What is capital gains tax and how is it calculated?
Capital gains tax is the tax that you are liable to pay on the earned profits that arise when selling your assets, such as; stocks, bonds or property during the calendar year.
The net profit of the transaction is calculated according to the following:
- The Final Sale Figure refers to the amount for which the sale was made, providing that it is not lower than the market value, in which case this value would prevail. The expenses and taxes inherent to the transfer that have been paid by the seller will be deducted, such as, among others, real estate expenses, and notary’s fees.
Another important cost to take into account is the Tax on the Increase in the Value of Urban Land, also known as “Plusvalía municipal” Council Tax that is accrued when transferring a property. It is the seller who is liable to pay this and will vary depending on the town where the land on which the property sits, is found, and the amount of years you have owned it.
- The True Purchase Price is made up by a base value which is either the price that appears on the deeds, or the assigned value for Inheritance Tax purposes, plus the expenses and taxes inherent to when the property was purchased (for example, notary’s fees, land registry fees, agency fees, lawyer’s fees, commissions, VAT, IHT or transfer tax expenses)
Expenses from improving investments in your property also increase the purchase price (For example installing solar panels or lifts, building a pool…). However, repair or maintenance costs are not included. Sometimes the line between the two is very fine, in which case it is important to seek professional advice to make sure which meet the requirements to be considered an improvement.
Nevertheless, for these expenses to be taken into account, you must be able to justify them with the corresponding invoices from whoever carried out the work or provided the services.
Finally, if your property has been rented out, you may also include the depreciation cost.
How much will I be taxed?
When the object of the transaction is a property situated on Spanish territory, tax will be liable, whether you are a resident or not. However, the consequences are set differently for those owners that don’t live in Spain.
Capital gains tax in Spain for non-residents
When selling a property, the applicable percentage for non-residents is a fixed rate of 19%.
Also, when you sell your property, to enforce this rule, the Spanish Tax Authority withholds 3% from the sale of your property. It is taken directly from the buyer, so you receive 97% of the sale price. The reason behind this is a safety measure so that non-residents don’t disappear before they have settled their capital gains tax account.
The buyer must pay this amount into the Spanish Tax Office within a month of the sale presenting the Modelo 211. Then, if you are liable to pay CGT, in the next three months you must present your Non-Resident Income Tax declaration via the Modelo 210.
Even if you are not liable to pay this because there was no capital gain, it is still recommended to present this form so you can get refunded the percentage that was withheld.
Capital gains tax in Spain for residents
Remember, you will be considered a tax resident in Spain when you reside in the country for more than 183 days per calendar year.
The amount of capital gains tax that residents pay is incremental. Therefore, as a resident, the spanish capital gains tax applicable is:
- 19%for the first 6.000 € profit
- 21% from 6,000 € to 50.000€
- 23% from 50,000€ upwards
- 26%from 200.000€ onwards
Can I claim tax relief as a tax liable resident in Spain?
As a tax resident in Spain there are three different scenarios which are very important to bear in mind when selling a property, because if you meet the requirements you may not have to pay the full amount of capital gains tax.
First exemption: Selling your main home.
This first case involves selling your main home and reinvesting the profit into the purchase of your next home. Some of the main points to consider whether you are eligible for this type of relief are as follows:
A property will be considered your main home when you have lived there for 3 years.
If you haven’t quite made the three-year threshold and there is a compelling reason why you have to sell, the Spanish Tax Authority will take this into account. So, for example, if you have a medical issue that means you need to downsize, or if you have to move because of work-related reasons, then the Spanish Tax Authority will take this into consideration.
- The reinvestment must take place in the space of two years fromthe sale date.
- The new purchase must be located in Spainor any other country within the European Union.
- If the reinvestment is worth less than the total amount obtained from the sale, you can enjoy a partial exemption, meaning that only a proportional part of the capital gains corresponding to the amount effectively reinvested, under the conditions indicated above, will be excluded from taxation.
Second possible exemption: For anyone aged 65 or over.
If you are 65 years old or over, you won’t be liable to pay any capital gains tax when selling your main home, regardless of whether you reinvest the money into a new home or not.
Again, to benefit from this exemption, the property you are selling must be your regular residence and you must have lived there as a tax resident for a minimum of three years.
If the property represents a second residence or a holiday home, there is another way of relief that could be of interest. The profit obtained from the sale can also be free of capital gains tax as a result of reinvesting the received capital in a life annuity.
- The reinvestment must take place in the space of six monthsfrom the sale date.
- The maximum amount that can be invested in the annuity is 240.000€
Third exemption: Selling properties that were purchased before 1995.
In this last case, if you are thinking of selling a property that you bought before 1995 then you will be able to enjoy a tax reduction. Nevertheless, there are two things to consider:
- This relief will only be applicable to the proportion of the gains produced until January 2006. Any gains in the asset’s value made after this date won´t include reductions and will be taxed at the normal rate.
- In addition, to be able to enjoy from this reduction, the property in question must have been purchased for 000€+.
If your property meets these requirements, then could enjoy a reduction of 11%.
What about if I am resident and selling my home in the UK / USA, or an EU country?
In Spain, as in many European countries, you are liable for tax on your global income. If you are a resident in Spain and sell your property located in a non- European country or another EU country, then you are also liable to pay capital gains tax in Spain.
You must declare the income from the sale on your income tax return. However, it is important to remember that this declaration covers the previous year. Therefore, if you sold your house in April 2021, you will have to declare it on the following 720 form and income tax return (from January until March for 720: from April to June 2022 for the income tax return).
We highly recommend you to start tax planning to avoid possible surprises in the future.
If you would like us to study your specific situation, please do not hesitate to contact us today.