Living in Ibiza and paying the right taxes

Living in Ibiza and paying the right taxes. Property Taxes and Legal issues in Ibiza – non-Spanish residents living in The Balearics Islands need to be aware of Spanish legal and tax considerations that could affect the value of their homes, the wealth in their Spanish estates and their ongoing tax liabilities.

Local Ibiza Property Tax & Ibiza Property Law Issues

If you are living in Ibiza or any of Spain, even if you are non resident, you are liable to pay a number of taxes consisting of personal income tax on property or any rental income, capital gains tax, City Council tax and tax on assets such as boats.  

Del Canto Chambers has advised clients from many countries who have properties, businesses and boats in Ibiza and need holistic joined-up legal and tax advice on their Spanish assets, taking into account their Spanish residency status together with their tax residence at home, as well as their global wealth position.

Ibiza Tax & Residency Rules

Spanish income tax and residence rules must be considered carefully when buying property, investing or having a business in Ibiza. If you own a property or investment in the Balearics, for example a holiday home or rental, you are liable to pay taxes to the Spanish tax authorities as a Non Resident Tax Payer on property you own, as well as on other assets and investments. 

If you do not pay the appropriate tax to the Spanish authorities your property may be charged, and interest and penalties will be applied too, which often leads to difficulties in selling it and your bank account could be embargoed.

It is important to assess clearly your tax residence position in Spain if you have an investment or property in the country. Determining with clarity whether you are classed as resident or non-resident is particularly important for tax purposes.

The Beckham Rule in Spain is a special expats tax regime that enables foreigners who have moved to Spain the option of paying tax as non-residents, so that their Spanish employment income is taxed at a fixed rate of 24% up to 600,000 euros rather than the progressive tax rates applicable to Spanish residents. If taxed as a resident, the expat would be subject to a progressive tax scale up to 43% depending on their level of their worldwide incomes. 

Some clients, from outside the EU, including now British citizens, chose the  Spanish Golden Visa as a way to achieve Spanish residency by investing € 500,000 in real estate or qualified financial investments. This is one of the visas available, intended to attract entrepreneurs to Spain, promoting inbound investments in real estate and other qualifying financial assets. There are other visas to be considered and our team in Ibiza will be delighted to help.

Buying Spanish Property Through a Company 

To mitigate their tax liabilities, some people buy their property in Ibiza through a company. Whilst this can be effective, it obviously has tax and legal implications that need to be considered. If you are considering purchasing a Spanish property through a company it is essential that tax and legal professionals review the potential structures  to buy property, to ensure compliance. 

Unfortunately, many Spanish property owners who created corporate structures to purchase their property years previously, have given them little consideration since. The Spanish tax authorities are aware of this and if a company was created before 2018 and the tax position has not been assessed recently, they should assess their position to prepare for potential tax enquiries or investigations.

Local Property Tax in Ibiza – IBI

If you own an Ibiza property, regardless if you are or not a resident, you must pay a property tax every year known as ‘Impuesto Sobre Bienes Inmuebles’ (IBI). IBI is a municipal tax, which has to be paid annually and is based on the ‘cadastral’ value of the property. The tax rate which has been approved by each Town Council – and which is the same for all properties within the municipality – will be applied to this value.

Property income tax has to be paid on the profit made when selling a property. The rate for non residents is 19% for EU, Iceland and Norway residents and 24% for all other countries, including the UK after 1st January 2021.

It is advisable to hire the services of a tax expert as there are a number of tax-deductible costs – for example, if the property was bought before 1986.

Municipal capital gains tax (plusvalía municipal) in Ibiza is a tax on the increase in the value of urban plots that is accrued when a property is being sold. According to the law, it is the seller who pays this tax, although it could be passed over to the buyer if specified in the contract. The amount of this capital gain depends, amongst other things, on the surface of the piece of land and the length of time that it belonged to the seller.

Spanish Wills & Inheritance

Spanish Wills and Inheritance Tax are both important considerations if you have property and/ or investments in Ibiza. It is normally recommended that you draft a Spanish Will to cover assets located in Spain and a foreign Will to cover any assets in other countries. It is important that there are no legal or tax conflicts between the application of the Spanish Will and the international Will.

If you own property in Ibiza, or if your beneficiaries reside in Spain, then you will be liable for inheritance or succession tax. The main difference between UK and Spanish inheritance tax is that there is no exemption between husband and wife. When one dies, the other is liable for inheritance tax on worldly assets. A surviving spouse may be left a `life interest´ in the property instead.

Tax rates range between 7.65% and 35% and beneficiaries are graded into 4 categories whereby the more distant the relationship, the lower the tax allowance and the higher the tax. If you are UK domiciled you are liable to pay tax in both countries, but these liabilities can be offset against each other. Any trust arrangement should be discussed carefully as Spain does not recognise the Trust.

Matriculation Tax on Boats in Ibiza

It is not uncommon for people who have a property in the Balearic Islands to also want to purchase and own a boat to take advantage of the beautiful sea. However, buying a boat in Spain requires an understanding of many complicated tax laws.

A brand-new boat, over 8m length, purchased in Spain and registered under the Spanish flag will be liable to VAT at 21 per cent and Matriculation tax at 12 per cent, both calculated on the value for Spaniards. VAT is chargeable on boats imported into the EU and on boats purchased and owned by residents of the EU who are using their boat within the EU. VAT is also chargeable on boats, irrespective of ownership, which spend more than 6 months in any calendar year cruising in the EU.

If the purchase is of a second-hand boat the seller has to offer an automatic guarantee in the event of possible undetected problems for a period of six months to two years depending on how the transaction was conducted. 

Who is buying or selling the boat can also make a difference regarding the amount of tax to be paid. If there is a professional agent/ intermediary acting on behalf of the buyer/seller in the boat transaction the tax liability can differ. If the transaction takes place between two individuals, but the buyer is non-resident in Spain, the transaction will be tax-exempt in Spain. With such complicated tax implications it is important to get advice before buying or selling a boat in Ibiza.

With Spanish tax inspections and investigations on the rise, it is more important than ever to have a qualified international tax and legal team who have expertise in both areas if you have property or assets in Ibiza. Del Canto Chambers office in Ibiza has a team of expert lawyers who are dual-qualified in the UK and in Spain, meaning we are perfectly positioned to support our clients with any legal or tax requirements. We help ensure you are fully compliant with your tax position, helping you plan and protect your income as best as possible.

Spanish Tax & Legal representation is a fundamental service for both our private individual and commercial clients. Having worked on over 500 cases globally, our team of Tax and Legal advisers deal promptly with requests and ensure full compliance with Spanish regulations. Our Spanish Tax and Legal services encompass all the requirements, from property conveyancing matters to identifying the best corporate structures available.

To make a no-obligation enquiry, please either call Del Canto Chambers now on: +44 2070 430648 or complete our online form on our website’s contact page, which after receipt we will come back to you within 24 hours.