Question: I live and work in Madrid (I have been a resident in Spain for almost 5 years and I pay all my taxes here). I own a flat in London and I am currently thinking about selling it and buying a property in Madrid.
As my flat in London is not my main residence, if I were to sell it, I have discovered that I would be liable to pay capital gains tax on any profit made. I checked with Hacienda (equivalent of Inland Revenue in Spain) and they have advised me that as I am a resident in Spain I would pay capital gains tax in Spain (not in UK) as this is where I pay all my taxes, and that the rate is a fixed 18% on any profit made (this would be quite a considerable sum -at least not quite as bad as the 40% I would have to pay in the UK- as I bought the property almost 10 years ago in Hackney, an area that has seen house prices rise quite dramatically in this time).
Normally in Spain, if you sell a property that is your main residence and you immediately invest the money from its sale in a new property you do not have to pay any capital gains tax, but as the property is not my main residence I am therefore liable to capital gains even if I buy a property in Madrid straight away.
So I am now looking for ways around having to pay the capital gains tax. One thought I had was if I "officially" moved back to live in the UK flat (I would be able to work remotely from the UK, or at least make it seem like I was) immediately registering utilities bills and council tax in my name at the UK address. How long would I have to be living there for it to be considered my main residence? If I then sold the flat in the few months following moving back to the UK, would that therefore mean I am not liable to pay capital gains tax? If I advised relevant parties that I do not intend to be in the UK for more than 6 months (and therefore not be a resident there) can I still just keep paying my taxes etc in Spain? Who would I have to notify to make all this "official"?
Answer
“If you are tax resident in a country you will have to pay all its relevant taxes such as income tax and capital gains tax. If you have an income or capital gains in another country, then you normally pay its own taxes and also declare them in the country where you are a tax resident. If there is a Double Taxation Treaty between the two countries then you will only pay the difference in your ‘home country’.
There are several different rules which decide your tax residency. If you spend 183 days or more in a country, you are likely to be tax resident there. You are also likely to be a tax resident of the country you declare your ‘main home’. Furthermore, if your ‘centre of economic interest’ (i.e. where you work etc) is in a specific country, then you are also likely to be resident there for tax purposes.
So, as you can see, the 183 day rule is not the only way which your tax residence is decided and is not as easy as saying “I will live in the UK for 6 months and therefore not have to pay capital gains tax”.
From the information you provided me, I doubt whether you are considering giving up your job in Madrid and getting another job in the UK because of the sale of your property in London.
However, as you are living and working in Spain, it is worth checking whether you will come within the 40 per cent tax band in the UK. I suspect that the picture is not as bleak as you think.
If you still think it is worth changing the country of your tax residency then I would suggest speaking to an expert to make sure that you do it properly and achieve the outcome you desire. I would start talking with a legal or tax expert to discuss your particular circumstances.”
By Peter Esders partner and specialist Spanish lawyer The International Law Partnership LLP
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