Issues
Letting property is a business in itself … it requires administrative, financial and marketing skills together with commitment and patience with the tenants.
Deciding whether to manage the property yourself or to use a letting agency … around 50% of all rentals are arranged through letting agents in the hope of offering a hassle-free life for the landlord. Full property management can cost anything from 12% to 20% of the total rent, depending on the area and which managing agent you choose.
Choosing the right letting agent isn’t easy as the quality varies between agents, together with their fees! Many of my clients have been disappointed with service levels and are often left wondering why they pay an agent because they end up dealing with tenants’ issues directly.
It may be difficult to find tenants in areas where there is a surplus of rental property.
Evicting a tenant that is not paying the rent or trashing your rental property can be a lengthy and costly exercise. Although a landlord is protected by property law, enforcing the law may involve the services of a solicitor and court proceedings, incurring additional costs. You can take back possession of your property at the end of a fixed-term tenancy agreement, or trigger an agreed break clause with a Section 21 notice of possession. Other than that, a Section 8 eviction notice must be served when you have grounds for eviction. For example, the tenant has not paid the rent, damaged the property or is causing a nuisance. In such cases you can terminate the tenancy during its fixed term if the tenant has breached the tenancy agreement. But your tenant may dispute it, and it could go to court where you’ll need to evidence the reason for the eviction. Even then the outcome might not go your way with the effect that no order for possession is granted, especially if the tenant has remedied the breach that you relied on to seek possession. A tenant may choose to ignore the notice and a judge in court may not decide in your favour!
Age and condition of the property you buy will affect the maintenance costs and could result in greatly reduced or even zero income from the property, it is usually worth buying a newer property for renting.
Expected Rental Yields
Rental yields vary significantly between different properties and different locations. As a general rule, the larger the property the lower the yield. Also, general expenses such as the costs of agents, maintenance and buildings insurance all impact on the overall yield, reducing it on average by around 25%.
Void Periods
Property investment carries with it the risk of the loss of rent. As all landlords will know, tenants do not stay in buy-to-let properties for ever. After a period of time most tenants will begin to consider upsizing, downsizing, buying their own property or moving for work. When tenants do vacate a property, this often causes void periods where there is no tenant, and therefore no rental income. The other issue of course is the reliability of the tenant and the expectation that the tenant will pay the rent regularly and on time!
Prospect for Capital Growth
One of the main attractions behind property purchase has been the prospect of long-term capital growth. However, even that isn’t guaranteed, especially if interest rates are rising.
The alternative …
There is a much more tax efficient way of providing an income without the issues that come with a rental property … a Spanish Compliant Investment.
Spanish Compliant Investment
This type of investment is specifically tailored for those living in Spain who want either capital growth and/or income in a tax efficient way. It offers you the opportunity to pay less tax, making sure your hard-earned cash works for you not the tax man! To explain in relation to what’s available to residents of the UK, it is the nearest thing to an ISA for those living in Spain. The detail of this solution is too far reaching to include in this article, but I list below a broad outline of some of the benefits which make this a fantastic tax efficient alternative for those who don’t want the hassle and tax implications of rental property:
tax free growth whilst the money is invested.
tax efficient withdrawals/income at a time that suits you, whether it’s monthly, quarterly, annually or adhoc. When a withdrawal is made only the growth is taxed. This provides the benefit of tax deferral and can often lead to significant savings, particularly when you consider that part of any withdrawal is also deemed return of your own capital and is not taxed at all.
In most cases, the tax due is automatically deducted when you make a withdrawal and sent directly to the Hacienda, so no need to report the income on your Spanish tax return.
No Spanish inheritance tax paid on a joint life policy on first death, irrespective of the inheritance tax allowances at the time.
No need to wait for Wills to be processed on death and all the bureaucracy that comes with it in respect of either probate or the Hacienda. Proceeds from a Spanish Compliant Investment are paid out immediately and directly to your named beneficiaries, which makes life a lot easier for your loved ones in the event of your death.
If held in joint names, it would automatically continue in the name of the survivor on first death, so no issues with change of ownership or being forced to fully encash.
Wealth Tax can be reduced by up to 80% (dependant on what other income you have).
Flexible enough to change as your needs change.
Avoids the need to be reported on the Modelo 720 as this is done automatically by the provider for all their clients on one return.
At Speed Financial Solutions, our focus is to ensure that you are able to enjoy life and we aim to organise your finances in the most tax efficient way for your particular circumstances. If you are considering alternatives to rental income please contact us.
Speed Financial Solutions are a highly qualified and regulated financial services provider looking after clients throughout Spain and the UK. Established in 2010, we provide a discreet and comprehensive service to individuals, and our service is tailored to suit your needs taking advantage of tactical opportunities as they arise in respect of your financial planning.
Our Principal, Andrea Speed, is a qualified Discretionary Investment Manager specialising in Investment and Risk, Taxation and Trusts, and a qualified Pension Specialist. Andrea is also a Fellow of the Chartered Insurance Institute (CII), which is the world’s largest professional body for insurance and financial services in the world.
Fellowship is the highest qualification awarded by the CII (Level 7) and is universally regarded as the premier qualification. It is a major achievement in the financial industry and demonstrates the acquisition of skills and knowledge at the highest of levels. Along with a Fellowship, Andrea is a CII Chartered Financial Planner.
Please take a look at our website – www.speedfinancialsolutions.com
For further information contact us on Tel 951 315 271 or 951 318 529
admin@speedfinancialsolutions.com
We are happy to discuss your own situation in more detail. One of our advisers would be pleased to spend some time with you either in your home or at our office to review your current savings, investments and pensions, so do call to make an appointment. Our Financial Review is completely free of charge and without obligation. Follow us on Facebook for regular updates.
This communication is for information purposes only based on our understanding of current legislation and practices which is subject to change and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice form a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.
Andrea J Speed FPFS (DM), M.A.
Principal, Fellow and Chartered Financial Planner
Speed Financial Solutions
26 October 2023