This article is aimed to give certain tips as to how to proceed with the purchase of a property in Spain in order to avoid the possible pitfalls.
It is advisable for the prospective purchaser to use the service of a reputable Real Estate Company who will help him find a property in a given location to meet both his requirements and budget. A small reservation fee will be demanded in the region of 1.000 to 6.000 Euros which can be given to the Real Estate to take the property out of the market.
However, as a “caveat emptor” no further monies should be given to any person other than a Lawyer as deposit to be held until a prior inspection of the Title and searches have been conducted which show that the property is registered in the name of the Seller free from any charges and encumbrances. To avoid surprises when it comes to development property, the lawyer should carry out searches in the planning department of the local council to verify that the building licence under which the property is being erected has not been challenged for not complying with the existing zoning and building regulations in the Town Plan as this type of information may not have reached the land registry.
The Lawyer should recommend his client to carry out a survey of the property should same be more that 10 years old or if it apparent state may lead to believe that there may be structural defects or the installations may not work properly. The Builder of a property in Spain is liable for any structural defects on the property which occur within ten years from the issue of the Certificate of Completion of Works from the Architect. As from 6.05.2000, the developer must subscribe an insurance policy to cover any structural defect within the said 10 year period. This gives additional protection to the buyer, who will become beneficiary on taking out title to the property, as the insurance company will require that all the constructions works are supervised by a quality control company. However, after the expiry of the said period, any remedy from the builder will be non existent and therefore rectification of any of these potential problems can only be sought from the Seller. Thus in case of old properties, the Survey is of capital importance before the buyer is embarked in the transaction.
The Private Contract
Once the searches have been conducted and the outcome is satisfactory, the Lawyer will negotiate the terms of the contract with the Seller or his Lawyer. There are different types of private contracts to be signed at this stage to secure the purchase of the property and take it out of the market, i.e. deposit contract, contract of purchase and sale, option contract, etc, whereby the purchaser pay a deposit, normally 10% and the vendors agree to sell the property. The completion of the transaction is fixed within a particular time scale, usually four weeks when the balance of the purchase consideration is paid and the Title Deeds of the Property is executed and signed by the parties in the presence of a Public Notary.
The choice of the type of contract is something to be assessed by the Lawyer of the Purchaser taking into account the circumstances of his client and the terms of the negotiations with the Lawyer of the Seller. Please note that not all private contracts will lead to the same consequences as for instance sometimes the Seller may pull out of the transaction paying a compensation, usually double of the deposit paid to the Purchaser who may find out that although he may obtain certain economic compensation this is not what he wanted as he was interested in acquiring a particular property on which he has paid a deposit. This may be avoided if properly negotiated by the Lawyer who may draw up a contract whereby the Seller will be committed to sell the property on the agreed date to the Purchaser once the remaining conditions of the contract have been met by the latter, especially the payment of the balance of the purchaser consideration, therefore not leaving any contractual possibility for the vendor to pull out of the transaction. If the Purchaser fails to complete the contract on the agreed completion date, the deposit or option price paid shall be forfeited.
Purchase of Property under construction
When purchasing a property off the plans or under construction an obvious risk is added to the transaction, i.e. that for some reason the property is not started or once commenced is not delivered on the agreed date. In order to protect the prospective purchaser of any of these eventualities the Lawyer should demand a bank bond or an insurance cover from the developer whereby any amounts handed over by the purchaser plus interest shall be returned to him should the property not be started on a certain date or same is not completed on the agreed date. In these cases the buyer can rescind the contract and execute the Bank Bond or Insurance Cover in order to obtain his monies back plus interest.
The specifications and plans of the property must be agreed and attached to the contract. If the property is within a Complex, another plan of the Common elements where the gardens and pool must be shown should be attached to the contract.
On the agreed completion date the Title Deeds or Escritura is executed by the parties before a Notary Public and the Title is vested in the name of the Purchaser. On completion possession is given to the Purchaser and the signing of the Title Deeds in Spain equates delivery of the property to the Purchaser unless otherwise agreed.
In normal conditions the final payment is effected by the Purchaser upon completion before the Notary. The Tax Fraud Prevention Act creates new obligations when it comes to property transactions. In order for the Land Registry to register a transaction, the Title Deed must include the Fiscal Identification Number (NIF or NIE in case of non-residents) and the means of payment for the purchase price. If the vendor is a non resident the law provides for the obligation of the Purchaser to withhold 3% of the purchase consideration to be paid to the Tax Office as a payment on account of the vendors Capital Gains Tax liability as result from the sale. If this retention of funds is not made and paid the Property conveyed will be affected to the payment of the Capital Gains Tax. This affection will be shown in the Land Registry Books.
The Vendor must produce a Capital Gains Tax Assessment within the next four months from Completion and the said 3% will either be deducted from any Tax to be paid or partially or totally refunded if the amount withheld exceeds the Capital Gain Tax to be paid. Capital Gains Tax applicable to non residents is 18% on the net Gain.
Upon completion the Lawyer must check that all the outgoing expenses on the property are paid up to date and make the corresponding apportion with the Vendors Lawyer to this effect.
The Original Title Deed of Purchase will remain in perpetuity at the attesting Notarys Office who will issue an authorised Copy of the Title Deeds which is the working copy which must be processed by the Purchaser for the payment of the taxes involved and the Registration in the local Land Registry. Payment of the taxes should take place within 30 days of completion and surcharges are applicable therefrom.
The costs involved in the acquisition of a property in Spain are different if the property is bought from a developer as 7% VAT plus 1% Stamp Duty must be paid than if it is a resale as only Transfer Tax is paid at the rate of 7% on the agreed consideration.
Apart from the tax on the transfer the Purchaser must face the Land Registry fees and his own Lawyer fees. The Land Registry fees are based on a scale and ranges from an average of 300 to 1000 Euros and the Lawyer fees varies from 1 to 2% of the purchase consideration.
In addition to the said strictly costs attributed by the Law to the purchaser, Notarys fees and a local tax known as Plusvalia Tax has to be paid. Although these are the liability of the vendor it is widespread practice that the parties agree, based on a demand from the Vendor, that the Purchaser pay all the taxes and disbursements on the transaction. The Plusvala Tax is a one time payment local tax which levies the increase in value of the land on which the property has been built since the last recorded transfer of ownership and is based on the value of the property for local rates purposes (Valor Catastral). It is strongly advisable for the Purchaser that the amount of this tax is checked by his Lawyer before agreeing the demand from the Vendor that the Purchaser pays same.
In summary the Purchaser has to allow for an additional 11% of the Purchaser consideration to meet the transfer costs involved in the transaction.
Foreign Company Registration
Up to very recently there was a tendency to use Foreign Companies as vehicle to register property being purchased by non resident purchasers in order to avoid the payment of Transfer Tax and Death Duty. These taxes were avoided when the shares were exchanged abroad and the Authorities would not know when the property was changing hands. Nearby Gibraltar did a booming business with the result that there are more companies registered in Gibraltar than inhabitants in this colony.
The Spanish Tax Authorities reacted and passed a law whereby Non Resident Companies owning Real Estate in Spain must pay annually a tax consisting of 3% on the Value of the Property for Rates Purposes (Valor Catastral). The Valor Catastral has no resemblance with the real value of the property and normally does not exceed 50% of this. Only the States, International organisms, Non Profit Making Organisations, Companies which develop business in Spain which can be differentiated from the mere holding of the Real Estate are exempted from the payment of this Tax. When property is indirectly held through the use of a non resident company the exemption of this Tax can be achieved so long as both Company and the Physical Persons who are the ultimate beneficiaries of the capital of the Company are residents of a Country which has a double taxation treaty with Spain with provisions for exchange of information between the Tax Authorities of both Countries. In addition to this, the new Tax Fraud Prevention Act in force since January, the 1st, 2007, includes important changes affecting Offshore Companies. These are companies from a list of jurisdictions (from the so-called Black List) which were subject to prime attention from the Spanish Tax Authorities. These Offshore Companies face severe tax legislation, apart from the 3% tax on the rateable value of property when the company holds real estate, the transactions they carry out with third parties are valued for tax purposes at market value. Now the law attempts to close the circle, enlarging the list to include not only companies on the “Black List” but also those from jurisdictions of practically null taxation or those with which Spain has not worked out a double taxation treaty with provisions for exchange of information. The Law will consider Offshore Companies resident in Spain if their main assets consist of real estate property situated in Spain. As far as CGT goes, the existing Non-Resident Income Tax Act provides for the taxation in Spain of the share transfer from a company whose main assets are directly or indirectly (through a subsidiary holding) real estate assets in Spain. Under the new draft bill, if an offshore company is involved, the appraisal of these transactions will be based on the market value of the real estate, regardless of the property price declared and the real estate assets of the company will be affected by the payment of the tax.
Upon the enforcement of this legislation the use of an Offshore Company to vehicle an investment in Spain will be something belonging to the past.
For those who purchase property in Spain is strongly advisable to execute a Spanish Will confined to their Spanish Assets as this will avoid backlog to their heirs upon their death who will save to translate, notarise and legalise any Grant of Probate or Letters of Administration issued in their own country and will allow the heirs to simultaneous wind up the British and the Spanish Estates left by the Testator.
In Summary when dealing with purchase of property in a foreign country, irrespective the size of the investment, the prospective foreign Purchasers should be assisted by a Lawyer as they would do in their home country. This will defend their interest before the Vendor and help them in adhering to all legalities and not least important, will give them peace of mind.
Please note the information provided in this article is of general knowledge only and is not to be construed or intended as substitute for professional legal advice.