Owning rental property in the UK has long been an attractive investment due to the strong legal framework, high demand for housing, and potential for capital growth. However, when you move to Spain while continuing to rent out a property in the UK, the tax implications become more complicated.
If you’re already living in Spain or planning to relocate, it’s essential to understand your tax obligations. This guide explains what you need to declare, what you can deduct, and whether maintaining your UK property is still a smart choice under Spain’s tax regime.
To begin, it's crucial to know if you are considered a Spanish tax resident. If you spend more than 183 days in Spain or your primary economic interests are located there, you are deemed a Spanish tax resident. As such, Spain will tax your worldwide income, including rental income from UK property. Even if you maintain UK citizenship, once you become a tax resident in Spain, you must follow Spanish tax laws for all of your global assets.
Renting out a UK property while residing in Spain requires careful tax planning. For long-term lettings, you must declare the gross rental income on your Spanish personal income tax return. Spain uses a progressive tax scale ranging from 19% to 47%, depending on your total worldwide income.
If you’re letting the property long-term, you could benefit from a 60% reduction on your net rental income, provided the rental contract exceeds 12 months. However, it’s essential to bear in mind that Spain has strict rules for deducting expenses. You can deduct costs such as mortgage interest, local council tax, UK property taxes, building insurance, property management fees, agency letting fees, maintenance and repairs (excluding improvements), utility bills (if paid by you), and depreciation on the building and furniture.
The key requirement is proper documentation. To claim these deductions, you must have official invoices (or facturas) in Spanish-compliant format. Without valid invoices, you cannot claim the deductions, no matter how legitimate the expense may seem.
Although you are now a tax resident in Spain, your obligations to the UK tax system remain. As a non-resident landlord, you are still required to pay UK income tax on rental profits, typically at a rate of 20%. However, the UK and Spain have a Double Taxation Agreement (DTA) in place, which means that the tax you pay in the UK can be offset against your Spanish tax liability, but only to a certain extent.
You’ll need to file a UK Self-Assessment tax return each year, reporting your rental income from the UK property. Simultaneously, the same income must be reported on your Spanish tax return. Additionally, you will need to apply for tax credit relief in Spain for the UK tax you’ve paid. This relief is not automatically granted, so you must ensure it’s properly claimed.
Alongside income tax, there are a few additional factors to consider when renting out UK property while living in Spain. Since your rental income is earned in GBP but taxed in EUR, fluctuations in exchange rates can affect your returns. Currency risk is something to consider, as the timing of conversion can materially impact your financial outcomes.
If you decide to sell your UK property while residing in Spain, you may owe Capital Gains Tax (CGT) in both the UK and Spain. The UK tax rate on capital gains ranges from 18% to 28%, while in Spain, it ranges from 19% to 28%. However, Spain will provide a credit for the UK tax paid, which can help reduce your overall liability. Keep in mind that Spanish residents don’t benefit from the UK’s Private Residence Relief (PRR) unless the property was your main home while you were a UK resident.
Another important consideration is inheritance tax in Spain. Spain does not have a universal inheritance tax threshold, meaning that your UK property could be subject to regional Spanish succession taxes, especially if passed on to non-immediate family members. Furthermore, all global assets, including UK property, must be declared each year using Spain’s Modelo 720 form. Failure to comply with this declaration can result in severe penalties.
Owning UK property while living in Spain may seem appealing at first, but the reality often proves more complex. The additional administrative requirements, tracking invoices, filing dual tax returns, dealing with currency risk, and possibly hiring both UK and Spanish tax advisers, can significantly reduce your net rental yield. Add in property management costs and the travel expenses for inspections, and the returns may not be as favourable as expected.
For many expats, especially retirees or those seeking a simpler lifestyle in Spain, the complexities of managing a UK property may outweigh the benefits. If your primary goal is to enjoy a hassle-free life in Spain, you may want to reconsider whether holding onto your UK property still aligns with your financial objectives.
If your UK rental property has appreciated significantly, now might be the time to explore alternative investment options. Many former landlords are choosing globally diversified investment portfolios that offer tax-efficient structures. These portfolios help spread your investments across different markets, reducing your exposure to any one asset.
Other alternatives include Spanish-compliant investment bonds or life assurance-linked savings plans. These options offer lower tax burdens, minimal administrative hassle, and better alignment with long-term retirement goals. By holding wealth in these structures, you can avoid the complexities of managing rental properties abroad and better position your investments for the future.
Owning UK property as a Spanish tax resident can be a solid investment, but the tax and administrative complexities may make it less attractive. Whether you choose to sell or keep your UK property, it's crucial to structure your assets in a way that works for your life in Spain. Our cross-border wealth experts can help you navigate these complexities and guide you in making the best decisions for your financial future.
Andy is a highly experienced financial services professional and joined Skybound Wealth Management from a major European Wealth Management business, bringing with him considerable industry knowledge and expertise.
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