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:
A. Compulsory Substitution (Subrogacion Forzosa). In this case, the
mortgage company which is offering more favourable interest rates takes over the existing
mortgage.
B. 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
A. 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.
B. 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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