Enter Your E-mail

TaxationWeb by Jonathan Miller

A guide for anyone who is, or has bought property in Spain. It is helpful also for those thinking of, or who have become, resident in Spain. There is also guidance on the new strategy of Buying Off Plan, that is being promoted heavily here in the UK.

THE PURCHASE

Background

Buying a property in Spain, either as a holiday home or to retire, has been a pretty popular thing to do during the last few decades. And although prices have gone up recently, the same could have been - and was - said in virtually every year during the last thirty or so.

Those thinking of such a purchase may worry a bit about what the implications are, and what are the issues they should look out for. This is primarily an article about the taxes you should be aware of, but it is worth spending a moment or two on the legal matters first.

There is one, absolutely key, piece of advice. Find a good lawyer, whom you understand and who, above all, is independent of the vendor or developer and of the sales agent. A property purchase may look like a fairly non-contentious transaction, but in our experience, there are at least five or six very important areas in which the views and interests of the vendor and the purchaser may vary considerably. You need a legal advisor who is solely on your side, and is prepared to fight for your interests where necessary. Bear in mind that it is you who is buying the property, and that your property will be the most obvious and immediately available asset to the authorities in the event that they discover such matters as shenanigans with the declared price. And if your lawyer tells you it's OK to underdeclare the price, get him to give you that in writing on his letterhead, signed and dated - and then change lawyers.

Buying a property can be a straightforward, pleasant experience, and quite trouble-free. But do get good legal advice, so it stays that way.

If you want to know more about the process of the purchase and sale contract, we can provide a copy of our briefing note called "Property purchase - an outline of contract procedures".

Costs and taxes associated with the purchase

The overall cost to the purchaser is likely to be in the region of 9% - 11% of the purchase price. If you take a mortgage from a Spanish bank, the costs may be a little bit more - just how much depends on the size of the mortgage.

The principal cost will be either stamp duty or Spanish VAT. If you are buying a brand new house from a developer, VAT (called IVA in Spain) is generally chargeable at 7%. In addition you will have to pay a documentary stamp duty of 0·5% - 1% (the rate depends on where the property is situated). If you are buying a "second-hand" house, stamp duty of 6% - 7% on the transaction is due (again the rate depends on the region in which the property is). No additional documentary stamp duty is payable on such transactions.

In addition, you will need to deal with legal fees (averagely 1%, though may be a higher percentage on smaller properties), the Notary's fee and the Registry fee (it is impossible to give an exact figure, since those fees depend on many variables - but between them, perhaps, they may come to a further 1% or so). There are also some smaller disbursements to take care of to make sure all the knots are properly tied.

Following the purchase, it may be necessary to contract (or re-contract) the utilities (electricity, water, phone and so forth). Sometimes, a contract with an alarm/security company is thought wise. Evidently, the costs of these need to be allowed for.

Buying "off-plan"

When buying from a developer, it is not unusual to do so before the property has been built. Evidently, your lawyer needs to do a considerable amount of due diligence investigation before he lets you part with your money in such "off-plan" purchases. Among many other matters he will need to be satisfied of are (a) that the developer owns the land on which he is intending to build (b) that he has planning permission (c) that he has obtained a building permit from the municipal authority (d) that he undertakes to guarantee the various stage payments you will be making to him, and so forth.

The usual form is for the developer or agent to require you to make a reservation deposit, typically of 6,000 Euros. It is common that the reservation agreement does not adequately protect your position or your money, but also that it obliges you to make the first real payment (10% or more) within a very short time (often seven days - very difficult to meet if you have not only to brief a lawyer and give him time to make his enquiries, but also to arrange for cleared funds to be transferred to Spain), or forfeit the reservation fee.

If you decide to proceed, you will be asked to sign a contract and pay over the first stage payment. The contract will provide a schedule of future stage payments and an estimated completion and handover date. This contract will be what is known as a private contract, which is to say that it is not a public contract included in a Notary's protocol. Completion and handover will later be effected by way of public deed of contract which enables you to register title to your new property in the land registry.

Upon completion, you will be required to pay the 7% IVA (VAT) and the documentary stamp duty referred to above. No tax is payable before that point, though some developers require you to make pro-rated payments of the VAT with the staged payments.

It is possible, with the agreement of the vendor/developer, to assign your rights in the private contract by way of sale. This is a mechanism by which you may effectively participate in some of the market gain in the price of the type of property you are buying, without actually having first to buy the whole property. It is clear that you should declare your gain on such a sale for tax.

Since this is a private contract, many people do not declare, however. This possibility of tax fraud has, at least in part, led to the heavy promotion by unscrupulous - or possibly ignorant - sales people of this method of buying property and taking a gain.

But beware. Not only is it a fraud, it can be a criminal offence. And precisely because the vendor/developer must agree to such a sale (being a party to the assigned contract), it puts him at risk, not only of the additional costs involved in the administration and in the re-issue of bank guarantees, but more importantly of being an accessory to such fraud. Many vendors now are reluctant to permit such assignments therefore, and even where they do, they will restrict assignment to related parties or to companies controlled by the assignor.

The mechanism is lawful and entirely legitimate, per se. There are various potential pitfalls, which need to be checked before you even make a reservation payment. And any gain realised on assignment is taxable.

NOW THE HOUSE IS YOURS - SOME TAX CONSIDERATIONS

Non-residents

If you are a non-resident of Spain, and you keep the property for your own use, you will have to deal with two annual personal taxes. There is a deemed income of 1% - 2% of the catastral (rateable) value of the house, and the tax on this deemed income is 25% - so, in short, the tax is a quarter to a half a percent annually of the rateable value. There is also wealth tax to be dealt with; the rate of wealth tax depends on the value of the property, and those rates range from 0.2% to 2.5%. As an example, a property valued at 200,000 Euros would pay 432.87 Euros (an average rate of a little under 0.22%) per annum. Both income and wealth taxes may be paid together on one simple form, provided that you own only one property in Spain for your own use.

If you let the house, Spanish tax of 25% of the rental is due. This can normally be offset against any taxes due in your home country.

Residents

The same two annual taxes as above are due from residents who occupy their own Spanish property. The two differences are (a) that the deemed income (1% - 2% of the catastral value) is added to your other income and taxed according to the rates given below, and (b) that, in respect of wealth tax, residents benefit from an exempt band of a little over 108,000 Euros.

Income Tax Rates

Band Euro	Tax rate %	Tax on Band Euro	Cumulative Tax Euro
0 - 4,000	15%	600	600
4,001 - 13,800	24%	2,352	2,952
13,801 - 25,800	28%	3,360	6,312
25,801 - 45,000	37%	7,104	13,416
45,001 >	45%	-	-

Personal and family reliefs ("personal and family minimum") are given by way of deductions from total income, before applying the tax rates. The core relief is a personal minimum of Euro 3,400 per taxpayer (ie Euro 6,800 for a married couple). Additional amounts may be added to the personal minimum to reflect disability, age over 65, and single-parent status. An additional family minimum may be available to reflect, for example an aged parent, or an unmarried child, financially dependent upon and living as a member of the taxpaying family unit.

If you let your house, the rental income you receive is also added to your other income and taxable at the above rates.

Residents and non-residents

As you would expect, you will have to pay the local equivalent of rates, known as IBI, and also the annual charge for rubbish collection. In addition, your property may form part of a Community of Owners in which case your annual subscription must be paid, to deal with the upkeep of the common areas and other community matters. You should note that all Communities of Owners have legal powers to enforce payment - membership is not voluntary. In the case of a new house, you may be required to make a deposit to help provide an initial working fund for the new Community.

What if I sell the house? (capital gains tax)

It is normal practice for the purchaser to pay all costs of the transaction, except, of course, the vendor's legal fees and his tax on any gain.

Your capital gain is calculated by taking your "base cost" (which is the price paid for the property, plus the costs of the purchase) and "actualising" that by applying a co-efficient (stipulated by law) designed to compensate you for the effects of monetary inflation. You then deduct that actualised figure from the price at which you sold the property. You can then also deduct your costs of the sale (eg legal fees and agents' fees). The resulting figure is your taxable gain.

Non-residents

If you are a non-resident of Spain, the purchaser is obliged by law to retain 5% of the agreed price and pay that in to the Spanish tax authority on account of your liability to tax on any gain realised on sale. No retention is due if you have owned the property for 10 years or more prior to 31 December 1996.

For non-residents, the rate of tax applicable is 35%. In making your declaration, you can claim the retention already deducted by the purchaser. Indeed, if that retention is more than the tax due from you, you can claim repayment of the difference.

Residents

A resident of Spain pays tax of 15% on his or her realised gain provided he or she has owned the asset for more than one year prior to sale. If he or she has not, any gain is treated as income and taxed according to the income tax rates given above. Save as mentioned below, there is no difference in the treatment of gains arising on property or any other type of asset.

There is a special, transitional, basis for calculation of the taxable gain on assets acquired prior to 31 Dec 1994. In such cases, there is some difference of treatment between real property, quoted shares, and other assets. The tax rate applied to the resulting gain, however, is the same as that mentioned above (15%).

A resident, disposing of his or her principal private residence in which he or she has been resident for at least two years, may elect to roll-over any gain into the new principal private residence provided the second property is bought within two years of the sale of the first.

A resident, aged over 65, who disposes of his or her principal private residence (in which he or she has been resident for at least two years) is exempt from tax on any gain realised on disposal.

WHAT IF I DIE? (INHERITANCE TAX)

The first thing to note is that there is no "capital gains tax" due on death. However, there may be a charge to Spanish inheritance tax on your heirs.

The second, vital, thing to note is that a spouse is not an exempt beneficiary - transfers between spouses are chargeable to Spanish inheritance tax. However, recent legislation has taken some of the sting out of this for residents. Most autonomous communities (eg Andalucia, Baleares, Catalunya, Comunidad Valenciana) have exempted a percentage (typically 95% - 100%) of the value of such transfers of the principal private residence, albeit subject to a financial cap.

Spanish inheritance tax is very different from the British version. Most obvious is that the taxable person is not the donor but the recipient. The tax due is calculated not only on the value of the assets passing but also on the degree of family relationship between donor and recipient. There is no spouse exemption and, indeed, spouses are treated no differently from the adult children of the donor.

The rates of tax are

Band up to.... Euro	Tax rate on band %	Cumulative tax Euro
7,993.4	7.65	611.50
15,980.91	8.50	1,290.43
23,968.36	9.35	2,037.26
31,955.81	10.20	2,851.98
39,943.26	11.05	3,734.59
47,930.72	11.90	4,685.10
55,918.17	12.75	5,703.50
63,905.62	13.60	6,789.79
71,893.07	14.45	7,943.98
79,880.52	15.30	9,166.06
119,757.67	16.15	15,606.22
159,634.83	18.70	23,063.25
239,389.13	21.25	40,011.04
398,777.54	25.50	80,665.08
797,555.08	29.75	199,291.40
excess	34.00

The tax, calculated according to the rates above, must then be multiplied by a coefficient as shown below (first determine the appropriate kinship group - first table - and then the coefficient - second table):

Kinship groups and personal allowances

Kinship Group -	those included	allowance (DEATH ONLY)
I	direct descendants under 21 yrs	Euro 15,956·87 plus Euro 3,990·72 for each year under 21 yrs of age maximum allowance of Euro 47,858·59
II	direct descendants over 21 yrs, spouse, ascendants	Euro 15,956·87
III	Other relatives, out to collateral second degree (eg: brother, uncle, nephew)	Euro 7,993·46
IV	more remote family, unrelated persons (including "common-law spouses")	nil

Coefficients

Pre-existing net wealth (Euro)	Group
	I and II	III	IV
0 - 402,678.11	1.0000	1.5882	2.0000
402,678.11 - 2,007,380·43	1.0500	1.6676	2.1000
2,007,380·43 - 4,020,770·98	1.1000	1.7471	2.2000
4,020,770·98 (+)	1.2000	1.9059	2.4000

It can readily be seen that, in the worst case, the top rate of tax can be 81.6% (34% x 2.4).

The detailed considerations with this tax are complex - too much so, for this short article. If the editors agree, we may submit a future article on the topic.

The possible effects of inheritance tax should be considered before you buy. The impact of the tax will differ if you own your property in your sole name, jointly with your spouse, or in some other way. Consult your lawyer and make sure you consider this aspect before signing any property purchase document, whether it is the public deed of conveyance or any preliminary agreement.

You should also consider making a Spanish will. It can make life greatly simpler and quicker for your heirs.


If you would like to know more about Spanish taxes, you may wish to consult our website www.windrammiller.com.


Note: the tax rates quoted in this article are current at the date of writing. Any new rates are normally published at the end of each year.

© 2003 Jonathan Miller, Windram Miller & Company SL, Marbella, Spain