Buying a property in Tenerife
The advantages and disadvantages of registering in the name of a limited company.
Many clients looking to purchase property overseas are looking for the most tax-efficient vehicle through which to buy. Historically, clients would often consider using an offshore company through which to channel the purchase. However, changes to legislation in recent years have significantly reduced the potential advantages of purchasing through a limited company. Let us look at the pros and cons of each method of ownership.
Buying in your own name
This is the most common method for clients emigrating to Tenerife or perhaps just buying a holiday home here. Most are buying primarily for personal use, though some may be planning to rent out the property for some or all of the year.
Considering the budget of the average British property purchase (typically less than €200,000), Spanish companies are relatively expensive to incorporate and run. They will attract high tax rates on any earnings, plus there is a tax on any dividends paid. This will almost certainly exceed any capital-gains tax an individual owner must pay. Current rates for CGT are a flat 18% for non-residents and residents alike.
Furthermore, Spanish residents selling their main home can reinvest all their gains tax-free into another principal home, whether it’s in in Spain or the UK. This is not an option for people who own via companies.
Another important reason to buy privately — one that is often overlooked — is the “benefit in kind” tax you are obliged to pay to the British taxman if you own property through a company abroad. If your company owns a property, and you have the benefit of staying there, you could be hit with a tax bill running into thousands of pounds. Many Brits who have bought second homes through companies to avoid local taxes and Spanish inheritance laws do not realise this and do not declare it in their self-assessment tax returns.
Buying via an Offshore Company (eg. UK company)
There are instances where it is beneficial to own property via a UK or Spanish company. For instance, if the company is already a going concern with separate business interests, a property can be added to its portfolio without necessarily incurring the wrath of the taxman in either country. Refurbishment costs and expenses associated with renting the property are directly tax deductible. The UK taxman also offers certain business reliefs against transactions involving company assets such as properties.
Such an arrangement can also potentially avoid inheritance tax, particularly the punitive Spanish tax. Provided that the shareholders in the company are not resident in Spain, they can leave their shares in the company (or gift them during their lifetime) to their chosen beneficiaries under their Will, thereby enjoying the more beneficial UK Inheritance Tax rates whilst avoiding the more punitive Spanish system.
However, for the most part, all of the clever reasons for using companies to buy property in Spain, such as tax efficiency and greater flexibility, are complicated and highly impractical. Firms that offer such schemes as a universal solution to inheritance tax issues are typically selling ‘snake oil’. Interestingly, on carrying out an internet search, we were unable to find a single professionally qualified lawyer or accountant offering such a scheme in this manner.
Nearly every tax regime within the European Union now considers Property Holding Vehicles to be a form of tax evasion. Property Holding Vehicles are those where the owning company does not have any business interests separate from the property itself and is simply in existence for the purpose of owning, and/or perhaps renting out the property.
Owning through a company can also make it difficult to sell. Many who own properties via a company would prefer to sell the entire company rather than just the property so as to avoid a massive tax bill. However, the vast majority of buyers just want a property, not shares in a company.
For instance, a Spanish, French or Russian buyer is very unlikely to take the risk of acquiring a UK company just to get their hands on the property that company owns, as they will invariably be unfamiliar with UK Company law and accounting regulations. Also, companies cost money to set up and administer, so for most buyers it is just simpler, and cheaper, in every respect, to buy in their own names.
Buyers can also forget about putting properties into tax haven companies and structures where the true owners or beneficiaries of the scheme are not disclosed to the Spanish taxman. To counter this, Spain imposes a punitive tax of 3% of the market value of the property every year upon such schemes.
Naturally, each case requires a detailed assessment of the buyer’s personal circumstances before a final decision should be made. Tenerife Solicitors can advise buyers as to the best structure for purchasing property in each instance and ensure that the scheme is properly implemented and registered, thereby avoiding any nasty surprises in the future.
To arrange a consultation, contact us on 922 717845 (0871 218 0063 from the U.K.) or email us at firstname.lastname@example.org