Transfers Between Spouses

There are many situations where a Spanish property has been acquired in the sole name of a husband or wife and, at a later date, the decision is taken to transfer that property into joint names.

Unfortunately, transfers of this nature are more involved than otherwise would be the case in the UK or Ireland.

In such cases it is preferable for there to be an actual sale and purchase between the husband and the wife, otherwise, the transaction will be treated as a gift and the percentage of the value passing charged to gift tax at the appropriate rate (up to 35%). If the transaction is dealt with by way of a sale and purchase, the transfer tax payable on the declared value of the share passing is reduced to 7%.

Assuming the transferor is not resident in Spain, the transferee is required to make a payment to the Spanish Tax Authorities of a sum equal to 3% of the declared value passing. This is treated as a payment on account of any capital gains tax payable by the transferor on the transfer by him/her to the transferee. If there is no gain arising, in most cases, the 3% payment is still due but application can be made for reimbursement.

Special advantageous rules apply for those properties purchased before 31st December 1986.

There are deductions that can be offset against the gain which is then charged to tax at 18% after giving credit for the 3% retention. For those who bought between 1st January 1987 and 31st December 1996 there are also partial exemptions from capital gains tax.

For the purposes of the transfer value, it is advisable to establish the official value given to the property by the tax authorities which may help reduce the overall transfer tax payable. However, this is only a starting point as technically the legislation contemplates the use of market value.

A transfer also triggers Plus Valia which is a tax payable to the local authority based on the increase in the value of the land (not the building), since it was acquired. It is important to establish this figure in advance as the Plus Valia can be significant when a considerable time has passed since the original purchase or local land values have increased.

Following the recent introduction of further anti-money laundering regulations in Spain, the Notaries now require to see proof of the payment passing between the parties. Although the transfer of funds does not need to take place in Spain the Notary will still need to see reliable proof of the payment.

A lifetime transfer of this nature does involve costs and expenses but overall it can significantly reduce the charge to Spanish succession tax on death.

Other Transfers

In the case of transfers to children, common law partners, co-owners and others the same considerations set out in the preceding paragraph also apply to those transfers.

Matrimonial Transfers

A transfer of property in matrimonial proceedings is treated as any other transfer of real estate in Spain and charged to stamp duty at 7% of the declared value passing. If there is no declared value this can give rise to a charge to gift tax which can be as much as 35% of the value passing. There are also capital gains tax implications arising for the transferor as referred to above.

Where the transfer of real estate arises in matrimonial proceedings and the Spanish authorities can be persuaded that each party will be receiving assets of an equal value, the tax payable on the transfer is reduced to 1% and capital gains tax is not triggered. In these situations the Court Order requires to be carefully drafted and we recommend that an advance copy of the draft is produced to the local Land Registry for prior approval.

UK Corporate Ownership

Some UK resident owners of property in Spain purchased their property in the name of a UK limited company to avoid the impact of the Spanish laws of forced heirship. In so doing many were unaware they became the subject of a benefit in kind tax charge in the UK.

The good news for UK taxpayer owners is that HMRC introduced legislation in the Finance Bill 2008 which will allow corporate ownership without triggering the benefit in kind tax charge. There are a number of conditions to be met which require, among others, ownership of the company by individuals and that the property is the sole or main asset of the company.

In the case of corporate ownership three important issues are often overlooked:-

1. For those owners resident in the UK, with a few exceptions, the laws of forced heirship do not apply to them and such persons are free to dispose of their property in accordance with UK law.
2. Many owners believe corporate ownership will enable disposal of shares in the company without incurring a tax liability in Spain, but this is not so. The UK company must apply each year in Spain for exemption from payment of the 3% annual charge applied to non-resident companies owning property in Spain. This application includes declaring details of the beneficial owners of the company and their personal tax residency in the UK. Any transmission of those shares, whether on death or by way of sale, will be noted by the Spanish tax authorities and may attract a charge in Spain either for succession tax or capital gains tax.
3. Some individual owners seek to reduce the impact of Spanish succession tax on death by mortgaging the property. Generally, most Spanish banks will happily entertain applications for a mortgage by an individual but are reluctant to do so in the case of corporate ownership.

If an owner prefers to have the Spanish property in his/her personal name this can be achieved by way of a voluntary liquidation of the UK company and distribution of the property into their name. One benefit, compared to lifetime transfers mentioned above, is that the transfer tax payable is reduced to 1% of the value passing.