UK-Spain Double Taxation Agreement: What British Property Owners Need to Know

If you are a UK tax resident who owns property in Mallorca -- or anywhere else in Spain -- you are potentially liable to pay tax in two countries on the same income or gain. Rental income, capital gains on sale, and even imputed income on an empty holiday home can all trigger tax obligations on both sides of the Channel.

The good news is that the UK-Spain Double Taxation Agreement (DTA) exists precisely to prevent this. The bad news is that it does not eliminate your reporting obligations in either country, and understanding exactly how it works requires careful attention to the detail. This guide explains the treaty's key provisions as they apply to property income, with practical examples using real numbers.

What Is the UK-Spain Double Taxation Agreement?

The DTA is a bilateral treaty between the United Kingdom and Spain, originally signed in 2013 and effective from 2015. It replaced an earlier agreement from 1975. Its purpose is to allocate taxing rights between the two countries and provide mechanisms to prevent the same income being taxed twice.

Was It Affected by Brexit?

No. The DTA is a bilateral treaty between two sovereign nations, not an EU instrument. It remained fully in force when the UK left the EU on 31 January 2020 and continues to apply in its entirety. There are no sunset clauses triggered by Brexit, and no renegotiation is currently planned.

What did change after Brexit was the UK's status as a non-EU country for the purposes of Spanish domestic tax law. This affects the tax rates Spain applies to UK residents (e.g., 24% instead of 19% on rental income, and the loss of expense deductions). But these changes come from Spanish domestic legislation, not from the DTA itself.

The Core Principle: Where Is the Property?

Under Article 6 of the DTA, income from immovable property (real estate) may be taxed in the country where the property is situated. This means Spain has the primary right to tax rental income, imputed income, and capital gains arising from your Mallorca property.

However, the UK also taxes its residents on their worldwide income. So a UK resident with Spanish property income is liable to tax in both countries. The DTA's role is to ensure that the combined tax burden does not exceed what you would pay in the higher-taxing country.

How Relief Works in Practice

The DTA uses the credit method (rather than the exemption method used by some other treaties). Here is how it works step by step:

1. You calculate and pay your Spanish tax obligation on the property income or gain
2. You report the same income or gain on your UK Self Assessment tax return
3. You calculate the UK tax that would be due on that income or gain
4. You claim a foreign tax credit for the Spanish tax paid, reducing your UK liability by that amount
5. If the Spanish tax is equal to or greater than the UK tax, no additional UK tax is due
6. If the Spanish tax is less than the UK tax, you pay the difference to HMRC

Important limitation: The foreign tax credit cannot exceed the UK tax on the same income. If you pay more tax in Spain than you would owe in the UK on the same income, the excess Spanish tax is not refundable by HMRC. You simply lose the difference.

Rental Income: A Detailed Example

Let us work through a realistic example. Sarah, a UK higher-rate taxpayer, owns a two-bedroom apartment in Soller that she rents out as a holiday let. Her annual figures (in euros, then converted at an assumed rate of 1 euro = 0.86 pounds):

Item	Euros	Pounds (approx.)
Gross rental income	24,000	20,640
Allowable expenses (management, insurance, repairs, etc.)	8,000	6,880
Net rental income	16,000	13,760

Step 1: Spanish Tax

As a UK resident (non-EU since Brexit), Sarah is taxed on gross rental income at 24%, with no expense deductions:

Spanish tax: 24,000 x 24% = 5,760 euros (4,954 pounds)

Step 2: UK Tax

In the UK, Sarah reports the rental income on her Self Assessment return. HMRC allows her to deduct legitimate expenses, and she uses the accruals basis (reporting income in the year it relates to). As a higher-rate taxpayer (40%), her UK calculation is:

UK tax on net rental profit: 13,760 x 40% = 5,504 pounds

(Note: Sarah cannot claim the property income allowance of 1,000 pounds because she is deducting actual expenses.)

Step 3: Foreign Tax Credit

Sarah claims a foreign tax credit for the Spanish tax paid (4,954 pounds) against her UK liability of 5,504 pounds:

UK tax remaining: 5,504 - 4,954 = 550 pounds

So Sarah's total tax bill across both countries is 4,954 + 550 = 5,504 pounds -- effectively the same as if she had only paid UK tax. The DTA has prevented double taxation.

What If Sarah Were a Basic-Rate Taxpayer?

If Sarah paid UK tax at 20%, her UK liability would be 13,760 x 20% = 2,752 pounds. But her Spanish tax credit is 4,954 pounds -- more than her UK liability. She cannot reclaim the excess from HMRC. Her total tax bill across both countries would be 4,954 pounds (all paid in Spain), which is higher than if she only owed UK tax. In this scenario, the inability to deduct expenses in Spain (a post-Brexit consequence) creates a genuine additional cost that the DTA cannot fully remedy.

Imputed Income: A Complication

Spain's concept of imputed income on empty properties (imputacion de rentas inmobiliarias) has no direct equivalent in UK tax law. The UK does not tax you on hypothetical rental income from a property you are not renting out.

This creates an awkward situation under the DTA. You pay imputed income tax in Spain (for example, 475 euros on a property in Pollensa with a cadastral value of 180,000 euros), but there is no corresponding UK income against which to claim the foreign tax credit.

Can You Claim Relief?

The position is nuanced. HMRC's guidance suggests that foreign tax credits can only be claimed against UK tax on the same income. Since there is no UK tax on imputed income (because the UK does not recognise the concept), there is technically no UK tax to credit the Spanish tax against.

In practice, if you also have actual rental income from the same property in other periods of the year, your tax adviser may be able to structure the credit claim to capture some or all of the imputed income tax. However, for a purely owner-occupied holiday home with no rental income at all, the imputed income tax paid in Spain is likely a standalone cost with no UK tax relief.

The amounts are usually modest (300-600 euros per year for a typical property), but it is worth being aware of this gap in the treaty's coverage.

Capital Gains: How the Treaty Applies

When you sell your Mallorca property, Article 13 of the DTA gives Spain the right to tax the capital gain. The UK also taxes UK residents on worldwide capital gains. Again, the credit method applies.

Worked Example

James, a UK higher-rate taxpayer, sells his villa in Santa Maria del Cami for 650,000 euros, having bought it for 420,000 euros. After adjustments for purchase costs, documented improvements, and selling expenses, his taxable gain in Spain is 155,000 euros.

Jurisdiction	Calculation	Tax Due
Spain (non-resident, flat 19%)	155,000 x 19%	29,450 euros (25,327 pounds)
UK (higher rate 24%, after 3,000-pound annual exemption)	(133,300 - 3,000) x 24%	31,272 pounds
Foreign tax credit	25,327 pounds	-25,327 pounds
UK additional tax	31,272 - 25,327	5,945 pounds

James's total CGT bill across both countries is 25,327 + 5,945 = 31,272 pounds -- effectively the UK rate, since it is higher than the Spanish rate.

The 3% Retention and the Treaty

When James sells, the buyer withholds 3% of the sale price (19,500 euros or 16,770 pounds) and pays it to the Agencia Tributaria. This is an advance payment towards James's Spanish CGT of 29,450 euros. James must file Modelo 210 within three months to pay the remaining 9,950 euros.

The 3% retention does not affect the treaty calculation -- it is simply a collection mechanism. James claims a foreign tax credit for the total Spanish CGT paid (29,450 euros), not just the retention amount.

What If the Spanish Tax Exceeds the UK Tax?

For basic-rate taxpayers (18% on residential property gains), the UK rate can be lower than Spain's 19%. In that scenario:

• Spanish CGT on 155,000-euro gain: 29,450 euros (25,327 pounds)
• UK CGT at 18% on (133,300 - 3,000) = 23,454 pounds
• Foreign tax credit: 23,454 pounds (capped at UK liability)
• Excess Spanish tax: 25,327 - 23,454 = 1,873 pounds lost

The 1,873 pounds of excess Spanish tax is not recoverable. The total bill is 25,327 pounds (Spain) plus zero (UK) = 25,327 pounds, which is slightly more than the 23,454 pounds James would have paid if only UK tax applied.

Wealth Tax: Limited Treaty Relief

Spain levies an annual wealth tax on net assets exceeding 700,000 euros per person. The UK has no equivalent tax. Under the DTA, wealth tax is addressed in Article 22, which allows Spain to tax the value of immovable property situated in Spain.

Since the UK does not have a wealth tax, there is no UK tax against which to claim a credit. Spanish wealth tax is therefore a standalone cost with no treaty relief. For property owners with Spanish assets below the 700,000-euro threshold (or 1,400,000 euros for couples owning jointly), this is irrelevant. For those above the threshold, it is an additional expense that must be factored into ownership costs.

Inheritance and Succession: A Brief Note

While a full treatment of inheritance tax is beyond the scope of this article, it is worth noting that the DTA does not cover inheritance or succession tax. Spain and the UK do not have a separate inheritance tax treaty. This means that Spanish succession tax (Impuesto sobre Sucesiones y Donaciones) and UK inheritance tax (IHT) can both apply to a Mallorca property on the owner's death, potentially without full relief.

The Balearic Islands apply their own reduced succession tax rates for close family members (spouses and children typically pay very low effective rates), but the interaction with UK IHT can be complex. This is an area where specialist cross-border estate planning advice is essential.

Practical Steps for British Property Owners

1. Keep Meticulous Records

You will need to report the same income and gains in two jurisdictions. Keep records of all income received, expenses paid, taxes declared, and exchange rates used. HMRC requires you to convert foreign income to pounds sterling using either the exchange rate at the date of each transaction or the average rate for the tax year.

2. Understand Exchange Rate Risk

Your Spanish tax liability is calculated in euros, but your UK credit is claimed in pounds. Exchange rate fluctuations can affect the net outcome. A weakening pound means your Spanish tax (in pound terms) is higher, potentially giving you a larger foreign tax credit. A strengthening pound has the opposite effect.

3. File in Both Countries

You must file tax returns in both Spain and the UK. In Spain, this means Modelo 210 (non-resident income tax) and potentially Modelo 714 (wealth tax). In the UK, it means your Self Assessment tax return, including the foreign income pages (SA106) and the capital gains pages (SA108) where applicable.

4. Claim Foreign Tax Credit Correctly

On your UK Self Assessment, you claim the foreign tax credit in the "Foreign" section (SA106). You must report the Spanish tax paid in the year it relates to (not the year you paid it, if different). If you pay Spanish tax in instalments (e.g., quarterly Modelo 210 for rental income), each payment is credited against the UK tax year in which the corresponding income falls.

5. Coordinate Your Advisers

Ideally, your Spanish fiscal representative and your UK accountant should communicate with each other. Many errors arise because each adviser works in isolation, using different assumptions about income allocation, expense treatment, or exchange rates. A brief annual coordination call between the two can prevent costly mismatches.

Common Mistakes to Avoid

• Failing to report Spanish income in the UK: Even if your Spanish tax fully covers the UK liability, you must still declare the income on your UK return. HMRC and the Agencia Tributaria exchange information automatically -- non-disclosure will be detected.
• Claiming credit for the wrong tax year: Spanish and UK tax years do not align. The Spanish tax year follows the calendar year (January-December), while the UK tax year runs from 6 April to 5 April. Income earned in January-March 2026 falls in UK tax year 2025/26, but Spanish tax year 2026.
• Using incorrect exchange rates: HMRC publishes official exchange rates on its website. Use these consistently -- do not mix spot rates and average rates within the same return.
• Assuming imputed income tax is creditable: As discussed above, this is not straightforward. Do not assume you can offset Spanish imputed income tax against UK tax without taking professional advice.
• Ignoring the annual CGT exemption: Remember to deduct your UK annual exempt amount (currently 3,000 pounds) before calculating UK capital gains tax. This reduces the UK liability against which the Spanish credit is applied.
• Not claiming the credit at all: Some UK taxpayers simply pay tax in both countries without claiming the foreign tax credit, either through ignorance or because they assume it is too complicated. This is literally paying double tax when the treaty exists precisely to prevent it.

Will the Treaty Change?

There are no current proposals to amend the UK-Spain DTA. The treaty has been stable since 2015, and both governments appear content with its operation. The OECD's Pillar One and Pillar Two initiatives (focused on multinational corporate taxation) do not directly affect individual property taxation treaties.

However, Spanish domestic tax law could change -- for example, future legislation might adjust non-resident tax rates or expense deduction rules. Similarly, UK CGT rates and thresholds are subject to change in each Budget. Any such changes would affect the practical outcome under the treaty, even if the treaty itself remains unchanged.

Get Professional Advice

The interaction between Spanish and UK tax on property income is not something most people can manage effectively without professional help. A qualified adviser with experience in both jurisdictions will typically save you more in avoided overpayments and penalties than they charge in fees.

We recommend appointing a Spanish asesor fiscal for your Spanish obligations and ensuring your UK accountant has experience with foreign property income and DTA relief claims. If possible, choose advisers who are willing to communicate with each other directly.