ALLOWING FOR ADDITIONAL BUYING COSTS

It is normal to allow ten per cent of the property value declared in the escritura for the additional buying costs which covers three taxes, two fees and charges from an abogado.

Transfer Tax or IVA (Value Added Tax)	7%
Actos Juridicos Documentados on a new property only	1.0%
Plus Valia Tax	0.5%
Notary fees	0.5%
Property Registry fees	0.5%
Charges from an abogado	1.0%

Transfer Tax and IVA

Impuesto de Transmisiones Patrimoniales is the Spanish for Transfer Tax which is charged on a sale between two individuals. IVA, the Spanish equivalent of Value Added Tax, is a business charge on a sale between, say, a property company and an individual. Governments can vary taxes, and they do, but it is normal to allow seven per cent for either of these two taxes.

Actos Juridicos Documentados

Effectively stamp duty of one per cent payable on a new property. It is not payable on a resale property.

Plus Valia tax

Plus Valia is payable on a resale property and a new property. It is assessed locally on an increase in the value of the land since the previous owner bought the property or a developer bought the land. An apartment on an urbanisation where little land is involved, or where there has been no increase in value in a short time, will occur a low plus valia tax charge. Conversely a home with a large plot of land, held by the previous owner for say 30 years, will suffer a high charge.

Of course it is the seller who should pay this tax. They have gained the benefit of the increase in land value. The law of the country supports this view. In practice however this tax has often fallen on the purchaser since it a more secure method of collection. After all, a vendor may flee the country leaving this tax unpaid.

A purchaser may feel, quite rightly, aggrieved at paying this tax. A recourse is simply to have a clause inserted in the contract stating it is the vendor who pays the Plus Valia tax and withholding this sum from the final payment.

Notary fees

These vary according to the value of the property declared in the escritura and the number of pages in the document. Allow 350 euros or 0.5 per cent.

Property registry

Again there is a fee to have the property registered. It is wise to allow a similar figure of 0.5 per cent.

Charges from the abogado

Naturally this fee will depend on the amount of work done. If the basic paperwork has been handled to a straightforward conclusion then the charge will be low. If on the other hand there has been complications or the need to draw up multilingual contracts then the charges will be higher. Allow one per cent for this charge.

Who pays?

The buyer and seller can agree between themselves who pays taxes, fees and charges. This can be incorporated into the contract and is not overridden by Spanish law. In practice however the buyer pays either directly, or on occasions indirectly, when the agent incorporates these charges into an overall selling price. Todos los gastos is the Spanish phrase meaning ‘all expenses arising’.

It is also normal practice to deposit the approximate figure of ten per cent of the escritura value with the abogado or the bank manager (for mortgaged properties), who will pay these accounts on behalf of the buyer who submits an itemised statement when the transactions are completed.

BLACK MONEY

It is quite common in Spain to have two purchase prices for a property:

• one price is the actual price paid exclusive of any fees or taxes;
• the other is a lower price declared in the escritura;
• as a guideline, the difference between the two prices should be less than 15 to 20 per cent;
• the difference between the two prices is normally paid to the vendor in cash.

This practice is known to agents, buyers and sellers, builders and developers, the abogado, the bank manager and the notary. It is known by the tax authorities. In fact it is known by everyone.

It is a mechanism of tax evasion which if not radically abused, is tolerated by the Spanish tax man. All taxes and fees are calculated on the value stated in the escritura, not the actual price paid. The Transfer Tax or IVA charged at seven per cent is effectually reduced to 5.6 per cent if the escritura value is declared at 80 per cent of true selling value. When reselling the same property a few years later a similar reduction needs to be applied to avoid excessive payment of capital gains tax as this too is based on a value declared in the escritura.

Many people are now seeing the folly of this practice but once started it is difficult to stop. The saving of say 1.4 per cent in initial taxes on purchasing can easily be outweighed by a greater loss in capital gains on any profit made when reselling. If a low value is declared on purchase then the capital gains liability will be on a greater profit upon selling. It is in the interests of the buyer to declare the full value of the sale.

Spanish tax officers do not sit idly by. Renowned for being sharp but pragmatic, they maintain their own table of property values and are empowered to set a higher value which can result in an additional tax bill should they feel excessive tax avoidance has taken place. This scrutiny is applied mainly, but not exclusively, to a purchaser’s tax liability. If they discover that the sale has been under declared by more than 20 per cent they can apply heavy penalties under the terms of Spain’s Ley de Tasas which was enacted to prevent this practice.

‘Black’ is the term used to describe the difference between the actual price paid and the value declared in the escritura. ‘Black money’ describes a cash payment representing the difference in values. Incidentally the payment of ‘black money’ can also occur at the start of the buying process, when an initial deposit paid as cash to the agent becomes their black money commission.

MINIMISING THE RISK OF LOSING MONEY

• Never pay a deposit directly to a seller. They may abscond. Never pay a deposit to an agent. They too may abscond. The agent will want the deposit paid to them in cash. But it is not their house! It is not their money. Ensure a deposit is placed in a bonded client account, from which it will not be released until the sale is final.
• Pay by cheque or a certified cheque or a banker’s draft in euros drawn from a Spanish bank account. Do not pay in cash.
• Never make a cheque out to an agent, only to a seller (reservation contract excepted).
• If the seller insists on anonymity ensure that no money changes hands until at the notary – where a seller must be identified.

• Be fully aware if the deposit is returnable or non-returnable in the event of failing to complete a transaction. Alternatively ask the number of day’s grace in which to change your mind.
• Do not accept a verbal agreement – ask to see it in writing.
• The payment of a deposit is the first financial and legal step in buying a property. It must be linked to a contract.

WHO SHOULD OWN IT?

There is more than one option when structuring ownership of a property. Each has advantages and disadvantages. The choice depends on personal circumstances, together with due consideration of inheritance tax. It is an important choice, for if incorrect more tax will be paid than necessary both during a lifetime and on death. Inheritance tax consequences arise not only in Spain but back home too.

Joint ownership

This is the normal way of proceeding. Two people buying together will buy in both names. It gives a level of security. Upon death the other half passes to the fellow owner (UK inheritance law) and is taxed according to the relationship by Spanish inheritance laws. It is normal for the ownership split to be 50/50 but in the case of a second marriage with three children on one side and one child on the other the split can be 75/25 which would give a fairer distribution of inheritance.

Children named in the deed

In the example above, with two adults and four children, there is nothing wrong with having all six names on the deed in equal or unequal parts. It one person dies their share of the property passes equally to the other five. Spanish inheritance tax will be small if anything.

And the disadvantage – if the children fall out with the surviving spouse they could insist on a sale of the property unless an arrangement was made for the spouse retaining a life interest.

Property in children’s name

In this case a property is in the name of the children only, with a life interest held by the named parents who paid for it in the first place. The property is the children’s in whatever parts so defined. A life interest (usufructo) is the right to use the property for a lifetime. On the death of one person, the remaining spouse or partner who has a life interest would still be able to use it. On death there will be little or no inheritance tax.

A disadvantage – the property is no longer owned by the purchaser and if families fall out, get divorced or children suddenly die it becomes complicated. As this is a peculiarly Spanish practice there is plenty of ‘civil code’ for guidance.

Offshore company

A property may be owned by an offshore registered company, in a so called tax haven, where the property is not in the name of the owner but in the name of a company. The owner of the company owns the property. When the property is sold, it is only company shares that are transferred. The same company continues to own the same Spanish property, so no Spanish taxes are charged. But the company has a new owner.

A similar approach applies to inheritance tax – the company is bequeathed to an inheritor. The Spanish authorities, blocking this loophole, have placed a tax of three per cent per annum on any property held by an offshore company. After three years it is cheaper to pay the taxes associated with purchase (ten per cent) and after ten years probably better to allow for inheritance tax at 30 per cent.