Spain is the most popular destination for UK overseas property investors, and the Spanish Canary Islands enjoy a lot of interest for their year-round temperate climate.
However, whilst the Canary Islands are one of Spain’s autonomous regions, that doesn’t mean that tax rules remain the same.
The Canary Islands are fully integrated with the EU as part of Spain, but while the tax rules are similar to the rest of Spain, there are certain tax incentives on offer to promote investment in the islands.
VAT is set at 7 per cent in the Canary Islands, compared to a standard rate of 21 per cent in mainland Spain, showing considerable savings.
Businesses are being encouraged. The Canary Island Investment Reserve (RIC) is a corporate and income tax benefit allowing businesses to invest up to 90 per cent of their undistributed profits in fixed assets that will be used for their economic activity.
In addition, the ZEC regime is applicable to newly incorporated businesses that carry out permitted activities. With a minimum investment of €100,000 and creation of 5 jobs on Gran Canaria and Tenerife but just €50,000 and 3 jobs on the other islands. The rate of corporation tax is set at 4 per cent as opposed to the general rate of 25 per cent.
Purchasing property
When buying property across Spain you will need to pay purchase tax based on the catastral value of the property, set by the local authority.
Tax on rental income from the property must be paid in Spain even if you receive the income in your country of residence. This is set at 19 per cent for EU residents, but 24 per cent for those that are not.
Selling property
When selling property, capital gains tax is applicable at 19 per cent of profit. If non-resident then a further 3 per cent of the sale price is withheld to be balanced later against the 19 per cent due on gains. Residents are not subject to the withholding tax, instead declaring the income in their Spanish tax return.
Inheritance tax
Another advantage of buying in the Canary Islands comes with inheritance tax.
Inheritance tax in Spain is considered high and differs in different regions. However, the Canary Islands currently offer a 99.9 per cent allowance between spouses, and also crucially between parent and child both for inheritance and donations.
This means that any investment in Canary Island property can be passed on free of tax to future generations.
Oh to have that benefit in the UK.