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Property Rental Income in Spain

By Jeremy Ferguson - Topics: Spain, tax advice, Tax in Spain
This article is published on: 23rd April 2021

For a Spanish Resident, property rental income can be incredibly tax efficient

It is commonplace to overhear conversations or see comments on social media where people are talking about how high taxes are in Spain compared to the UK.
By my reckoning, for the average person income tax and other taxes aren’t that much different between the two countries.

What you very rarely hear people talk about though, are some of the quite frankly amazing tax breaks available here. I use the word ‘breaks’ a little tongue in cheek, but if you are a Spanish resident, the tax treatment of residential rental income is a good example of why I choose to use those words.

Many people move here from the UK keeping what was their main family home there, and deciding to rent it out on a long term basis. It is surprising how many people have no idea what a tax efficient source of income that can prove to be.

Many expenses, as well as mortgage interest, are allowable deductions. Furthermore a 60% reduction is then applied to the final taxable amount. Even lesser known is the fact there is a further annual depreciation allowance of 3% of the rebuild cost, but if this figure is not known, then this is reduced to 1.5% of the property value.

property investment Spain

As examples are normally the best way to explain how this works in practice, let’s look at one:
A couple own a UK property, which they bought for £500,000 , still owing £150,000 on the mortgage. They rent this when they move to Spain for £2,500 per month.

So their overall situation will look like this:

  • £30,000 gross annual rental income
  • £500,000 original purchase cost
  • £3,600 annual rental agent and  property management fees
  • £2,500 annual repairs and other property expenses, including legal and accountancy
  • £2,250 mortgage interest for the year
  • The property was let out throughout the year

SPANISH TAX CALCULATIONS

Tax calculations
Gross rent 30,000
Less:
Loan interest (1) 2,250
Rental agent 3,600
Repairs and other costs 2,500
Depreciation at 1.5% (3) 7,500
Total deductions 15,850
Net rental income 14,150
Deduction available for residential rental income at 60% (4) 8,490
Net taxable income subject to the general tax regime 5,660

This therefore means the taxable income due is based on a figure of just £5,560 at the clients highest marginal rate of income tax.

So let’s assume the client’s tax rate is 30.9% (which would be typical for a couple with healthy pension income); they would be paying £1748.94 in total for the rental income they received.

So if property rental income is an important source of income for you, then Spain really is an attractive place to be living. The same allowances will apply if you have a portfolio of buy to let properties in the UK rented on a long term basis.

Investment income, if coming from an appropriate investment, can also be extremely tax efficient in Spain, so if you would like to know more about how your specific circumstances might benefit, then please contact me to discuss in more detail.

I would like to thank Spence Clarke and Co, Chartered Accountants in Marbella for providing the figures in the above example, and for their ongoing support to many of our clients.

Article by Jeremy Ferguson

If you are based in the Marbella area you can contact Jeremy at: jeremy.ferguson@spectrum-ifa.com for more information. If you are based in another area within Europe, please complete the form below and we will put a local adviser in touch with you.

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