Tax On European Properties After BREXIT
Despite a last-minute attempt at negotiations, the UK left the European Union on the 31st December 2020 without a deal.
Under the terms of a ‘no deal BREXIT’ - UK residents will only be permitted to visit EU countries for a total of 90 days out of every 180 days. This affects many who own second homes in Europe and who would be spending six months in their foreign home whilst letting it for the other six months.
This article highlights some of the tax implications for UK residents who own second homes in France and Spain.
Capital Gains Tax
An immediate practical implication is the requirement to appoint a French tax representative when selling a property. Under current legislation, any seller of French property who is domiciled in the European Union may use the same procedures as French residents. Formalities are dealt with by the ‘Notaire’ who deals with the transfer of the property, completes the required capital gains and social contributions computations and files this on the seller's behalf.
Sellers who are a resident of a non-EU country are required to appoint a French tax representative based in France. Since the representative must take full responsibility for the computation and filing of the gain, the seller will usually be directed to a professional representation company that has received permanent accreditation from the tax authorities and whose fees may be as high as 3% of the sale price.
There are certain exemptions from the requirement to appoint a tax representative, most notably that it does not apply to a sale price of €150,000 per owner. Other exemptions relate to the structures in which the property is held and are beyond the scope of this article.
Main residence relief
A UK national who is currently resident in France and the owner of his main home in France who moved back to the UK in January 2021, has until 31st December 2022 to complete on a sale of his French property, to be able to claim the main residence exemption.
A non-resident who has previously lived in France and sells a French property for the first time and meets certain conditions can claim an exemption from capital gains tax of up to €150,000 per seller. However, this only applies to sellers who are nationals of another EU country or an EEA state. Thus, since the 1st January 2021 a UK national selling a French property will not be able to benefit from the exemption any longer.
In addition to the standard capital gains tax rate of 26.5% for UK residents disposing of French property, gains on the sale of French property are also subject to French social surcharges called “prélèvements sociaux” at a current rate of 17.2%. Currently, UK residents who can prove that they contribute to an equivalent UK social security and health services tax can have this charge reduced to 7.5%
Since 1st January 2021, UK residents selling French properties will be subject to the French social contribution at the full rate of 17.2% with no possibility of exemption, unless they can provide evidence that they are registered with, and affiliated to, the social security and health care system of another EU or EEA country.
UK residents who let property in Spain are also going to be affected in a few ways.
Non-residents who rent out a property in Spain must declare their earnings by submitting form 210 on a quarterly basis. Under current legislation, foreign non-resident homeowners from the EU, Norway and Iceland can claim back property-related expenses such as mortgage interest, rates, and insurance which non-EU resident property owners cannot.
In addition, the non-resident rate at which rental income is taxed is 19% for EU residents and 24% for non-EU residents.
Therefore since the 1st January 20201, UK residents who let property in Spain will have to pay tax on their gross rental income and at a higher rate.
Interestingly, tax has to be paid on property in Spain regardless of whether it’s being rented out or not. A deemed rent of up to 2% of the “valor catastral” rateable value of the property is applied which would also be taxable at the 24% non-resident rate.
Capital Gains Tax
Those aged over 65, who have lived in a Spanish property for at least three years, will still be able to claim the equivalent of the main residence relief which provides full exemption from capital gains tax on disposal. For those under 65, the exemption from capital gains tax can only be claimed if they acquire a new home within the EU or EEA. Since 1st January 2021, if the replacement home is purchased in the UK, this relief will not be available.
If you would like further advice on the effects of BREXIT, get in touch with us today!