Dominic Coyleanswers your questions.
Spanish steps
Some time ago you published a query from a reader who had been taxed on notional rental income from a Spanish property even though it was not let. Could you repeat the circumstances in which this charge arises, please, and if possible, the manner in which it is calculated?
AQ, email
The last time I addressed this in any detail was in 2003 and I gather the rules have been amended slightly since then. Tax is one of the major considerations when buying property abroad and far too many people blindly go where the sales patter directs before considering the longer-term implications.
This is particularly important in relation to Spain because there are a plethora of taxes awaiting the unsuspecting foreign buyer both in the acquisition and disposal of the property and, as you remark, during your period of ownership.
The particular issue you raise is the question of deemed rental income or Impuesto sobre la Renta de No Residentes (declaración ordinaria) - known as IRNR.
Basically, although you may not be receiving any income on your Spanish home, the local tax authorities have decided that you are getting a benefit from ownership and therefore have to pay a tax. The tax applies as long as you are not resident in Spain, the property is exclusively for your personal use, and you have no other source of taxable income in Spain. Naturally, if you are renting out the property, income tax will apply - probably at the higher non-resident rate.
As of the start of this year, the tax is assessed at 24 per cent of 1.1 per cent of the property's valor catastral per annum. Thus, if the valor catastral (the assessed value of the property for tax purposes, explained below) is €250,000, 1.1 per cent of this will be €2,750. A 24 per cent tax rate would yield an annual liability of €660. The tax rate has actually come down slightly. Before this year, it was 25 per cent.
If the valor catastral has not been revised since 1994, the tax is levied at 24 per cent of 2 per cent of the existing valor catastral. There are no provisions for deductions against this sum for improvements or other costs incurred in owning the property.
The tax is paid in the first six months of the year following the year to which it applies, ie between January and June 2007 for the 2006 tax year
The valor catastral is assessed by the local authority and, in the case of most property currently owned by Irish residents, is likely to have been set since 1994. It equates to municipal rates, which would be more familiar to English homeowners, and is generally lower than the market value of the property.
The valor catastral can be found on the documents relating to the Impuesto sobre Bienes Inmuebles (IBI), a separate property tax levied locally across Spain. This ranges, in general, between 0.4 per cent and 1.1 per cent of the valor catastral.
On top of these taxes, you also face an annual nonresident wealth tax - the Impuesto sobre el Patrimonio. This is assessed on your net assets in Spain - which allows for deductions for Spanish mortgages on local properties, for instance. It works on a sliding scale with rates levied at anything from 0.2 per cent to 2.5 per cent per annum. Again, it is payable in the June following the year of assessment.
Given the range of taxes - and associated forms to be filled in - just for ongoing ownership, there could be a lot to be said for hiring a Spanish accountant to ensure you are compliant.
