Wealth Tax on the purchase of real estate
Spain and the Wealth Tax: What You Need to Know
Only a few countries worldwide still levy a wealth tax, including Spain. Even those who "only" own a vacation home on Mallorca can be asked to pay. In the following, we explain how the wealth tax works and how its effects can be reduced or avoided.
Come back to stay
Spanish coffers were empty during the economic crisis at the beginning of this millennium. So in 2011, Spain reintroduced the wealth tax to balance the government's coffers. Since then, the "impuesto sobre el patrimonial" has flushed more than a billion euros a year into the ailing state budget. The tax, which is levied in only a handful of other countries such as Switzerland, France and Luxembourg, had been abolished only three years earlier.
Initially, the wealth tax was only intended to help through the crisis period, but the 2021 tax reform eliminated its temporary nature. In addition, the market reference value introduced in 2022 caused the wealth tax value of many properties to rise abruptly - effectively a cold tax increase.
Tax-free allowance of up to one million euros
Who is liable for wealth tax in Spain? Wealth tax only applies to natural persons and is levied on global assets. Companies and corporations are exempt from it. Each person is allowed an allowance of 700,000 euros plus 300,000 euros for the property of the main residence. Loans and other liabilities can be credited.
The wealth tax does not only affect those who live permanently in the country and are therefore tax residents. The levy may also apply to vacation home owners. However, there is one restriction: non-residents living in Germany, Austria or Switzerland only become liable for tax on immovable assets - i.e. real estate.
A declaration must be made if a tax burden arises or if the gross assets exceed two million euros. If no tax burden arises for gross assets of more than two million euros due to liabilities or exemptions, no payment is due, but a declaration is. Important to know: The assets that a person owns on December 31 of each year are always decisive.
Each region has its own tax table
Although the Spanish central government has created the legal framework for the wealth tax, the regions have certain powers and can therefore also set their own regulations. As a result, different tax rates apply in each region. In Mallorca, for example, wealth is taxed at a regional maximum rate of 3.45 percent. The Madrid region, on the other hand, and more recently Andalusia (effective 2023) have virtually abolished the tax by means of a 100 percent credit.
Residents are bound by the tax norms of the region in which they are registered. Non-residents have been able to choose since 2015 whether to be taxed according to the (often more favorable) state table or that of the region where they have the bulk of their taxable Spanish assets.
How to save taxes
It is always advisable to think about tax arrangements before buying a property. However, especially for non-residents, there is scope for structuring to save wealth tax. One example of smart tax planning is to be mindful of the cutoff date on which property taxes are assessed. A person who buys property on December 30 must pay the same as if he or she had owned it all year. Conversely, the seller can save a year of wealth tax if he sells his house before New Year's Eve.
It is also essential to take advantage of the exemption amount. In this regard, it may be a good idea for high-priced real estate to be purchased by more than one person, since due to the exemption amount and the progressive nature of the tax, the total burden is disproportionately reduced with each additional owner. Another option is to own real estate through a company, although any undesirable side effects must be considered not only in Spain but also in the country of origin. Loans for the purchase of a house can also be useful, as long as the interest paid is less than the wealth tax saved.
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This article was prepared by the tax and legal firm PlattesGroup , based in Palma de Mallorca.