buy a property
in Spain:"Golden Rules"
THE ESTATE
AGENT
Once you have chosen
the right estate agent with experience and knowledge of the property
market, he will help you to find a suitable property. The agent will
show the finest selection of properties advising as to the best areas to
invest in, comparing prices and qualities.
You should ask for
details of the outgoing payable every year to maintain the property,
namely the Annual Real Estate Tax (IBI), the community fees, the charges
for rubbish collection, the water rates, the electricity charges and the
property Income and wealth tax in respect of the property you wish to
buy.
When you have made a
decision as to the property you want to buy you will be asked to make
immediate payment of a RESERVATION DEPOSIT, thereby ensuring by that the
property is not sold to another purchaser. You will then have a period
of between 10 and 15 days to exchange contracts but before doing so, you
should seek proper legal advice.
LEGAL ADVICE AND
ASSISTANCE
Prevention is always
better than cure. From now on until and after completion of the
purchase, the adviser will take care and assist you in all the different
steps involved in the transaction. There are many excellent
english-speaking-spanish advisers in Spain.
Choosing the right
adviser is your guarantee that spanish legal requirements are met, that
the property is registered in the vendorīs name and that it is free of
any mortgages, charges encumbraces, debts or other liabilities. Your
adviser will negotiate and discuss the purchase terms with the sellerīs
adviser. The terms should not be limited solely to price but should
cover in detail all your requirements like the completion date, the form
of payment... etc.
Once you have
appointed your chosen adviser firm they will explain the procedure
involved in buying in Spain and the associated costs.
The next step after
paying the reservation deposit is to evidence the terms of purchase in
writing. At this stage the legal advisers will draw up THE PRIVATE
CONTRACT. It is customary to pay a deposit of ten per cent of the price
on exchange of contracts, which is not normally refundable if the
purchaser defaults. Conversely, if the vendor fails to perform his
obligations, you will be entitled to rescind the contract and claim
damages. Before your lawyer exchanges contracts he will have completed
his searches and investigations in respect of the
property.
Finally, on the day
fixed for completion your adviser will go to the Notary Public to sing
THE TITLE DEED, making the final payment to the vendor who will
simultaneously pass over possession of the property to you, handing you
the keys. At this stage the sale is completed. Inmediately after
completion, the notary will fax details of the title deed to the local
land registry to inform them of the identity of the new owner so as to
prevent the property being sold twice. In this way the Notary and the
Land Register act together to protect and guarantee your
interests.
You will then have
to pay the relevant taxes and have the original title deed submitted to
the Land Register for registration of your title. Your lawyer can also
arrange for the transfer to your name of utilities and services such as
water and electricity and organise their payment through a local bank.
The purchase of the property will involve the following
expenses.
THE
FEES
-Notary, who charges
according to a fixed scale, his charges may range from 56.619 ptas for a
property price of 20.000.000 ptas to 100.000 ptas for property price of
100.000.000 ptas.
-Land Registry, as a
rule of thumb, 40% of what the Notary charges.
THE
TAXES
-If you are buying a
re-sale property you are obliged to pay Transfer Tax (ITP) at 6%.
-If you are buying a
new property or a property in the course of construction from a
promoter, developer or habitual trader, then you should pay VAT (IVA) at
7% plus Stamp Duty at 0,5%.
-The VAT (IVA) rate
increases to 16% if you are purchasing plots and land, commercial
premises or garage spaces.
-Plusvalía is a tax
levied by the local Town Hall based on the particular area where the
property is located, on the surface area of the land, on the catastral
value and on the date of the previous title deed. This tax may range
from a few thousand pesetas to as much as several million pesetas on
larger properties with a lot of land. By law the vendor is obliged to
pay this tax but it is common practice for the parties to negotiate on
who is to assume this liability.
-Finally, bear in
mind that your adviser will charge fees for his professional services
normally at 1% of the price plus VAT (currently at
16%).
TAXATION OF THE NON RESIDENT OWNER OF SPANISH REAL
ESTATE
We seek here to give an
overview of how the non resident owner of Spanish Real Estate is taxed
here in Spain. The article will assist those of you who are thinking
about buying a property as well as those of you who already own
property. We begin by examining Spain’s Property Income Tax and it’s
peculiarities and thereafter Wealth Tax.
Property Income
tax
Letting your
property
Whether the non-resident owner of the
property is a natural person or a company, the taxable base is made up
of the gross amount of income earned through the collection of rents.
There are no permissible deductions on account of expenses incurred in
collecting the rent or with renting the property. That base will then be
taxed at 25%.
Example.
A non resident rents his villa for twelve months
for the sum of 1.000.000 ptas. He pays a local Estate Agency a fee of
150.000 ptas to rent the property and to collect the rent. The taxable
base will be 1.000.000 ptas which taxed at 25% gives a tax liability of
250.000 ptas.
Non let property -
the peculiarities!
It is evident that a
property which is not let nor sublet may be occupied by the owner, left
empty or given to a friend to use on a gratuitous basis etc. In neither
of the above cases does the owner earn any income from the property.
Thus in such cases the law in Spain has defined an imputed income or
fictitious income which is calculated by multiplying the Catastral Value
(an official valuation of the property for the purposes of calculating
certain taxes.
Found on your Annual
Real Estate tax receipt, IBI for short and is usually considerably lower
than the market value) of the property by 2% as a general rule or by
1,1% in the exceptions as described below. The taxable base is made up
between the difference between this imputed income defined by the
statute and certain deductible expenses. This imputed income is not
produced where the property is Non-urban.
The multiplicand of
1,1% is applicable in the two following cases:
- Where the Catastral
value of the property has been revised or modified since 1-1-1994
- Where the property
does not have a Catastral Value or this had not been modified at the
time when the imputed income tax is due. In the latter case, the value
of the base to be multiplied by 1,1% is arrived at by multiplying the
real value of the property, i.e. that declared on your title deed or
the market value which ever is the highest, by 50%. This second
possibility is applicable as from 1-1-1997
Creating a right of
use of the property
Where there exists
rights of use of the property given to another, it is the beneficiary of
those rights of use who will be taxed and not the non-resident owner.
The user will be imputed income in the amount resulting from multiplying
the total value of the property by 2%. In order to evidence the absence
of rental income in the owners tax return, it will be sufficient to
produce the covenant granting the right of use of the property to
another.
Property let on a
gratuitous basis
Where the property is
let gratuitously either to a friend or otherwise, or is let for a rent
considerably lower than the market rent, the Spanish Tax Authorities may
apply the presumption that the person letting the property has obtained
a rent equivalent to normal rental prices charged for properties with
similar characteristics. The owner will have the burden of proof of
demonstrating that the property was let gratuitously. Where such is
proved, the non resident owner will be imputed income on the basis that
the property had not been let, i.e. at 2% or 1,1% of the Catastral Value
whichever is applicable.
Where the owner fails
to prove the property was let gratuitously, he will be taxed on the
estimated market rent at the rate of 25%.
Property let to a
relative
Where property is let
to a relative, the rent charged for the purposes of calculating the
taxable income may not be less than 2% of the Catastral Value. Where the
property is let to a relative on a gratuitous basis and the owner is
unable to prove such, the rent may be assessed by the Tax Authorities at
the market rent which may not be less than 2% of the Catastral Value but
may be more.
Changes in the use
of the property throughout the year
Where the use of the
property changes over the year, the taxable base is arrived at by
applying the rules of calculation in respect of each of the
circumstances of use. Thus if the property is rented for part of the
year and left empty, given to another to use on a gratuitous basis or a
right of use created for other parts of that same year, the taxable base
will be arrived by applying the rules as described above to each of
those situations for the periods involved.
Deductible expenses
For non
resident owners the law limits the expenses which may be deducted from
the taxable base in those cases where the property is not let to the
Local tax charged each year on the Real Estate (El Impuesto Sobre Bienes
Inmuebles or IBI for short).
The Property Income
Tax rate
The taxable base
arrived at is then multiplied by the tax rate of 25% to give the tax
due. The tax year runs from
1st January to
31st December and is
payable in the month of January in the following year. The tax is
calculated on the same basis as it is for residents and is calculated in
proportion to that part of the year for which the non-resident owner has
held title to the property.
Property owned by a
non resident company
Where the title owner
of the property is a non resident company the property does not produce
any taxable rent but since 1-1-1992 the non-resident company will have
the property taxed under the Special tax on real property owned by non
resident companies. As from 1996, the rate applicable is 3% and is
charged on the Catastral Value of the property. As regards alternatives
to paying this tax see our article in issue number 11 of the Interealty
property Gazette.
Nevertheless, where
shareholders use the property, the non resident company will be imputed
a market rent earned in respect of periods of use of the property by the
non resident company shareholders. The non resident company will then be
taxed at the rate of 25% on the deemed income
earned.
Property Wealth
Tax
The non resident owner
of real estate in Spain will be taxed on the value of the real estate on
account of Wealth Tax. The same is applicable to residents save that
residents have an exemption of 17 million pesetas which the non resident
does not.
In
general
The taxable base will be
whichever of the following three is the highest:
- The Catastral Value
- The value imposed by
the Tax Authorities
- The real or market
value, the purchase price. (I.e. that which figures on the title
deeds)
Property under
construction
Where property is under
construction the taxable base is the value of the amounts invested in
the construction to the
31st December of the tax
year plus the value of the plot of land in accordance with the rules
outlined above.
Property bought
through time share schemes
The taxable base of
property bought through time share will be calculated in accordance with
the rules above where legal title to the property is held in the name of
the owner. Where the owner holds a share certificate or other form of
equitable title, the taxable base is the price paid for the time share
or share certificate.
Property let with a
contract which was celebrated prior to
9th May 1985
In this case and
provided the contract subsists at the
31st December of the tax
year, to calculate the taxable base the owner must take the lower of the
following two:
- The taxable base
arrived at through the application of the general rules outlined above
- The result obtained
from capitalizing the rent by 4%.
Example:
A non
resident buys a villa in January 1985 and in the same month rents the
property out to Mr.Ppito who in 1996 pays 100.000 ptas per month. The
Catastral value in 1996 was 50.000.000 ptas. The owner must value his
property in the amount of 30.000.000 ptas. (100.000 ptas x 12/0.04 =
30.000.000 ptas).
The tax rate
in respect of Wealth Tax.
The base is then taxed on a sliding scale
as follows:
Taxable
Base:
up to
26.780.000 ptas 0,20%
from
26.780.000 ptas to 53.560.000 ptas. 0,30%
from
53.560.000 ptas to 107.120.000 ptas. 0,50%
from
107.120.000 ptas to 214.240.000 ptas 0,90%
from
214.240.000 ptas to 428.480.000 ptas 1,30%
from
428.480.000 ptas to 856.960.000 ptas 1,70%
from
856.960.000 ptas to 1.713.920.000 ptas 2,10%
from
1.713.920.000 ptas upwards 2,50%
This article
serves only as a guideline to some of the tax laws affecting the
ownership of real estate by non residents in Spain. Spanish laws are
complex and the above is not exhaustive. We recommend that you consult a
lawyer when it comes to taxes, conveyancing and indeed any other areas
of Spanish law.