If you are looking for your dream home in Mallorca, you’ll enjoy the search. There are so many wonderful properties here, to suit all budgets and personal preferences, you will be spoiled for choice.
But when weighing up the cost of a property, besides considering the asking price and running costs, you should also be aware of the various tax implications – from purchase taxes to annual wealth tax, to capital gains tax or succession tax. This applies whether you intend to live on the island or use the property as a holiday home or investment.
Purchase and local taxes
When buying property in Spain, you pay either 10% VAT (Impuesto Sobre El Valor Añadido - IVA) if it is a new build, or a property transfer tax (Impuesto Sobre Transmisiones Patrimoniales - ITP) for other residential property acquisitions. In the Balearics, this ranges from 8% to 11% depending on the value (some exceptions apply).
You also pay Actos Jurídicos Documentados (stamp duty) which is generally 1.2% of the property value in the Balearics.
You are also liable for the local council tax known as Impuesto Sobre Bienes Inmuebles (IBI) on Spanish residential property, based on the official value of your property (valor catastral).
Annual wealth tax
Be aware that residents of Spain are liable to wealth tax on their worldwide assets every year. If you are a non-resident, only your Spanish assets are assessed. So this is always something to consider when buying Spanish property, particularly high-end properties or if you have substantial wealth.
Both Spanish residents and non-residents receive a €700,000 personal allowance, and if you are a resident you receive an extra €300,000 main home allowance. Resident couples owning a property in joint names could benefit from a total tax-free allowance of up to €2 million.
Wealth tax rates in the Balearics range from 0.28% for taxable assets up to €170,472 to 3.45% for assets over € 10,909,915 (as of September 2021).
Income tax (rental income and notional rental income)
Unsurprisingly, if you rent out Spanish property you will pay income tax on the income.
The general scale rates of income tax apply for residents, ranging from 19% to 49.5% in the Balearics (as of September 2021). For long-term lets, you could get a 60% tax reduction against the net rental income.
Tax for non-residents depends on where you live. EU/EEA residents currently pay a flat 19% tax rate on the net income, after deduction of some expenses. Non-EU/EEA residents – which now includes UK nationals – pay 24% of the gross rental income and cannot deduct any expenses.
More surprisingly, if you own a Spanish holiday home or property not used as your main home, tax is also payable on ‘notional rental income’ for the period it is not rented out. This is generally based on 1.1% of the valor catastral (2% if the value has not been revised within ten years). This is added to other general income and taxed at the progressive income tax rates for Spanish residents. For non-residents, it’s taxed at 19% for EU/EEA residents and 24% for others.
Capital gains tax
If the time comes for you to sell your Mallorca property, the gain will be subject to tax in Spain.
If you are resident in Spain at the time, the gain is added to your other investment income and gains for the year and taxed using the ‘savings income’ rates, currently:
Up to €6,000 – 19%
€6,000 to €50,000 – 21%
€50,000 to €200,000 – 23%
Over €200,000 – 26%
If you (as a Spanish resident) are aged over 65 when you sell a property that has been your main home, you will not have to pay tax provided certain requirements are met. If you are younger than 65 you may also be eligible for this relief if you use the full proceeds to buy another main home within the EU/EEA within two years.
If you are not resident in Spain, capital gains tax is charged at a flat rate of 19%.
You may also have to pay Plusvalía municipal when selling a property (whether residents or non-resident). This local land tax is payable on the increase in the value of the land (excluding buildings); the amount varies according to the size of the local population and length of ownership.
Succession and gift tax
Finally, consider how much tax your beneficiaries will pay if they inherit the property on your death (or you gift it to them during your lifetime). Succession tax is always due on Spanish property, regardless of where you and your heirs are resident.
Tax rates depend on who the beneficiary is and the amount inherited or gifted. In the Balearics rates for inheritances (not gifts) between spouses, direct descendants and ascendants range from 1% to 20%; for others they vary between 7.65% and 34%.
The Balearics provides a 100% reduction against the value of the main home, but up to a maximum of €180,000. Generally, this allowance is available to spouses, descendants and ascendants and only if they keep the home for at least five years.
Additionally, there are some personal reductions: €25,000 for close relatives, €8,000 for other relatives and €1,000 for non-family.
Owning property through a company
Changes over the years have diluted the tax advantages of owning Spanish property through a company. ‘Enveloped’ property today attracts savings income tax on profits and is liable for wealth and succession taxes without being eligible for any of the main home allowances. Spanish corporation tax may also be due in some cases. Seek objective advice and carefully weigh the pros and cons.
Spanish tax can be highly complex, especially if you have to consider the tax regime in your home country and how they interact. Everyone’s situation is different, and the rules change over the years, so take specialist wealth management advice to establish what you could do to lower your tax liabilities – you may be surprised by how much you can reduce your overall tax bill.
Blevins Franks has decades of experience supporting expatriates in Spain with specialist tax planning, as well as pensions, estate planning and investment management services. They have had an office in Mallorca for over 20 years and their local advisers have the cross-border expertise to make sure your financial affairs are in order so you can relax and enjoy your new home away from home in beautiful Mallorca.
By Cathal Rochford, Partner, Blevins Franks. Fine & Country Mallorca would be delighted to introduce you to Cathal.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.