Both Brexit and the Covid pandemic have had a negative impact on the fortunes of British property owners in Spain. As the two crises have combined over the last twelve months to create adverse investor conditions – encompassing a 25% increase in taxes, vastly reduced demand for holiday rentals and much reduced long term rental returns. As well as new restrictions on how often British owners can now visit their properties in Spain.
An estimated one million British nationals own a property in Spain according to Spanish government figures. Around 380,000 now reside permanently in the country for tax purposes, leaving over 600,000 property owners subject to new non-resident tax regulations, which affect all non-EU investors regardless of whether they rent their property out for profit or not.
Modelo 210 Tax Changes
Now that the UK has withdrawn from the European Union British property owners who are not resident in Spain are faced with a 25% increase in the taxes that they are obliged to pay on their property.
A large proportion of these owners have earned income in the past by renting their properties out to holidaymakers. A practice which is still entirely legal, assuming they have an official tourist licence. But which will now attract a tax levy of 24%, as opposed to the previous 19% applicable to all EU citizens.
In addition, holiday rental investors will no longer be able to claim any deductions such as insurance or mortgage interest to offset against their tax bill. A development which will obviously eat further into their returns.
Even if owners only use their property for their own personal enjoyment, they will still be required to pay the same increased tax rate. As the Spanish authorities still levy an annual charge known colloquially as the Modelo 210 Non-Letting tax – essentially a wealth tax based on deemed or imputed income – on properties that are not rented out at all.
Given the fact that many holiday rental owners generated little to no income from their property in 2020 as a result of the Covid pandemic and the resulting travel restrictions across Europe, more owners than ever before are expected to fall into this latter category during the 2021 tax year.
Long-Term Rental Returns
The collapse of holiday rentals during 2020 has resulted in a glut of long term let properties entering the market, as owners and landlords seek any means available to generate a return from their property.
According to El Pais one of Spain’s leading national newspapers, this in turn has resulted in a fall in rental rates as increased supply drags prices downwards.
Owners and landlords who are resident in Spain benefit from a 60% reduction in their tax bill if they rent their properties out on a long-term basis – an attractive break which will not be extended to British non-resident owners post-Brexit.
The 90 Day Rule
If the new tax regulations were not bad enough, British non-resident owners now also face restrictions on how often they can visit and enjoy their holiday home in Spain (as well as elsewhere in the EU).
As of January 1st 2021 they will only be able to spend up to 90 days at a time, out of every 180 days, relaxing in the Spanish sun. A development that has angered many owners who have become accustomed to enjoying much longer breaks abroad from the British weather.
Spanish Property Sales in 2020
Unsurprisingly, Spanish property sales fell by nearly 18% last year. With sales to foreign nationals dropping by 24% and to British nationals by 44%, according to data recently released by Spain’s Institute of National Statistics. With the largest falls experienced in the key tourist/retirement destinations of Andalucia, the Canary Islands and the Balaerics.
So where is the market heading in 2021?
According to Nick Ball, spokesperson for Atlantico Homes estate agents, who are based in Lanzarote, “The double whammy of Brexit and Covid has certainly had a pronounced impact on demand and transactions during 2020. However, this has yet to feed its way into prices. In addition, Spain remains a very popular destination amongst all EU nationalities, not just the British and many industry observers believe that the pandemic has also created a dramatic increase in stored household income – providing funds for potential investment in 2021 and beyond.”