The taxmen are after you!

Both HM Revenue & Customs (HMRC) and Spanish Hacienda have declared war on UK citizens who own property in Spain, whether they are resident or not. Paul Whitelock has been taking a look…

If you have not been paying your taxes you are likely to be tracked down by one or the other of these two agencies ….. or both!

HMRC has announced its latest tax evasion crackdown, and this time the focus is on taxpayers who own property abroad. Specifically, the HMRC statement, which was issued way back on 31 October, 2011, states: “Wealthy tax cheats with overseas property are now being targeted by a new 200-strong team of investigators and specialists”.

Provided you have been correctly following the tax rules of both the UK and the country where the property is located you should not have any problems. However, there are people who do not declare their overseas property and income to HMRC, so it is understandable that the authorities have decided to start this investigation.

HMRC’s “affluent team” was set up to focus on the UK’s wealthier taxpayers and this overseas property initiative is just one of their projects to prevent tax evasion and increase tax revenue for the Treasury.

The team is utilising new and innovative “sophisticated data mining techniques” to trawl through publicly available information to identify individuals who own property abroad. Computer programmes will search the internet for properties listed for rent in countries like Spain, France, etc, which are owned by British people.

Using risk assessment tools, the team will then look for people who have not been declaring the correct income and gains on their overseas property to HMRC, ie British taxpayers who earn rental income from overseas property which they do not declare on their annual UK tax return and/or those who have made gains on the sale of overseas property which would be taxable in the UK.

Exchequer Secretary to the Treasury at that time, David Gauke, said:

“With HMRC’s increased capability and expertise, and its increasing success in tackling evasion both at home and offshore, the message is clear: there is no hiding place for tax cheats.”

So what are your tax liabilities as a non-resident on overseas property?

If you rent the property out at all, then as a UK taxpayer you need to declare the rental earnings on your annual tax return.

If and when you sell the property, the gains also need to be declared and taxed in the UK.

Besides complying with the UK tax regulations, you also need to comply with those of the country where the property is located. Both rental income and capital gains would normally be taxable locally as well as in the UK, so you would need to review the terms of any double tax treaty to establish in which country you should pay tax, if you would receive credit for tax paid elsewhere, etc. The same goes if the country imposes an inheritance tax. In countries like France and Spain you may also be liable for wealth tax if your local assets exceed the threshold.

This latest HRMC investigation could potentially lead to problems locally if you have not correctly fulfilled your local tax obligations and HMRC shares the information it finds.

It is a sign of the times we live in and this is a good example of how important it is to make sure you are fully aware of all your tax obligations, both in the UK and locally, and that you get your tax planning right. If you are in any doubt you should seek advice from an international tax advisory firm or a gestor with experience of UK tax legislation.

If you own property in Spain and are resident there, have you submitted your Spanish tax return each year?

If you are not resident, have you submitted your non-resident tax declaration each year?

Do you know that the tax authorities now have records of your property and are checking if you have filed tax returns?

The Spanish tax authority, Agencia Tributaria (AEAT), has been writing to Spanish property owners warning them that it is aware that they have not submitted tax returns for the last few years.  It is thought that around 300,000 letters have been sent out so far.

Here’s a translation of some of the letter:

“From the information we have available at the Tax Administration Agency (AEAT), we believe that for some of the tax years 2007, 2008 or 2009, you held a Spanish property, and we note that you have not filed a Non Resident Tax Return, an Income Tax Return, or a Wealth Tax Return (applicable only for 2007).

“If any of the above tax returns should have been filed, we notify you that, before we can proceed with an enquiry, which could entail penalty charges, you can regularise your tax affairs by filing the missing tax return or tax returns and paying the corresponding taxes due.”

The letter is basically a warning, giving the recipient a brief opportunity to rectify their affairs to avoid becoming the subject of a tax investigation and being charged penalties.  If you have received a letter, or even if you haven’t received one yet but have not submitted tax returns for the years in question, you should seek advice from an expert on how to rectify the situation.

The AEAT has linked up with the Land Registry system and has also been receiving information from electricity companies.  It is therefore fully aware of who owns each property in Spain, and whether the property is lived in for most of the year.  It obviously also knows who has been submitting annual tax declarations.

If you are resident in Spain you need to declare your worldwide income and gains each year by the end of June, even if the income is not remitted to Spain.  For 2007 and now again for 2011 and 2012 and up to the present day you also need to declare your wealth for wealth tax purposes.

Non-resident property owners have to submit a non-resident tax declaration by the end of December.  You need to pay tax at 24% on the notional rental income (normally calculated at 1% or 2% of the valor catastral) for periods when the property is not let out – even if the property is just your holiday home.  You also need to pay tax on any income arising in Spain (eg rental income), even if not paid into a Spanish bank account.

As part of its efforts to increase tax revenue the government has been intensifying its efforts to crackdown on tax evasion over recent years, and we can only expect this to continue.  If you are found to owe tax from past years, you will need to pay it fully plus interest and penalties.  Penalty rates depend on the seriousness of the tax offence and can be as high as 150% in some cases.

If you have not submitted tax returns, whether because you were not aware that you had to or because you chose not to, you need to take action now to avoid the punitive consequences.  Don’t bury your head in the sand – the Spanish tax authorities mean business.

Contact an expert now to establish whether you have any irregularities you need to rectify – you do not have much time to get your affairs in order and it could prove very costly if you don’t.

You have been warned …

Note: Post-Brexit things have changed. With the UK no longer being a member state of the European Union since 1 January 2021, we Brits just have what is called third country status. That means that the taxes due are likely to be higher than before. Watch this space …