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Real Estate Spain - Tax Incentives for Properties Spain

From April 1995, changes in tax laws in England were introduced. Tax relief at the highest rate is now available for borrowing on overseas property, whether or not the money has been lent by a UK bank or building society; and whether or not its repayment has been secured by a mortgage on the property.

In addition, Spanish Law offers tax incentives for the purchase of property in Spain. The following are examples of this:

Incentives to improve the terms of your Mortgage

Before the new Act, if a borrower wanted to change to a mortgage company which offered a lower interest rate, a great legal and tax expense was involved. This made the change unattractive. A recent Act of the Spanish Parliament (Ley 2/1994, of the 30th March) makes it easier and cheaper for mortgagors to improve their mortgage terms with their mortgage companies and also facilitate the redemption of the existing mortgage by a third party lender which offers the mortgage or a lower interest rate.

This Act established two ways of improving the existing mortgage terms:

  • Compulsory Substitution (Subrogacion Forzosa). In this case, the mortgage company which is offering more favourable interest rates takes over the existing mortgage.
  • Variation (Novacino modificativa). This is the variation of the interest rate between the original mortgagor and mortgagee. The repayment period can aslo be modified.

This can be enjoyed by both resident and non-resident Spanish Property owners and is applicable to all mortgage borrowers in Spain.

Tax-free Capital Gains

From June 1996. when you sell a property which you have owned for more than 10 years no capital gains tax liability arises. Also, after the property has been owned for 20 years, the purchaser is not obliged to withhold the 5% withholding tax that he/she would otherwise have to withhold from the purchase price. Thus you save:

  1. The sum of money otherwise payable as tax;
  2. The loss of interest when 5% Withholding Tax has to be paid;
  3. The professional fees payable to recover any balance of the 5% withholding tax.

When the proceeds of sale are used for the purchase of your new home within two years of the sale. to qualify for this exemption, the property you are selling must be your permanent dwelling. Thus, you must be resident in Spain for tax purposes.

Income Tax Incentives

It is possible to reduce your income tax bill. The reduction consists of 15% of the amounts paid out of income with a bank during the relevant year into a special home-saving account. To benefit from this, the monies paid into that account must be used exclusively for the purchase of a property which is to be your permanent residence. Thus, you must be resident in Spain for tax purposes.


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