Archive for April, 2010
Spanish Capital Gains Tax Relief on the Main Home
Does It Apply On Overseas Properties?
The Spanish gains tax regulations can provide relief on the sale of the main home for Spanish tax residents whose property qualifies as their habitual main residence. If you are 65 years or older the gain is tax free even if you do not buy another property. If you are under 65, the exemption only applies if you reinvest the proceeds of sale into a new main residence within a four year period, starting from two years before the sale. There is some confusion about whether this relief applies if your new main home is located outside Spain, so this article looks into this issue.
How does the relief work?
For the property you are selling to qualify as your main home, you need to have lived in it for a continuous period of at least three years from the date the property was bought or construction was completed. If you have to sell earlier because of a change of job, marriage, separation or death of a partner, the tax relief can still apply.
The relief is based on the proportion of the total sales proceeds reinvested in the new home. If it costs more than the sale price of the old home, the full gain is exempt. If only half of the sale proceeds are reinvested, then only half of the gain is exempt and the other half is taxable in the year of sale.
If the property being sold has a mortgage on it, it is the net sale proceeds (after deducting the mortgage) which need to be fully reinvested to escape capital gains tax.
The taxpayer must declare the gain on his Spanish tax return together with his intention to reinvest the proceeds into a new main home, or the relief will not apply.
Location of the properties
While the tax relief is only available to Spanish tax residents (as the property cannot be your main home if you are not Spanish tax resident), the properties themselves do not need to be located in Spain – either the residence you are selling or the new one you are buying.
So, if you move to Spain and sell your main home in your former country of residence (eg the UK) after you become Spanish resident, you may be able to avoid Spanish capital gains tax under these provisions. You have to purchase your Spanish home within the two years preceding the date of sale of the UK property or within two years following the sale. The purchase price of the Spanish property should be at least the net sale proceeds of your UK property for full relief to apply.
If the Spanish property costs less than the amount you received from the sale of your UK property, you will be charged tax in Spain on a proportion of the gain equivalent to the sale proceeds not reinvested.
Similarly, if you sell your main home in Spain and move to another country, reinvestment relief can still apply to the former Spanish home even though the new home is not located in Spain, provided that you and your family make this property your new main home. The purchase of the new home must take place within the relevant time limits and the full sale proceeds must be reinvested for full relief to apply. If the family members move overseas to the new home, but the taxpayer remains in Spain, the relief will not apply as the property has not become the taxpayer’s new main home.
An example of relief applying in such a case is given in a formal response to a query submitted to the Spanish tax administration.
Furthermore, it would be a clear breach of EU law if Spain did not allow the relief for reinvestment in a new home situated within another EU country. This situation arose in Portugal, and so the European Commission took action, as below:
“In July 2004 the European Commission invited Portugal to change its rules which prohibit the capital gains tax relief where the new main home is situated outside Portugal. The European Commission considers these rules to be discriminatory and contrary to the EC Treaty rules on the free movement of people, etc.
“Portugal did not amend its legislation within the 2 months time limit given by the Commission, so in January 2005 the Commission decided to refer Portugal to the European Court of Justice.
“On 26 October 2006, the European Court of Justice ruled that the restriction of the relief to the purchase of a primary residence located in only Portugal was an infringement of the fundamental freedoms guaranteed by the EU Treaty.
“As a result of the European Court decision, taxpayers should be able to benefit from the main residence relief in Portugal, provided the proceeds are reinvested in another primary residence within the European Union.”
By David Franks, Chief Executive, Blevins Franks
Testing Times For The Euro
Over the last three years, the currency story for British expatriates has all been about the Pound Sterling and its fall from grace – it lost around a third of its value against the Euro and a fifth against the US Dollar.
This year the focus is shifting to the Euro. Uncertainty over Greece’s financial viability, not to mention concerns over other European economies, is plaguing the single currency. Some analysts have even queried whether it can survive.
The problems of sharing a single currency across countries with divergent political priorities and economies has been brought sharply into the spotlight, as have the difficulties of getting 16 Eurozone States to agree on a solution.
At the end of March Eurozone leaders reached agreement on a rescue fund for Greece, if needed. The Euro briefly strengthened as a result, but the sketchy details of the fund could not sustain the gains.
Eurozone finance ministers then took further steps to support Greece and prop up the Euro, announcing a €30 billion loans package on 11th April. The IMF is also expected to offer financial aid if needed.
At the time, Jean-Claude Juncker, head of the Eurozone group of finance ministers, said: “This is the step of clarification that markets are waiting for – it shows there is money behind this.”
The loans are available should Greece need them. Payments would only be made if all 16 Eurozone countries agree – and countries could potentially veto it.
The Euro hit a one-month high on the announcement, but it has dropped again since. Following the news that Greece’s budget deficit is worse than expected, and of another credit rating downgrade for the country, the Euro continued to slide towards a one-year low against the US Dollar.
The outlook is looking very challenging for the Euro. With 16 different nations involved, there are both political and legal restraints to fixing the single currency. Economists warn that the Eurozone still looks divided and little has been done to address the longer-term underlying problems it is facing.
Most British expatriates holding Sterling assets would be pleased to see a stronger Sterling and/or a weaker Euro. The lowest currency risk option for an individual is to match assets (bank deposits, investments etc) and liabilities (day-to-day expenditure) in the same currency. However, many British expatriates tend to retain a significant amount of assets in Sterling, including private pension arrangements, making them subject to the vagaries of currency exchange rate movements.
It is impossible to predict future currency movements with any certainty. However, in my opinion there is a strong possibility that the Euro could weaken further in the short to medium term while the Eurozone problems exist. I do not subscribe to the worst case scenario of the Euro failing, or of a Member State reverting to their original currency.
As a UBS Bank article reporting on research by its economists says, “Perhaps it would have been better for a number of countries if they had never joined the Euro. Nevertheless, the European Monetary Union is certainly not about to break up; at this stage, the costs would far exceed the benefits.”
Uncertainty about the fate of the Euro may be around for a while. What can you do to protect your assets? Swapping all your Euros to Sterling or another currency is not the answer. For a start you should have enough assets in Euros to meet your spending liabilities for a few years, and also there is no guarantee that Sterling or the US Dollar won’t fall more than the Euro. What you need to aim for, as much as possible, is diversification and flexibility.
When it comes to your savings and investments, you could diversify them over two or three currencies. Much depends on your individual circumstances, including whether you are likely to live in the Eurozone for the rest of your life, if there is any possibility that you will return to the UK and if you expect to leave an inheritance to heirs in the UK.
If you invest within an insurance bond choose one which allows currency flexibility, so you can switch currencies if the need arises. If you are waiting to invest, you could invest now in Sterling and if or when the exchange rate improves, switch some to Euros then.
The same goes for your UK private pension funds. If you were to, for example, transfer them into a QROPS (Qualifying Recognised Overseas Pension Scheme), this allows you to choose the currency for the underlying funds and the income. You can usually set it up in Sterling and switch to Euros later, or, if it is in Euros, have the option to convert to Sterling at a later date if your circumstances (or the fate of the Euro) change. However you should keep in mind the fact that, exchange rate movements may affect the value of your funds.
There are testing times ahead for the Euro. What happens to it is out of your control, but you can usually control your choice of savings, investment and pension structures so as to give yourself currency diversification and flexibility. Ask an experienced international wealth manager like Blevins Franks for advice.
By Bill Blevins, Managing Director, Blevins Franks
Opportunities For British New Tax Planning Expatriates – QNUPS
On the 15th February 2010, a new UK HM Revenue & Customs (HMRC) statutory instrument came into force, the implications of which create significant opportunities for British expatriates to save local taxes in Spain as well as UK inheritance tax (IHT).
The UK legislation has now created a new type of trust known as Qualifying Non-UK Pension Schemes (QNUPS) – which should not be confused with Qualifying Recognised Overseas Pension Schemes (QROPS).
As pension schemes are one of the key ways that most governments incentivise their citizens to save for their retirement, the tax rules are generally more favourable than other investment structures.
The problem for most retired expatriates is that they believe that their days of being able to put money into pension schemes are behind them; however QNUPS may significantly change many retired expatriates’ view on this.
Firstly, there is no maximum age at which you can invest in a QNUPS.
Secondly, you do not need to have any earned income from an employment in order to make a contribution.
Thirdly, there is no maximum contribution that can be made into a QNUPS.
The rules are sufficiently flexible to allow someone who is 85 years of age and has been retired for 25 years to put large investments into a QNUPS and immediately create significant tax advantages for themselves.
So what benefits do QNUPS give to retired British expatriates?
The main thing to remember is that a QNUPS is a pension scheme trust and as such you are entitled to take a cash lump sum and income during your lifetime, with the remainder of your fund being able to be passed to your spouse or heirs on your death free from all taxes.
The following advantages are available to you through a QNUPS:
- As a pension scheme, a QNUPS is very tax efficient in most countries as it can avoid both local wealth taxes during your lifetime and succession taxes on your death.
- A QNUPS also avoids local succession law, so that you are free to choose exactly who inherits your money and in what shares.
- Income can be taken from age 55 (after 6th April 2010) or it can be deferred as it does not need to be taken until age 75. In certain countries it can be paid in a manner where a significant portion can be paid to you tax free.
- When income is taken it is drawn down from the fund, thus leaving your scheme assets invested. Otherwise the assets grow free from tax.
- On death the value of the QNUPS will be exempt from UK inheritance tax and local succession taxes.
- A QNUPS offers considerable investment flexibility and choice. Furthermore your assets can be invested and any benefits taken in a currency of your choice, giving you the opportunity to remove currency risk.
- The trustees of a QNUPS have no reporting obligations to HMRC unless the scheme also holds any assets transferred from an authorised UK pension scheme. You can have both a QROPS and a QNUPS.
In essence QNUPS allow retired British expatriates to put their investable wealth into a pension structure and significantly improve their personal tax position as a result.
Solving the UK inheritance tax conundrum with a QNUPS
The only way to avoid UK inheritance tax is to become a non-UK domicile, which is NOT the same thing as becoming a non-UK resident. It can be very difficult to shrug off your UK domicile even though you may have lived overseas for many years and so your estate on death can be liable for tax of 40% (or probably more if a Labour Government is re-elected).
QNUPS immediately solves this problem even if you were to return to live in the UK. In fact, it avoids the tax even if you never left the UK to live overseas in the first place. You do not have to wait seven years to avoid the tax (which is the case under the PET or potentially exempt gift rules), and you do not have to give the assets away either. You and your spouse or partner can continue to benefit from the assets. It couldn’t be better!
By David Franks, Chief Executive, Blevins Franks
The Spanish Property Market
The Spanish property market has fallen victim to the current recession and taken with it many of the big building names in Spain who have gone into administration. Thousands of agencies have closed but hopefully illegal sellers who took advantage of the boom years will have disappeared also, they are no loss to an industry which is still reeling from bad publicity caused by illegal builds, land grab and corruption. That said, many of these matters are being dealt with and Spain has been addressing these problems for some time, with new legislation covering the building industry and the EU is taking an active part by investigating the plight of buyers caught in financial and legal nightmares over homes they bought in good faith.
During the boom years, thousands of homes were built and sold as people rushed to own a second holiday home but gave little thought to what and where they were buying, how much they were spending and how it would all be paid for in the future and many were blinded by the glossy pictures and over emphasised spiel of the big agencies that herded them into large urbanisations. Now we see hundreds of ex-pats returning home as the crisis has crushed their dreams, interest rates eroded their savings, losing jobs they thought they had for life and crippled by large mortgages and without the means to pay them, many have had their homes repossessed.
However, for many their life in Spain continues, they are happy and take an active part in the community and town activities in which they live and would never dream of returning to the UK or country of birth.
There are of course properties which have been slashed in price to sell them but what you must ask yourself is, why? It could be that the owner is so desperate that they will take anything to return home but it may be because they bought in the wrong location to begin with? If that is the case, you may buy the property very cheaply and be happy with that but what if you want to sell it again yourself? Will you be able to or will you be in the same plight as the current seller?
Many people still want to buy property in Spain and now is the time to buy before the VAT increases in July and there are many bargains to be found and in the right place to buy.
No, they will not be detached villas with sea views for 50,000 euros, they are piped dreams but there are properties now being sold at thousands of euros below market value, in nice areas near the sea and are good long term investments for when the market recovers. The Spanish are searching along the coast for such bargains as they are well aware that the market will recover and prices will increase, so are jumping on the bandwagon now.
Some advice:-
- Don’t be deceived by glossy brochures and the hype of property fairs.
- Research areas as much as you can on the internet or your local library.
- Do come to Spain and look for yourselves without the pressure of inspection trips.
- Never exceed your budget.
- Always use a solicitor.
- Choose an accredited agent, who will assist you throughout and after the purchase. We recommend WiseBuySpain.com
Editor 13 April 2010
You are currently browsing the SpanishPropertyBuyer.com blog archives for April, 2010.