This is a question I get asked so many times. British expats moving to Spain typically have excess cash in their life after the sale of their UK property. In many of these examples, people have also had buy to let properties that have done really well for them in the UK, where capital appreciation and good rental income is commonplace.
So in answer to my original question, is doing something similar a good financial idea in Spain. Put quite simply, no. Let me explain.
When you buy a property in Spain, there are costs and taxes of approximately 12%. Let’s say this is a ten year plan, you will need to factor in costs on the sale of the property as well. Estate agents will charge 5% plus 20% IVA (6% in total) to sell the property, plus the legal and Notary fees, and a Plus Valia, which is a tax on the increase in the land value, with a multiplication factor depending on how many years you have owned the property (to a maximum of 20 years). If, after all of these costs, you have managed to make any profit, then the capital gains tax will be between 19% and 26% depending on the amount. All in all, I reckon there are costs of about 20% that you would need to cover before you would make any capital profit.
In summary, it is very hard to realise any real capital appreciation on a property here.
But let’s assume you have bought a property, you now need to consider the running costs. Almost every property will have community fees each month, which alone can be quite expensive. Then there is the annual IBI tax on the property, and home insurance. This needs to cover the fact you rent out the property so a suitable policy may be more expensive than normal.
Rental agents will normally take a fee, but if you rent directly, then the listing websites (AirBnB for example ) will also want their cut. Then there is the general maintenance of the property, and with patchy build quality these costs can come as a bit of a shock. Next, you need to consider damages by guests, laundry and cleaning costs each time you have a guest turnaround.
After all this, your net annual income (after costs ) is then subject to income tax, which means your in-pocket profit each year is always substantially lower than the figures you will hear about. Many agents will talk about 35 weeks a year rental at so many euros a week etc, but in reality this is really hard, if not impossible, to actually achieve.
From a financial standpoint, any income is going to be needed to cover the capital losses talked about when buying and selling the property (approximately 20% as per above). So that takes quite a while. Also, factor in potential exchange rate issues if ever you were to return to the UK, which could well go against you over the coming years.
To get to the main point though, the costs of buying and selling properties here in Spain, added to high running costs and taxes, all mean I don’t ever recommend buying a property to rent out as an investment / money-making opportunity. Selling property here can also take a long time, so liquidity is always a consideration – if the worst were to happen and you needed to return permanently to the UK, having funds tied up in property here is never ideal in those situations.
If I then compare this with a sensible Investment fund, with tiny entry and exit costs, almost instant liquidity, and if bought through the right company, extremely low taxes, and a decent long-term yield, I see there being no comparison between the two. The right products can usually be ‘taken back’ to the UK with no need to change anything, so again a really valid point.
If you would like to learn more about the Investment products available to expat residents here in Spain, please get in touch.
This article has been contributed by Jeremy Ferguson. Jeremy has been a trusted service partner of Upsticks for the past 3 years and is a specialist in working with British moving to Spain since 2000 and is a partner with The Spectrum IFA Group. www.spectrum-ifa.com
No need to worry about capital gains, as Jeremy and his team are here to help with exactly the sort of planning you need, making sure you leave the UK in the most tax efficient way before starting the next stage of your life here in Spain. You can contact him following this LINK