UK and Spanish tax implications of a property in Spain

Both Spain and the UK tax offices want their cut

If you own a holiday home abroad and live in the UK then the rent is taxable income.  This message was reinforced recently when the British press was full of stories like this one about a Revenue crackdown on "rich" second home owners:

Taxman pursues Britons hiding holiday rent on overseas homes

So it is clear that the British tax authorities are making an effort to uncover undeclared rental income from holiday homes using land registry information abroad and looking at holiday rental websites.  It is also a fact that the Spanish tax office (la Agencia Tributaria) are looking hard at the same income because of course any income earned in Spain by non-residents is declarable and taxable there too.  The Spanish authorities have access to a lot more information in their efforts to crack down on tax evasion ("authorities tackle tax avoidance in Spain").

So what do you do if you want to stay within the law and keep both tax juridictions happy?  Here is a guide to how rental income is dealt with in each country:

1.  UK Income Tax on Rent Received

You need to declare your Spanish holiday rental income on your UK tax return of course.  The rental profit is calculated in much the same way as that earned from a UK property.  These are the allowable type of expenses:

These are examples of disallowable expenses:

- Improvements rather than just maintenance e.g. putting in a jacuzzi as opposed to redecorating

- Capital part of any mortgage (like in Spain)

- Costs while the property is empty

- Property sale and purchase costs

If you have multiple properties, perhaps in the UK and in Spain, you can’t lump all the profits together because of the tax relief issue discussed below.

One special thing about renting abroad is that any rent received in a currency other than sterling has to be translated into sterling at the exchange rate when the rent falls due.

2. Spanish Income Tax on Rent Received

The income from the rental of a dwelling is calculated as the total income received less deductible expenses and after application of a deduction of 50%.

The following are normally allowable:

- Interest and financing costs associated with acquiring, improving housing, transferred or appliances in the home.  Essentially this means the mortgage interest if there is a mortgage on the property.  If you look at the monthly mortgage statement from the bank it will split the cost between “interes” (interest) and “amortizacion” (capital) and it is the interest that is deductible.

- Taxes or fees such as property tax (IBI or SUMA) and rubbish collection 

- Expenses incurred in drawing up the tenancy agreement

- Maintenance and repair expenses.

- Expenditure on services and supplies to the property where these are covered by the lessor.

- Expenditure on administration and community fees

- Insurance premiums

The net result is reduced by 50% if the property is rented out as someone’s main home.  The deduction doesn’t apply to rent received from commercial premises like offices or shops.   The reduction may increase to 100% when the renter is under 35 years.

On a legal note there is are two obligations that come with being a landlord when you are selling the property with a sitting tenant.  The first of these is that you must offer the tenant first refusal and give them 30 days to decide.  Secondly you must inform a third party buyer that there is a tenant and they must respect the agreement you have entered into with the tenant.

See also Taxation of Rental Properties in Spain You may also want to bookmark our ADVICE page which has categorised articles on most aspects of Spanish tax and much else besides.