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‘It’s absurd’: How Britons who let out properties in Spain will see taxes triple after Brexit

Spain’s Inland Revenue is preparing to hike taxes for non-resident British homeowners who rent out their properties in Spain after December 31st 2020.

'It's absurd': How Britons who let out properties in Spain will see taxes triple after Brexit
The beautiful coastal town of Cadaqués on Spain's Costa Brava. Photo: Elektra Klimi/Unsplash

UK citizens who don’t live in Spain but let out a property in the country will no longer be able to dock off expenses from their tax declaration once they become non-EU citizens.

The measure relates to the IRNR (Non-resident Income Tax), which for EU residents is 19 percent on net income and for non-EU is 24 percent.

Crucially however, foreign non-resident homeowners from the EU, Norway and Iceland can claim back many more expenses (mortgage interest, insurance, IBI, community fees etc) which non-EU resident property owners cannot.

For example, an EU resident who makes €1,000 a month in rental income from a property in Spain will end up paying €779 annually in taxes after deductions, whereas a non-resident from a non-EU country would pay €2,880 a year in IRNR tax for the same earnings and time period.

This means that British second-homeowners who aren’t officially residents in Spain after December 31st 2020 will be treated the same as American, Russian, Chinese and any other third-country property owners who don’t have fiscal residence in an EU country.

The measure has been confirmed in Spain's “Agencia Tributaria” (Tax Agency) website under the headline “Consequences of Brexit on Non-Resident Income Tax from 1 January 2021”.

According to Spanish government data, there are between 800,000 and a million UK citizens who own a property in Spain but only 300,000 to 400,000 Britons registered as residents (these figures could be changing as the Brexit deadline fast approaches).

“The differences in taxation between member and non-member landlords are absurd and unfair,” tax lawyer Alejandro del Campo, partner at DMS Consulting in Mallorca, told The Local.

Del Campo, who has a large portfolio of foreign clients, appealed to the European Commission in 2018 for this discriminative clause to be addressed.

Back in 2008, Brussels warned Spain that their IRNR tax “restricts the free movement of people and workers, the free provision of services and the free movement of capital between countries”.

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 Around 500,000 Britons with properties in Spain will start paying more tax in 2021. Photo: Anders Nord/Unsplash

Although the discriminatory tax conditions no longer apply to EU residents with second homes in the country, this Spain-specific law still makes a distinction between EU and non-EU property owners.

“Such regulations manifestly and seriously violate European Union Law, which has priority and is directly applicable, and it is the obligation of the Spanish Courts, and also of the Spanish government itself, to make sure they’re not applied”, argues del Campo.

Spanish legislation also sets out big differences between non-resident landlords and resident landlords when it comes to tax deductions.

Whereas resident owners can apply a reduction of 60 percent of the net rent income on long-term leases before tax is calculated, non-residents can’t.

Brussels also announced back in March 2019 the initiation of an infringement procedure against Spain for this matter.

Property Rental Income Tax is one of several taxes that can apply to non-resident property owners in Spain along with inheritance tax, wealth tax and capital gains tax, although fiscal obligations vary between regions.

As a general rule however, any income which arises in Spain is considered taxable.

And when it comes to owning a property in Spain, tax has to be paid on it regardless of whether it’s being rented out or not.

Non-residents who are renting out a property in Spain must declare their earnings by submitting form 210 on a quarterly basis.

“It remains to be seen if Brussels will initiate another infringement procedure against Spain for this serious discrimination against non-residents,” Alejandro del Campo concludes. 

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Member comments

  1. It’s what they voted for and now the chickens are coming home to roost for many of them. And on top of the non-EU taxes that will be payable, they won’t be able to come and spend the 6 months of winter in their Spanish bolt-holes either! I just feel sorry for all those people who did not vote, nor want, Brexit!

  2. It is perfectly fair – it is what other non eu nationals have to put up with, I see no reason why Brits should be any different now they are no longer in the EU. The argument for the actual law being an issue it would be easy to agree it is punative on non eu citizens , however no one is forced to purchase property in Spain.

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For members

BREXIT

What is the latest on Gibraltar’s Brexit status?

With 2023 approaching and negotiations between Gibraltar, the UK, EU and Spain dragging on for yet another year, what is the latest on Gibraltar and Brexit? Will they reach a deal before New Year and how could it affect life in Gibraltar and Spain?

What is the latest on Gibraltar's Brexit status?

As British politics tries to move on from Brexit, the tiny British territory at the southern tip of Spain, Gibraltar, has been stuck in political limbo since the referendum all the way back in 2016.

Gibraltar, which voted in favour of Remain during the referendum by a whopping 96 percent, was not included in the Brexit deal and has instead relied on a framework agreement made between the UK and Spain on New Year’s Eve in 2020.

After that framework was laid out, it was hoped that the various parties – that is, the Gibraltarian government, Spain, the EU, and the UK – would build on it and quickly find a wider treaty agreement establishing Gibraltar’s place on the European mainland in the post-Brexit world.

It was thought that Gibraltar could enter into a common travel area with the Schengen zone, limiting border controls and essentially creating a custom-made customs arrangement with the EU.

But since then, the negotiation process has stopped and started, with no deal being made and uncertainty dragging on through 2021.

Despite all parties still being relatively optimistic in the spring of 2022, no resolution has been found and 2023 is approaching.

Relying on the framework agreement alone, uncertainty about what exactly the rules are and how they should be implemented have caused confusion and long delays on the border.

The roadblocks

Progress in the multi-faceted negotiations to bash out a treaty and determine Gibraltar’s place in the post-Brexit world have repeatedly stumbled over the same roadblocks.

The main one is the issue of the border. Known in Spain and Gibraltar as La Línea – meaning ‘the line’ in reference to the Spanish town directly across the border, La Línea de la Concepción – the subject of the border and who exactly will patrol it (and on which side) has been a constant sticking point in negotiations.

Madrid and Brussels have approached the British government with a proposal for removing the border fence between Spain and Gibraltar in order to ease freedom of movement, Spain’s Foreign Minister José Manuel Albares said in late November 2022. There has been no immediate response from London.

The Gibraltarians refuse to accept Spanish boots on the ground and would prefer the European-wide Frontex border force. The British government feel this would be an impingement on British sovereignty. There’s also been the persistent issues of VAT and corporation tax considerations, as well as the British Navy base and how to police the waters around it.

Though there had been reports that the ongoing British driving license in Spain fiasco had been one of the reasons negotiations had stalled, the British ambassador to Spain Hugh Elliot categorically denied any connection between the issue of Gibraltar’s Brexit deal and British driving licence recognition earlier in November.

READ ALSO: CONFIRMED: Deal on UK licences in Spain agreed but still no exchange date

On different pages?

Not only do the long-standing sticking points remain, but it also seems that the various negotiating parties are on slightly different pages with regards to how exactly each seems to think the negotiations are going.

Judging by reports in the Spanish press in recent weeks, it appears that many in Spain may believe the negotiations are wrapping up and a conclusion could be found by New Year. This perception comes largely from comments made by Pascual Navarro, Spain’s State Secretary to the EU. Speaking to reporters in Brussels, Navarro claimed that negotiations have advanced so well that they were now only working ‘on the commas’ of the text – that is to say, tidying it up.

According to Gibraltar’s Chief Minister Fabian Picardo, though negotiations are ongoing, “we’re not there yet”. (Photo: JORGE GUERRERO/AFP)

“No issue that is blocked,” he said. “All of the text is on the table.” A full treaty, he suggested, could be signed “before the end of the year.”

Yet it seems the Gibraltarians don’t quite see the progress as positively as their neighbours. Last week the Gibraltar government, known as No.6, acknowledged Navarro’s optimism.

According to Gibraltar’s Chief Minister Fabian Picardo however, though negotiations are ongoing, “we’re not there yet”.

No.6 remains positive and hopes for a deal, but in recent weeks has also published technical contingency plans for businesses to prepare for what they are calling a ‘Non-Negotiated Outcome’ – effectively a ‘no-deal’ in normal Brexit jargon.

The UK, however, seem to be somewhere in the middle. Like Navarro, the British Foreign Secretary James Cleverly recently suggested at a House of Commons select committee that only “a relatively small number” of issues remain to be resolved.

However, he also acknowledged the possibility of a non-negotiated outcome. “I think it’s legitimate to look at that [planning for a non-negotiated outcome] as part of our thinking,” Mr Cleverly said. “But obviously we are trying to avoid an NNO.”

Election year

If no deal is found by New Year, that would mean that negotiations drag into 2023 – election years for both Picardo and Pedro Sánchez, Spain’s Prime Minister.

Gibraltar is expected to have elections sometime in the second-half of the year, and Sánchez has to call an election by the end of 2023.

In many ways, Spanish domestic politics has the potential to play a far greater role in Gibraltar’s fate than British politics. In fact, the shadow of Spanish politics looms over these negotiations and the future relationship between Spain and Gibraltar, the UK and Spain, and the UK and EU.

If Sánchez’s PSOE were to lose the election, which according to the latest polling data is the most probable outcome, then it would be likely that Spain’s centre-right party PP would seek to renegotiate, if not outright reject, any deal made.

READ ALSO: Who will win Spain’s 2023 election – Sánchez or Feijóo?

If PP are unable to secure a ruling majority, however, they may well be forced to rely on the far-right party Vox, who have often used nationalist anti-Gibraltar rhetoric as a political weapon. If Vox were to enter into government, which is unlikely but a possibility, it’s safe to say any agreement – if one is even reached before then – would be torn up and the Spanish government would take a much harder line in negotiations.

As the consequences of Brexit churn on in Britain, in Gibraltar uncertainty looms.

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