RECORD numbers of British people already own a second home abroad, and millions more are thinking of pursuing the dream.

About 800,000 Britons have bought property overseas and more than 5m would buy abroad if they could, according to a survey by Mintel, a market-research company.

Spain is by far the most popular location. Two in five of those who own or would like to own a property abroad rate Spain as their preferred location.

Now is traditionally a peak time for the overseas holiday-home market. Katy Katani of Grupo Lar Sol, a Spanish property developer, said: “We always see a lot of demand from Britain in February and March. Christmas is over and the weather is miserable, so thoughts turn to sunnier climes.”

Property in Spain is by no means cheap after years of strong house-price growth. A new-build two-bedroom apartment on the Costa del Sol that five years ago would have cost the equivalent of about £60,000 could now set you back £200,000 (€300,000), according to Katani.

But low interest rates, cheap and frequent flights and the development of a range of services aimed at the large community of British expatriates have made it easier than ever to buy.

There are pitfalls for the unwary, though. Tax in particular is notoriously complicated. In the first of a new series, we answer the essential questions on buying a Spanish property.

Can you take out a mortgage on a Spanish home?

Some British high-street banks and building societies, including Halifax, Lloyds TSB and Scottish Widows, will lend on Spanish properties or have subsidiaries that do, and most Spanish banks will lend to nonresidents as well. Many firms are happy to lend on rental properties, holiday lets and second homes. You cannot usually borrow more than 80% of the purchase price.

What are the best deals?

You have the choice of taking out a mortgage in sterling or euros.

Brokers usually recommend that you arrange your mortgage in the currency that you earn in, where possible. That avoids the problem of the currency in which you make mortgage repayments strengthening against the one in which you are paid, which would make the loan more expensive.

However, you also have to factor in differences in rates. The Spanish mortgages that are available in sterling are now more expensive than deals in euros.

Norwich & Peterborough, for example, has a sterling mortgage charging 5.49% interest. The cheapest euro mortgage from Scottish Widows has a rate of 4.5%, according to Savills Private Finance International, a broker.

Remi Gashi at Savills said: “Sterling mortgages may be suitable if you are simply buying a property as a holiday home, have no intention of renting it out and don’t want any currency risk. However, as the UK base rate is a lot higher, even if the European Central Bank raises rates another 0.5%, pushing up the cost of euro mortgages, a loan in euros would be more attractive.”

I’ve already got a Spanish mortgage. Can I switch to a better deal?

You can, but you should be aware of penalty charges on your current deal. Some Spanish lenders charge exit fees even on standard variable-rate mortgages. These fees may not make the switch worthwhile.

Will I need to set up an overseas bank account? What is the best way to transfer money?

If you are taking out a euro mortgage with a bank in Spain you will usually have to set up a Spanish account out of which your mortgage payments will be deducted each month. Transferring money from a UK bank into an overseas account can be expensive, but there are ways to keep costs down.

If you set up accounts with a UK bank and its subsidiary in Spain you may be able to transfer money free of charge. Halifax, for

example, allows free electronic transfers from its UK accounts to Banco Halifax Hispania.

Specialist currency-exchange brokers, such as Foreign Currency Direct or HIFX, also offer free international transfers. And they can help smooth exchange-rate risks by fixing a currency rate for up to two years.

Are there other costs when buying a property?

There is 1% stamp duty, a transfer tax of about 7% and a tax on mortgages. You should expect to pay about 10% of the purchase price in extra costs.

What taxes will I face when I sell?

Spanish capital-gains tax (CGT) may be due, and you may have to pay tax in Britain as well.

Your liability depends on where you are regarded as a “resident” by the tax authorities. In both Spain and the UK you are regarded as a resident if you spend 183 days or more there, or your visits to the country average 91 days or more a year over four years. Since January 1 everyone, resident or not, is liable to pay 18% on capital gains on property in Spain. Before then nonresidents paid a heftier 35% to the Spanish authorities.

The tax cut sounds like good news for Britons who own second homes in Spain, but the truth is that for many it makes no difference to the tax they pay.

“If Revenue & Customs considers you to be a British resident you have to declare the gains on your self-assessment return and are liable for UK tax,” said Bill Blevins of Blevins Franks International, an adviser.

You can deduct the Spanish tax you have paid from your British tax bill, but if the overseas tax is lower than the UK tax you have to make up the difference.

So a higher-rate taxpayer who paid 18% in Spain might have to fork out 22% extra to the British taxman, taking the total to 40%.

What about income tax?

UK residents renting out a Spanish property need to declare the income on their British tax return. They pay income tax in Spain of up to 24%, which is deducted from any tax due in the UK. You may be able to reduce your total bill by claiming for mortgage interest, repairs and letting costs.

Even if you do not rent out your holiday home, you still have to pay tax on a notional income determined by the Spanish authorities. This is usually based on 2% of the declared value of the property.

I have heard there is a wealth tax. How does that work?

This is paid annually. If you are nonresident it is assessed solely on your Spanish assets. Spanish residents are assessed on the basis of worldwide assets but can claim an allowance of about €150,000 against their main home and €108,000 against other personal assets. The tax starts at 0.2% and rises to 2.5%.

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