UK holiday homes in Spain attract capital gains tax rebate

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In a move which could eventually cost the Spanish authorities hundreds of millions of pounds it has been revealed that a private action by two UK property owners with a holiday home in Spain has been successful in reclaiming a 20% CGT rebate from the Spanish authorities. So what exactly is going on with the Spanish holiday home market and capital gains tax for non-residents?

The Spanish capital gains tax regime

Under Spanish regulations prior to 2007, all non-residents of Spain attracted a capital gains tax levy of 35%, against just 15% for residents of Spain, when crystallising capital gains. Alan Roy and Margaret Roy took the Spanish government to court believing that under EU regulations all EU residents should be treated the same irrespective of their resident or non-resident status.

While capital gains tax may well just be the tip of the iceberg and we may see other tax adjustments across Spain and across the rest of Europe this particular ruling could lead to substantial windfalls for up to 10,000 UK property investors who bought and sold property in Spain prior to 2007.

The case of Alan and Margaret Roy

The names of Alan and Margaret Roy will likely go down in history as they could potentially bring average windfalls of up to £18,000 for up to 10,000 UK investors who have bought and sold property in Spain. In summary the Roy family acquired a Spanish property in 2001 for a total cost of €150,000 which they then sold in 2004 for €160,000 which crystallised a gain of €10,000. The couple were then charged Spanish non-residents tax on their capital gains which amounted to 35% of the gain as oppose to the 15% levy placed on Spanish residents.

It was at this stage that the Roy family decided to take their action to the European Courts where a ruling in 2008 confirmed that the differential between rates was a direct contravention of European Union legislation and EU non-residents should not be charged more than residents of any other EU country. After the complaint was upheld by the EU Courts this was ratified by the Spanish courts as the authorities looked to avoid a hearing at the European Court of Justice.

As well as the 20% rebate (i.e. the difference between 35% and 15%) the Spanish authorities have also agreed to pay interest on any excess capital gains tax levies which lawyers suggest will be around about 6%. If this is the case then up to 10,000 UK investors could be in line for an average payout of £14,100 plus interest which could take the figure to a sizeable £18,000. However, those with a potential claim need to ensure they register as soon as possible because under Spanish law those who sold properties before November 2004 and after the rule change in 2007 may not qualify for compensation.

The cost to the Spanish government

It is estimated that up to 10,000 UK investors could be in line for compensation which could total around £140 million although the figure is estimated at over £350 million when taking into account all other European countries and those who have invested in Spain. However, this may well just be the tip of the iceberg because there are other European countries with similar tax regimes which could and will probably fall foul of EU regulations.

At this moment in time the Spanish courts have around 260 Britons who are actively pursuing a compensation claim and another 340 who have registered their details and are waiting for their actions to begin. While the initial case brought by the Roy’s took some time to reach a conclusion it should be fairly straightforward now that a precedent has been set and compensation claims should be settled in a far shorter timescale.

Taxation on property

As any property investor will be aware, the taxation issues surrounding property both at home and overseas can change on a regular basis and it is vital that professional advice is taken when looking into these markets. The fact that the Roy’s decided to take action against the differential in tax regimes has been beneficial to them but will have far-reaching consequences for both overseas investors and the Spanish government in particular. There will also be a number of other EU governments checking the small print of their taxation regimes and awaiting potential similar cases in due course.

The Spanish property market

It is ironic that this case has been proven and moved towards the compensation stage at a time when the Spanish property market is under serious pressure. More and more investors are selling up and repatriating their investment funds as property prices in the more tourist related areas of Spain show significantly higher falls than the more industrialised property markets.

While potential compensation claims of up to £350 million are but a drop in the ocean in the context of a national budget, this potential cost could not have come at a worse time for the Spanish government which like many European counterparts is struggling to stay above water.

While the fall in the value of sterling has benefited some property investors who have sold up and repatriated their funds, overall the last 12 months have been a very difficult time for those with exposure to the Spanish property market.

Conclusion

More and more we are seeing EU policies and the EU legislation directly impacting upon the ability of local governments to govern in a manner which they see fit and have done for hundreds of years. The fact that the Spanish authorities effectively gave up the fight once the EU ruling was published, in order to avoid a hearing at the European Court of Justice, shows the strength of the EU and the power it holds over EU members.

The 20% rebate plus interest will be well received by those directly affected although for many who have reinvested elsewhere it may come as too little too late. Unfortunately, as the worldwide property market continues to struggle, and with the European Central Bank following the likes of the UK government in reducing interest rates and also considering the use of quantitative easing to kick-start economies, it looks as though the next 12 months could be as bad if not worse than 2008.

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