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Capital Gains Tax

A rough guide to Capital Gains Tax on property in Spain.
 
If you sell a Spanish property more than one year after purchasing it, then you are liable to pay Spanish capital gains tax (GGT) on the difference between the amount that you sell the property for and the amount that you declared having purchased it for previously, minus any inflationary gain. A non-resident will pay Spanish CGT tax at 35% and residents will pay at a rate of 15%. A resident may have the option to ''roll'' the tax into another property provided that it is a single main residence.
 
Although the figure of 35% for non-residents sounds high, CGT is subject to an annual indexation (inflationary) tax relief. This means that an allowance is subtracted from the profit before the CGT rate is applied. A Non-resident who purchased their property before 1986 actually has no CGT tax to pay on sale. Whereas non-residents who purchased their properties between 1986 and 1998 have a complicated tax position as both the old formula (an indexing allowance of about 11 % per annum) and the new formula (an indexing similar to the rate of inflation, recently about 1 %) need to be considered. Non-residents are liable for a "cautionary" retention tax of 5% when they come to sell their Spanish property. When a non-resident sells their Spanish property their buyers pay 5% of the sales price (retention tax) directly to the Spanish tax authorities and the sellers will only receive 95% of the sales price. This retention tax is kept "on account" by the Spanish tax authorities until the non-residents capital gains tax is calculated. Once the capital gain is determined (i.e. the profit minus any inflationary considerations for the period that the property was owned) and the appropriate CGT is calculated, the Spanish tax authorities will deduct the retention tax from the CGT that is liable. If the CGT liable on the sale of the Spanish property is more than the 5% retention tax that is held "on account" then the non-resident has to pay the difference. If, however the CGT liable on the sale of the Spanish property is less than the 5% retention tax that is held "on account" then the non-resident is reimbursed the difference by the Spanish tax authorities.
 
Property acquired before 1st January 1997. The acquisition cost of the property (which includes the price paid for it plus the related expenses and the cost of any improvement work, having regard to the year when such work was done) is increased by applying to it the indexation rates published in the annual Finance Act. The difference between this increased acquisition cost and the selling price of the property is the initial capital gain. This initial gain is then further reduced by 11.11%for each year, discounting the first two during which the property has been owned by the seller, up to the 31st December 1996.
 
Property acquired after 31st December 1996. no reduction (i.e. 11.11% p.a.) is applicable to the gain realised. Only the indexation rates published annually in the Finance Acts will be applied to the acquisition cost.
 
The purchase value is the price paid for the property plus allowable expenses and taxes paid on the purchase and
the appropriate coefficient is then applied relative to the year of purchase as per the list below.

1994 and before - 1.1146
1995 - 1.2108
1996 - 1.1694
1997 - 1.1461
1998 - 1.238
1999 - 1.1036
2000 - 1.0824
2001 - 1.0612
2002 - 1.0404
2003 - 1.02
2004 - 1

The selling price for calculating Capital Gains Tax.

The selling price as you would imagine is the actual price for which the property has been sold, deducting the relevant taxes and expenses incurred by the seller of the property in Spain. Legal fees, taxes and agents commission can also be deducted from the actual selling price of the property. However, improvements made to the property of the ownership period also have to be taken into account in order to calculate the CGT. This is only true if the construction is legally and administratively documented and invoices are present showing IVA (VAT) for all work that was carried out on the property.

An example of such calculations could be as follows:

Mr & Mrs A purchased a villa in 2002 for 350,000 euros and sold it in February 2005 for 460,000 euros.

In 2002 Mr & Mrs A paid out the following sums:
24,500 euros (transfer tax @ 7 percent)
1,000 euros (Notary and land registry) 
3,500 euros (legal fees)
Total of 29,000 euros

The total cost of acquisition was:
350,000 euros for the property
29,000 euros in additional costs
giving a total of 379,000 eurosCalculator

To adjust the cost using the relevant coefficient for 2002 you need to multiply by 1.0404 to give a final total of 394,311.60 euros.

When the property was sold by they incurred the following costs: 
23,000 euros 5 percent agents commission 
4,600 euros in legal fees 
550 euros Plusvalia
A total of 28,150 euros

The CGT would be calculated as follows:
X = The total selling price of 460,000 euros less the costs of 28,150 euros
Total of  431,850 euros

Y = The total acquisition cost plus the purchase costs
Total of 394,311.60 euros including the coefficient adjustment.

The capital gain (X-Y) which is 37,538.40 euros.
The CGT rate for non residents of Spain is 35% therefore the Capital Gains Tax is 13,138.44 euros.

5 percent withholding tax for a non resident is paid on account of CGT 23,000 euros.

In this case there would be a tax credit for the balance between the 5 percent withholding tax of 23,000 euros and the total CGT of 13,138,44 euros. This excess amount of 9861,56 euros can be claimed directly from the tax office within 3 months from the date when the 5 percent withholding tax was initially paid.

If the seller purchased the property before 31st December 1986, the CGT would be zero with no obligation to pay the 5 percent withholding tax.

As a resident in Spain there are some advantages in respect of Capital Gains Tax on the sale of property. These factors should be considered carefully when you buy a property in Spain if you want to avoid any unnecessary taxes.

Residents:

There is no withholding tax on the sale of property
The capital gain can be exempt if reinvesting in a new main home (totally or partially)
When the seller is over 65 and the main home is sold there is an exception on CGT so long as certain requirements are met then the rate of CGT can be reduced to 15%.

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