Harry King retired from corporate life in Britain to live in Spain. He would do so all over again if faced with the same decision, and now lives in Alicante. He is the author of a number of books including Going to Live in Spain, Buying a Property in Spain and Buy to Let in Spain.
A seller and buyer, with the assistance of an agent, will agree details of a purchase. A Private Contract is drawn up by an abogado, at which time the buyer makes a substantial non-returnable deposit. This deposit holds the property for the buyer until an agreed date at which time the buyer pays the full purchase price, either from their own resources or by obtaining a hipoteca (mortgage). If the buyer does not complete the sale, they lose the deposit. If for whatever reason the seller does not complete the sale, double the amount of the deposit is returned to the buyer. The two parties complete the transaction at the notary and sign the escritura when the balance of money exchanges hands.
While selling a property is simply the reverse of buying one, some key issues need to be addressed:
- the division of costs associated with a property transfer;
- the value to be put in the escritura;
- the role of an abogado.
Plus Valia Tax
Remember the comments in Chapter 7: ‘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.’
Who pays the Plus Valia tax? The normal practice of this being to the account of the buyer needs to be confirmed.
Value in the escritura
Again remember the comments in Chapter 7 where it was stated that it is quite common 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. ‘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 the market value.’
The purchaser may wish to declare the full purchase price, or no less than 80 per cent of the purchase price, in the escritura. The seller will wish to have 80 per cent of the purchase price declared to reduce any capital gains tax liability. Of course the seller’s position will be influenced by any substantial under-declaration on their part when initially purchasing the property.
How is this resolved? The seller can perform a number of calculations to determine the least damaging position, but to coin a phrase ‘at the end of the day it is the buyer who calls the shots’. If the buyer wants 80 per cent or 100 per cent, or any other figure in between, declared in the escritura then that is what happens. Why? The buyer has the legal right to do so.
Role of an abogado
Let us again remind ourselves of some of the comments in Chapter 6. ‘It is not necessary in Spain to have two abogados. It is accepted that only one is necessary, as a contract drawn up by an abogado can be assumed to be correct. After all the final legal safeguard, the notary, is still to come. An agent selling a property normally appoints an abogado. The contract may be perfectly legal but it is possible it will contain clauses more favourable to the seller than the buyer. But who pays the bill? The buyer. It is wise for the buyer to appoint an abogado to draw up a contract or to take other additional independent legal advice prior to signing a contract.’
Conventional wisdom states a buyer may need two abogados but a seller certainty will not.
CAPITAL GAINS TAX
Details of how to calculate CGT are contained in Chapter 14 on personal taxation. There is exemption if:
- the property was bought before 1987;
- the owner is 65 years old, a resident, and has lived in the property for a minimum of three years;
- the owner is a resident using the full purchase price to buy another principal residence in Spain.
Buying from a non-resident
Anyone buying a property from a non-resident is required to subtract five per cent from the purchase price and pay it to the tax office within 30 days of the transaction. This is a deposit against a vendor trying to avoid paying capital gains tax. Provided the buyer deducts five per cent from the purchase price they cannot be pursued for additional CGT if the seller’s liability was greater than five per cent and they fail to pay it. However, if the buyer fails to subtract and pay five per cent tax, they are liable to pay all CGT due on the sale.
After paying five per cent, a buyer must give the vendor a copy of the completed tax form. The vendor must then apply for a return of the difference between the five per cent deposit and total CGT liability. However this is an unlikely scenario, as a nonresident’s liability to CGT is probably more than five per cent of the sale price.
Having a local authority purchase a property or piece of land can hardly be regarded as a sale. There is however a requirement for them to pay a fair price and go through a judicial process. The system is known as expropriation (to take away, or transfer from an owner, for public use). For most people, any improvement in public services such as a new road is good news but not necessarily so if it affects an individual.
The authorities are represented by the public works department, Ministerio de Obras Püblicas y Transportes, which informs the owner that expropriation proceedings are about to begin by sending a letter inviting those affected to attend a hearing in the town hall. Once the extent of expropriation is defined, the authorities communicate an offer of payment which if acceptable concludes the matter. But it is the degree of expropriation that is often the issue. Where there are different ideas on a small piece of land, a building or even part of a building, discussions on value are often necessary. Expert advice too is taken.
Unable to come to an agreement with the authorities? Then go to the Jurado de Expropiaciones, a special court set up for this purpose. Its members comprise not only judges but property experts too and its decisions have ensured that a fair market value has been paid to many property and land owners. However it must be stated that the chances of resisting expropriation are not good, because in law public benefit always takes precedence over private ownership.
Compare the fairness of this system with the so termed ‘land grab’ approach of the Valencian Comunidad below.
Valencia’s Ley Reguladora de Actividad Urbanistica
Property owners in the Valencian Autonomous Community should be aware that under the Valencian Government’s Ley Reguladora de la Actividad Urbanistica of 1994, all land may be converted for property development, unless it has been deemed no urbanizable on historical, cultural or ecological grounds.
This means that even rustico (rural land) may be redesignated as fit for property development if the town hall approves a developer’s plan for such a change in use. Land classed as urbanizable is also, by definition, appropriate for development. It is therefore important when buying property in the Comunidad of Valencia, which includes the Costa Blanca, to check future development plans at the local town hall. This is also advisable even where land is already deemed to be urbano, since only by checking the status of a property can one become aware of the implications of likely future developments.
The Valencian regional law regulating urban development was passed with the aim of stimulating urban development. Many parts of the region were caught in a situation where normal urban growth was paralysed by a maze of smallholdings whose owners refused to sell or to participate in development projects. Town planners found their projects blocked by stubborn people. As a result the rationalisation of streets, sewage, lighting systems and parks required for harmonious urban growth could not go ahead.
To deal with this situation, the regional government came up with new rules. The legislation provides for compulsory participation by landowners in development projects backed by town halls, and ensures that existing owners do not benefit from windfall profits. These profits occur when an owner in the path of development discovers their formerly rural farm is about to become a city block. The land is suddenly worth a fortune. Paying for this formerly fell to other taxpayers. So the Valencian authorities designed a way to make the landowners pay their share.
The town hall plan and carry out an urbanisation project on their own, or designate a private developer as an ‘urbanising agent’. The latter is the most common. This delegated private developer then acts as an agent of the municipal authority, with the right to take private land or compel payment for it even when the owner does not wish to sell.
If planning is approved
Owners of property where a change of classification is approved receive a notice from the town hall that they have 15 days in which to comment on the proposed new use. They may argue to preserve the status quo or in some way to protect their existing rights, but as matters stand the probability is that the change of use will be permitted, perhaps with some modification. The town hall’s decision is subject to approval by the Valencian Government.
If planning is approved, current owners will be obliged to contribute to the new development. This may involve having some of their land expropriated for compensation, which will depend on the existing classification of the land. Owners may also have to make a financial contribution to the construction of roads, drains, lighting and other urban development costs.
This is clearly not what the law was designed for. In fact there is a major loophole in it. Through protests and publicity there is a determination to make the authorities in Valencia, Madrid, London and Brussels aware of the injustice of this system and to demand a change, but the Valencia authorities seem slow to react. This will happen sometime because the present situation is intolerable. Until then ... beware when purchasing property in the Comunidad of Valencia.
This story will roll on. It is familiar to people in the Valencian region who have a property close to rural or undeveloped land. What can be done about it?
The best thing is to find a lawyer who does not carry out work for a local council and who specialises in urban law. They will at least be able to understand the bureaucratic process, which can last for years. There will be several steps that will have to be taken within short time limits and an owner may not be aware or properly informed of these. Non-compliance with these requests, or failure to officially notify an answer in a stipulated time, may make things worse.
The first, and possibly only, notification received will be in the BOP Valencian bulletin, which can be accessed over the web, plus a notice in a local (Spanish) newspaper. Of course one can go to the town hall for information and even though they may appear helpful, they can be misleading, withholding information unless specifically requested. Even then an expert is required to explain exactly what these documents signify.
Hundreds of people have banded together and joined the AUN association (Abusos Urbanisticos No), for mutual support and advice. Residents of all nationalities and age groups are presenting a united front. Contact details: www.abusos-no.org