BUYING AND SELLING PROPERTIES IN SPAIN
1 LEGAL ASPECTS
1.1 Private Contract
When you decide to buy a certain property, it is important to have a private contract signed. On signing the contract, it is customary to pay a reservation deposit of 3,000 euros. The contract defines the method of payment, the takeover date, and the date for signing the Title Deed.
Note: The registration of the new Title Deed automatically invalidates the old one.
If you are buying a resale property, you are normally expected to pay the balance, sign the Title Deed, and take the property over in no more than 8 weeks. In many cases, vendors expect the deposit to be more substantial, say, 10% of the agreed price. Alternatively, a lesser initial reservation deposit should be supplemented with an additional payment of this magnitude as soon as possible.
If you are buying a new property from a builder or a promotor, the following method of payment is usual:
– One month after the signing of the private contract, 30%―50% of the purchase price plus the corresponding VAT is transferred to the builder's bank account in Spain
– Another 20%―25% stage payment plus the corresponding VAT may be due half way between the first payment and completion
– The balance plus the rest of the VAT—minus the reservation deposit—is payable on completion.
In order to protect your investment, you can request the builder to issue a bank guarantee for each of the amounts you have paid.
To legalise the property sale and purchase operation, both the Vendor and the Buyer must appear before a Spanish Notary, whose job it is to act as an impartial witness of the transaction and ensure that:
– The identity of each party is verified from valid ID documents
– The details of the property are correct
– The parties are in agreement over the price
– There are no debts or encumbrances on the property or, if there are, the parties are in agreement over them.
The current state of the property with regard to possible mortgages, debts, embargos, and other encumbrances is certified by the local Property Registry.
Note: The Notary will not sign the Title Deed, unless the state of debts and encumbrances has been clarified by means of a fax sent by the Registrar in response to the Notary's official request.
Once registered in the Property Registry, the Title Deed is sent back to the Notary's office, where it is archived. You get a First Copy of this public document. This process normally takes a few weeks.
If either of the parties is unable to appear before the Spanish Notary on the agreed day, they can be represented by proxies. A person appearing as a proxy needs a Spanish Power of Attorney.
If either of the parties is not fluent enough in Spanish in order to fully understand the proceedings, then the Notary requires an interpreter to give a reading of the Title Deed in the native language of that party.
1.5 Purchase-Related Taxes
A number of local and state taxes are levied on the property transfer. These taxes are based on the price of the property. They are:
– Value-Added Tax (IVA), currently 10% of the value declared in the Title Deed (new dwellings only). Levied by the Government.
Note: VAT for business properties is counted at 21%.
– Capital Transfer Tax and Stamp Duty (ITPAJD), either 1.5% of the declared value (new dwellings only) or 10% of the declared value (resales only). Levied by the Government.
Note:These percentages are not necessarily the same in all Autonomous Regions.
– Tax on the Rise of the Value of Land ("Plusvalía"), based on the increase between the previous purchase price and the present sales price. Levied by the local Town Council.
If the vendor is non-resident, then the buyer has the obligation to withhold 3% of the declared price and pay this amount to the Government Tax Agency as an advance for the taxation of the vendor's capital gains. The Government Form (Modelo) to be used for this payment is number 210. The vendor can solicit the refunding of this money using form number 212.
You can finance part of the property purchase with a Spanish mortgage. The paperwork should be sorted out with the bank well in advance of completion. Provided that the property is surveyable (that is, in existence), the application procedure can be completed in just a week or so.
Non-residents can expect to finance up to 70% of a dwelling, or up to 50% of a business unit, with a Spanish mortgage.
3 TAXATION OF NON-RESIDENTS
3.1 General Obligations
If your fiscal status in Spain is non-resident and you own an urban property here, you are liable to Income Tax, and to Real Estate Tax ("local rates").
3.1.1 Fiscal Representation
It is important to make sure that all your taxes in Spain are paid within the established legal periods and in an acceptable manner. You are therefore recommended to appoint a professional Fiscal Representative. The annual cost of this service should not be in excess of 150 € per person.
3.1.2 Fiscal Identification Number
Every person who owns a property in Spain must have a Fiscal Identification Number for the annual tax returns and any other correspondence with the Spanish Tax Administration. In the case of Spanish nationals, this number is the same as the number on their National Identification Document (DNI). The equivalent for foreigners is the Foreigners' Identification Number (NIE), obtained from the General Directorate of the Police. As of January 1st, 2006 all foreigners who own a property in Spain must have an NIE number. Without one, their property cannot be successfully registered at the Land Registry.
3.1.3 Who Is a Tax Payer?
When a property is owned by a married couple or by various individuals, each one is defined as an independent tax payer. This means that each co-owner must file a separate tax return.
3.2 Individual Income Tax
In the case of a property used by the owner(s) as a personal dwelling without rental income, liability for Income Tax takes effect once a year, on December 31st.
3.3 Real Estate Tax or "Local Rates"
The Real Estate Tax (IBI) becomes payable to the Town Council once a year. The amount is typically in the order of 100 to 200 euros, depending on the location, quality, size and age of your property.
As owner, it is your obligation to pay the local rates, even if you have received no invoice. In other words, you yourself are responsible for finding out the exact amount payable and making the payment within the legal collecting period. This varies by municipality, but is usually around September to November.
Penalty on arrears can be up to 20%. Prolonged non-payment can result in legal proceedings and, in the worst case, an embargo on your assets and selling of property through a public auction.
It is a good idea to have a standing order in your bank for the payment of this tax. Having a professional Fiscal Representative (see 3.1.1) control this paperwork can give you extra peace of mind.
4 CAPITAL GAINS TAX ON SELLING YOUR PROPERTY
Capital gains resulting from sales of properties are taxable. The amount of capital gains is determined by subtracting your original purchase value from your obtained net selling value.
4.1 Taxable Amount
To determine the net selling value, you deduct from the selling price your expenses and taxes. The difference between the net selling value and the original purchase value is the taxable amount. The tax rate is 21%.
4.2 The 3% Rule
If you are non-resident, then the buyer has the obligation to withhold 3% of the declared price and pay this amount to the Government Tax Agency as an advance for the taxation of your capital gains. See also 1.5.
4.3 Refund of Excess Withheld
The 3% withheld may be in excess. You then have the right to a refund, but it must be solicited using form number 212 (see 1.5). The Government Tax Agency will pay the refund either by means of a cheque, or a transfer to the bank account you define. The account holder must be either you or your representative whose powers must be officially confirmed before a Notary.
4.4 Provisional Settlement
The Tax Administration has the obligation to carry out a provisional settlement within six months following the deadline established for the filing period. Should they fail to do this, they must refund the excess resulting from your own assessment. Once six months have passed, the Tax Administration is liable to pay interest on your outstanding claim.
5 SPANISH WILLS
If you have made a Last Will and Testament in your own country, it will stand up in Spain on your demise. However, there would be quite a few inconveniences, translation costs, and other expenses ahead, so it is a good idea to go to a Spanish Notary and sign a generic Will governing all your property in Spain.
All Spanish wills are registered centrally in Madrid. Upon the death of the testator, the Registry of Wills will issue a certificate of the contents of the will and, if necessary, procure the transfer of the assets to the inheritors.
6 INHERITANCE TAX
6.1 Inheritance Acceptance Deed
On the execution of a will, the heirs must sign an Inheritance Acceptance Deed before the Notary. This document states the deceased person's all assets in Spain (real estate, cars, jewelry, etc.).
6.2 Payment of Inheritance Tax
The legal period to pay the Inheritance Tax is six months from the signing of the Inheritance Acceptance Deed. The heirs pay their taxes on a pro rata basis.
6.3 Tax Base
Spanish Inheritance Tax is levied on a progressive scale from 7.65% to 34%. The percentage is applied on each heir's received capital gain, discounting the liabilities.
You need to be aware of the following tax reductions:
– Close heirs (spouses, ancestors, children, and adopted children) over 21 years of age have tax exemption up to 16,000 €.
– More distant heirs have no tax exemption at all.
- Close heirs (spouses, ancestors, children, and adopted children) who are beneficiaries of the deceased person's life insurance can count on a 100% tax reduction on received life insurance payments.