Your business is growing. You are scaling successfully. Your cash reserves are increasing to the point that you are wondering how you can make your excess cash work harder for you. Where can you invest it?
You are building a fabulous team of loyal, hard-working and highly skilled specialists. They work hard and you want to be able to reward them and make sure they enjoy their time off.
Could you use some of your excess funds to invest in a holiday villa in Spain and let it to your staff at a subsidised rent??
The purpose of this article is to outline some of the implications you might have to consider. The advice is general in nature and if you were thinking about investing in a property in Spain – you must take specialist advice.
Benefit in Kind for Staff
- Renting the villa to staff at a below market value rent, would generate a benefit in kind (BIK) for staff
- Staff should pay tax on the cash equivalent value of the BIK
- Employer would have to pay Class 1A National Insurance on the value of the BIK
- BIK should be declared in a P11D at the end of the tax year
- Staff should be informed of the potential BIK before taking advantage of subsidised rent before booking the villa
- Employer would have to keep detailed records to evidence who had booked the villa, the period of rental, the price paid, the market value of the villa and therefore the cash equivalent BIK
PSA – PAYE Settlement Agreement
- It is possible but not guaranteed that you could enter into a PSA with HMRC so the Employer pays the BIK tax due on behalf of the employee at the end of the tax year. For further information see our article on PAYE Settlement Agreements
BIK for you, the company owner?
- As an owner-managed company, the biggest risk might be the implied BIK for you personally
- You would need to prove and keep records that the villa was bought for commercial or business purposes, by that we mean that this isn’t just a disguised way for you the director to buy a holiday home but not be taxed on the cash you might otherwise have had to draw from the business.
- The villa would need to be rented out commercially or rented to staff for a substantial number of weeks in the year to meet the commerciality tests
- If the villa is rented occasionally by staff and sits empty most of the time, then HMRC might argue that as the owner/manager of the business – it’s actually available for you to use (even if you don’t) and therefore you would get taxed on the benefit.
- The worst case scenario is you get taxed personally for the villa being available to you for 52 weeks of the year! Before you consider such an undertaking, do make sure there is sufficient interest from your team!
Purchase of a property by the company
Assuming you meet all the tests for commerciality….
- You’d have to check your Articles Of Association to make sure there are no restrictions on what the company can or can’t do commercially
- It may well be worth setting up a separate legal entity to buy/sell investment properties – there are tax advantages in setting up the holding co and multiple subsidiaries. This is not covered by this article – you would need specialist advice on this subject.
- All costs of buying the property, agents fees for running the rental side, maintenance, running costs, visitation checks etc should all be allowable expenses for corporation tax purposes
- You’d have to keep detailed records of course to prove that it was rented more often than not…either to staff or to third parties.
Spanish Taxes
- Spain has wealth taxes, gift taxes and succession taxes which are all quite complex and you would need to take specialist advice to understand the most tax-efficient route to purchase based on your particular circumstances.
- Taxation in Spain is complicated and you could incur fines or penalties if you miss a deadline or fail to do your taxes properly.
The key tax implications for non-Spanish residents who are shareholders of a company that owns real estate assets are:
- If the property is available to staff, directors or shareholders, they should pay a market rent to the company.
- If no rent or a subsidised rent is paid, the Spanish tax office could potentially claim tax on the the deemed rental amount.
- The company in turn, is required to pay a non-resident ‘corporation’ tax.
- Distributions of profit to the shareholder (if any) may be liable for Spanish income tax at the savings income rates.
- Rental income and any capital gains are taxed in Spain at company level, applying the tax rate for non-resident companies of 19%.
- Spain also has a wealth tax. Non-Spanish residents are only liable on their Spanish assets and rights. However, note that Spain’s double tax treaties with the UK include a clause allowing Spain to tax shareholdings of foreign companies which mainly own Spanish real estate. In this case individuals resident in the UK would be liable for Spanish wealth tax on shares in the company, despite it being based in the UK.
- Company assets are subject to Spanish succession and gift tax if it does not have a genuine economic activity and is merely a holding company for owning a Spanish property. The Spanish tax authority has shown in the past it will not accept the use of a non-Spanish company to hold property in Spain purely to avoid succession tax – i.e. the Spanish property will be fully subject to tax.
- You may need to appoint a Spanish based ‘Fiscal Representative’ to act as the company’s official contact in Spain, they will deal with the filing of any annual returns and accounts required by the Spanish authorities.
What are the problems of buying a Spanish Villa through a limited company?
- It’s not illegal to buy a Spanish property through a UK limited company if you have a genuine commercial reason for doing so.
- Historically, schemes have been set up encouraging UK residents to buy properties in Spain and transfer them to a limited company to avoid Spanish Inheritance tax rules. These are personal purchases disguised as commercial purchases to avoid tax.
- This is blatant tax evasion subject to criminal prosecution and heavy fines. The Spanish authorities are actively investigating Company owed property assets to wipe out this very practice.
- In 2018 the Spanish tax authorities set up a new Beneficial Owners Register – each country has its own register that must list the Ultimate Beneficial Owner of the company that owns the property.
Can I buy the villa through an offshore company?
- The Spanish authorities are not very happy about that either and charge an annual ownership tax of 3% of the property value!
This article is general in nature, intended to give you some insights into the implications of purchasing a property in Spain through a UK limited company. Spanish tax is complicated and you should take specialist and personal advice if you are considering an overseas property purchase.
Whilst we are not specialists in Spanish tax, we partner with tax advisers who are. Contact us if you have any questions.
