Could you offer advice to an Irish couple, both retired public servants, who are planning to take up residency in Spain. Our query relates to our family home in Ireland.
Would we continue to pay all our taxes in Ireland on public service pensions? And would we be liable to pay capital gains tax if we sell our home afterwards? And, if so, how could we avoid having to do so?
We are in a dilemma and not sure information provided from our current sources to date are in fact correct.
Ms A.K., email
So many people have the dream of relocating to sunnier climes when they retire. Not many hold their nerve to follow it through. Ties of family and friendship and fear of the unknown dissuade many.
For sure, living permanently abroad is very different to visiting on holiday even where you are very familiar with the local area, but it can be very rewarding. Even more so now where we have been so restricted over the past year; the idea of getting away is more attractive than normal.
But you are quite correct to get a sense of what it might mean in terms of tax and property – both here and in Spain. At least you’re not like our British neighbours who are finding they may have to head back home if they cannot secure permission to reside in the country.
Most people assume they will pay income tax in the country where they are resident and, by and large, that’s true. However, it can depend on where that income comes from, especially when you are talking about pension income.
If you were in receipt of a private sector occupational pension, you would be taxed in whatever country you were tax resident in as long as it had a double taxation agreement with Ireland – as Spain does.
However, the situation is different for public sector pensioners. The double taxation agreement with Spain states:
“a. Any pension paid by, or out of funds created by, a contracting state or a political subdivision or a local authority thereof to an individual in respect of services rendered to that state or subdivision or authority shall be taxable only in that state.
“b. However, such pension shall be taxable only in the other contracting state if the individual is a resident of and a national of that state.”
In plain language, that means if you are in receipt of an Irish public service pension, it will be taxed in Ireland unless you are both a Spanish national and resident in Spain. You will both meet the second condition but neither of you will meet the first, so your pensions will continue to be taxed here in Ireland.
What then about your home here?
As of now, that is your principal private residence – your main family home in simple terms – and, as such, it is not liable to capital gains. If you were to stay in Ireland and sell the home to purchase another property or to rent, you would not have to worry about capital gains.
However, your position is not that straightforward. You don't say whether you already have a property in Spain but, either way, the Irish home will clearly no longer be your main place of residence. Your Spanish home will clearly be your main family home under the circumstances you describe. That means the Irish property loses the tax protection afforded to principal private residences. And because the property is in Ireland, it will be liable to capital gains tax here even though you will now be resident in Spain.
There is provision for people to retain principal private residence status on their homes when they go abroad – or elsewhere in the State – but this is only where the move is dictated by the needs of your employment. It would not cover your situation where you are moving to Spain by personal choice.
All is not lost though. First, if you hold on to the property until you die, no tax will be due as any capital gains liability dies with the owner of the asset.
And even if you do sell the property some years down the line, you retain some tax advantage for all the years you have lived in it.
I don’t know the details but let’s assume you have lived in the property for 20 years and that you hold on to it for another five years after settling in Spain. When you come to sell, it will have been your family home for 80 per cent of the time you owned it – 20 out of 25 years – so you will not be taxed on 80 per cent of any gain.
In fact, it is slightly better than that because the last year of ownership is considered to be owner occupation regardless of whether you live there or not, so you will pay tax on only 4/25ths – or 16 per cent – of any gain after allowable expenses such as auctioneer and legal fees etc.
But I do not see any way, given your circumstances, where you would be able to avoid paying capital gains tax at 33 per cent on the eventual sale of your Irish home after you have left for Spain – unless it occurs within a year of your departure when the final 12-month period of exemption would apply.
The question you probably need to ask yourselves is why you do not sell now? If this move to Spain is permanent, there seems little point leaving behind an empty property. And selling now means no capital gains tax bill at all.
The only reasons I can see for holding on to the property here are (a) as an investment on the presumption prices will rise or (b) more likely, you’re not sure if this Spanish adventure will work out and are hedging your bets in case you decide to return home.
If the latter, I suggest you make up your mind sooner rather than later, minimizing any bill and the length of time it is lying empty.
Finally, you also want to be aware of property and other taxes on the Spanish side of things. There are taxes associated with buying property and these are different if you are buying new or second hand.
And once you have your Spanish home, if you don't already, there are ongoing taxes – notably the Impuesto Sobre Bienes Inmuebles (IBI), the Spanish property tax. It is assessed on the basis of the "valor catastral" – a town hall valuation of your property which, I am told, is generally about two-thirds of the actual market value of the home though that can vary from region to region.
You will then be charged tax at a rate that can vary from 0.4 per cent of that valor catastral to about 1.3 per cent, again depending on where in the country the property is located.
If you haven’t done already, it is no harm to have a Spanish lawyer for property matters as they can get complicated.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email firstname.lastname@example.org. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into