How does the legal system for buying property in Spain compare with England?
Properties in Spain are now registered at a Land Registry, similar to that in England and so the transaction does follow to a certain degree the English system. Once a price has been agreed, your lawyer will carry out searches against the property at the Land Registry and Town Hall for undisclosed charges, and when he is satisfied he will arrange for you to sign the contract. At the time of completion both parties appear before a Spanish Notary who draws up the Transfer Deed, the Deed is signed and the balance of the purchase monies handed over. The Transfer Deed is then registered at the Land Registry and you will in due course be issued with the Title Deeds.
What should I budget for in the way of extra expenses on top of the purchase price I have agreed with the Seller?
The total expenses incurred in the purchase should not, on average amount to more than 11% of the purchase price. This can be broken down as follows:
Stamp Duty (Transfer Tax)
There is no stamp duty threshold as in England and you will be required to pay at the appropriate rate based on the declared price. If you buy a new property from a developer I.V.A. (Spanish VAT) is charged at the rate of 7% of the declared price. In addition you will have to pay a further 1% for the Legal Documented Acts Tax. Resales vary between 5% and 7% depending on the area of Spain.
Land Registry Fees
The fees charged for registering the property at the Land Registry will generally be in the region of 0.5% to 1% of the declared value.
Notary's Fees
These will amount to approximately 800 Euros depending on the value of the property.
Legal Fees
The fees that your lawyer charges will vary from firm to firm. You should allow between 1-2% of the purchase price.
Power of Attorney
If you are not able to appear before the Notary in person for the signing of the Escritura (title deed) you will need to authorise someone, such as your lawyer, to appear for you by means of a power of attorney. The cost of this will generally be in the region of €250 - €325.
The Seller has asked me to underdeclare the purchase price on the Transfer Deed to save the Transfer Tax. Is this a good idea?
Whilst it may appear that by doing this you will be saving 7% tax on the underdeclaration, there are several reasons why you should think twice before doing so. The first is that the underdeclared value is the figure on which your capital gains tax liability will be calculated when you sell. The current rate of capital gains tax for non-residents is 35% and therefore you may be saving 7% now to pay 35% later. You will in effect be picking up part of the Seller's tax bill. The second reason is that the Revenue can reassess the value declared and charge you the 7% tax on the difference between the declared value and the market value of the property.
Will I have to pay any taxes in Spain if I only own a holiday home there?
Unfortunately yes. You are deemed a non-resident in Spain if you spend less than 183 days a year there. As a non-resident you will be liable for two annual taxes, wealth tax (patrimonio) and income tax (impuestos sobre la renta). Wealth tax is charged on the value of all your assets in Spain, but is only at a rate of 0.2% in general, so the amount payable is very small. Income tax is charged on the rental income from your holiday home and is charged at 25%. However, if your property is not let out then you will be taxed on a deemed income of 2% of the value of the property.
Do I need a Fiscal Representative?
Until comparatively recently it was necessary for a non-resident who owned a property in Spain to appoint a Fiscal Representative, resident in Spain to deal with his tax affairs. This rule has now been relaxed where the only asset in Spain is a holiday home. However, it is a good idea to employ one as you will find that they are not expensive in general. Without one you will have to attend to completion of the tax returns yourself, and any assessments will be sent to your Spanish address. If they arrive at a time when you are absent from Spain, you may well find that you are out of time to appeal against them if incorrect.
How can I minimise my liability to Spanish Death Duties?
As in the case of a non-resident of Spain it is worthwhile considering owning the property in joint names where appropriate, and passing your respective shares in the property to, for example children. If you pass your share to your spouse you will in effect be paying double Spanish death duties as there may be death duties on your death and in turn on your spouse's death not only on her own share but on the share inherited from you. Each beneficiary has their own tax allowance and accordingly the more beneficiaries there are, the more allowances can be set against the value of the estate. In the case of a Spanish resident, currently 95% of the value of their permanent home is exempted from death duty.
What about the use of offshore companies to hold my Spanish property?
This used to be a very tax efficient way of holding a Spanish property; the title to the property being registered in the name of the company and the owners holding the shares in the company. On a sale or on a death the shares in the company were transferred and as there was no change in the registered owner of the property, i.e. it remained in the name of the company taxes were avoided. The Spanish authorities realised that this was losing them a considerable amount of revenue and accordingly they imposed a Special Tax of 5% per annum on such properties subject to certain exemptions. The special tax has now been reduced to 3% per annum but there are no longer any exemptions.