How can the wealth tax be reduced?

Property tax ( Impuesto sobre el Patrimonio) was reintroduced in Spain, and therefore also in Ibiza, a few years ago, after property had not been taxed with this type of tax for several years. Wealth tax is payable by both residents and non-residents if the value of the property in Spain exceeds €700,000.

For the calculation, mainly real estate, account and financial investments are added together and the corresponding tax burden for the taxpayer is calculated. The wealth tax only affects natural persons, not companies (legal entities).

It should be noted that there are two legal regulations for Ibiza regarding wealth tax: One is the central government regulation and the other is a Balearic legislative decree from 2014, when Spain had to adapt its legislation following a ruling by the European Court of Justice and recognised the same rules for residents and non-residents. This means that non-residents with property in Ibiza are entitled to the tax table of the Balearic Islands (for example, in the area of inheritance and gift law). However, since the Balearic Islands’ property tax table has been considerably increased, it makes sense for non-residents concerned to pay property tax according to the state table.

A calculation example should clarify this: With assets of € 3,000,000, the non-resident pays € 29,000 wealth tax after deducting the tax-free amount of € 700,000, rounded up according to the rules of the Balearic Islands. Non-residents, on the other hand, who pay tax according to the state table, only pay around €21,000. The non-resident can therefore save €8,0000 by applying the central government table. The deadline for submitting the tax return for the wealth tax of non-residents for 2018 is the end of June 2019.

There are various approaches to avoid or at least reduce the wealth tax. One possibility is to purchase the property not in one’s own name as an individual, but through a company. However, the tax law situation must be carefully examined in each individual case: Although it is correct that companies do not pay wealth tax, the shareholders behind them are not necessarily exempt from this obligation. After all, the shareholders as natural persons must be allocated the values of the assets brought into the company. Nevertheless, buying a property through a company can make sense depending on the circumstances, even if additional costs are incurred by the establishment and management of the company.

Another option is to distribute the property among several owners in order to take advantage of the tax-free amount applicable to each co-owner. A similar idea is behind the establishment of a usufruct right, which reduces the value of the property. In order to ensure that these transfers are handled sensibly, one should always consult a lawyer.

Finally, there is the possibility of reducing the taxable value of the property by taking out a loan and mortgaging the property. Taking out a bank loan reduces the property and can be deducted when calculating property tax. This option is particularly interesting for those owners who have a large amount of property to pay tax on in Ibiza. Ideally, the cost of the loan and mortgage can reduce taxes to such an extent that the loan is self-financing. This type of loan, like all the other options mentioned above, should be examined on a case-by-case basis to determine the cost-benefit ratio.