Risks and costs of buying and owning private Property in Spain in 2012/2013

Risks and costs of buying and owning private Property in Spain in 2012/2013

(21. November 2012)

1. Introduction

Nobody should buy a house or a flat in Spain without taking a very close look at the costs beyond the purchase price. There are a lot of aspects a buyer should be informed of and we will discuss the main topics in this raw overview. This overwiew about the legal frame of the costs ob buying property in Spain will exclude the legal aspects of buying a property through a company and for business reasons, because these are very special scenarios. We will discuss these aspects in a separate article in the near future.

By the way and this is an old wisdom: Don’t do anything only because of some tax aspects as important they may be.

In this overwiew we explain the main costs. There are a number of costs and taxes over and above the property price that you will have to pay to the seller or the state or for service reasons. The detailed circumstances are depending upon whether you will buy a new property from a developer or a resale property from a private individual and you can even act as an investor on your own. In the following passages we will explain the different scenarios. The transaction costs usually consist of the costs and fees for the Notary, the Register and the Gestoria and applicable taxes, but don’t forget about insurance. With the exemption of “Plusvalia” and a special capital gain tax they are normally imposed on the buyer, although the – dispositive – legal model in Art. 1455 CC states a – not strictly legal binding - half - and - half - model. You have to calculate more or less 10 – 15 % average costs, but it depends on the individual case.

2. The real Purchase Price as the first risk: Trial and Error?

Basically a buyer of a Real – Estate – Object in Spain has to deal with three awards: the estimated value of the property (Tax Office, Banks), the price that is actually paid and the price that is registered in the Land Register following the Escritura. As we all know: in earlier years it was more or less usual to name the real purchase price only in the private buying contract – if ever - and a lower price in the “official” contract, which is recorded by an spanish Notary (usually defined in Spain as “Escritura”). The difference was paid in “cash” from the buyer to the seller, eye to eye. But since 2001 Money Laundering Rules got busted all over Europe and the western world and in it’s consequence in Spain too. Under these circumstances “Securitisation” can become a very risky business and we warn you to act that way.

With Ley Nr. 36/2006 the spanish Cortez stated in a then more or less new regulation that all parties of a Real – Estate – Contract are obligated to give all vouchers regarding to the transfer of the purchase price (account statements, bank transfers, Cheques, Bank Acceptance, etc.) to the recording Notary, who is obligated to attach such documents to the Escritura. It’s not unsual until now, to make the aspects of the transfer of money only clear between both parties to such a contract, without assistence of a legal professionell. To work at such things without professional legal Advise is a great risk. Since this regulation came up the related parties of such contracts were obligated to establish value market prices, which could be controlled by Spanish Tax Offices and they control it more and more. The intensity of this control was vary from town to town over the years. Because of this regulation the so called “Securisation” has become a risky business since 2006 and no Lawyer, Tax Consultant or Notary will advise you to do such a risky business, even if the practicing in some regions might be a little bit different from the letters of law. If Hacienda will find out such things all relevant taxes have to pay on the difference between the paid price and the value fixed by Hacienda. In a lot of cases it makes sense to oppose to such tax assessment notices.

There is another aspect buyers and sellers should be aware of: Prevention of Money Laundering. For several times Financial Action Task Force in Paris (FATF) has assessed Spain’s anti-money laundering and counter-terrorist financing (AML/CFT) standards. In August 2012 the US State Department stated in their Money Laundering Report – 2012 that Spain is still a major European center of money laundering activities, although the actual spanish Regulation is absolutely conform with the Third Money Laundering Directive of the European Union (Ley 10/2010), which is under pressure of FATF at the moment and because of this Germany and Italy have sharpened their rules in a kind of a anticipatory obedience.   

Spain enacted „Ley 10/2010“, which transformed the principles of the 3. EU-Anti-Money-Laundering-Directive into spanish Law. This „Ley 10/2010“ from the 28th of April 2010 has the following title: „De prevención del blanqueo de capitales y de la financiación del terrorismo“. It obligates financial institutions and other industries including Notaries, Lawyers and Tax Consultants to prevent Money Laundering and Financing of Terrorism. Of course it installs a network of a rigid state control in a free market. In Spain Money Laundering is an offense against Penal Law (Art. 301 – 304 Código Penal) if one brings “Black Money” into the national money circuit. Such an offense is punishable by up to 6 years in prison in Spain. Particularly serious is the offense of Money - Laundering – Rules, if the money comes from drug trafficking, corruption or crimes against urban laws, especially in connection with Real – Estate - Projects. Of course the laundry of evaded taxes is a crime too, especially if the money comes from a non-original offense. Any Investor whereever in Europe should now the basic facts about this rules to avoid problems with State Offices, Police and Justice.

With a new regulation which is in effectivity from the 19/11/2012 (http://www.minhap.gob.es/es-ES/Paginas/Luchacontraelfraude.aspx) the control over money transfer shall get much better in Spain. It is part of a greater Anti – Tax – Fraud – Strategy of the spanish Government as one reaction to the fiscal crisis in Spain. This new Law is called “Anteproyecto de ley de modificación de la normativita tributaria y presupuestia y de aduaciación de la normativa financiera para la intensificación de las actuaciones en la prevención y lucha contra el fraude”. With this law it will amended that transactions above 2.500,00 Euros can not be paid in cash anymore (“en effectivo”) when one of the parties involved is acting as a company or as a professional (Real – Estate – Agent, Lawyer, Notary, Tax Consultant, etc.). The definition of “Cash” appears in Article 34.2 of the Spanish prevention of Money Laundering Law 10/2010. This regulation will not take place if parties will transfer a purchase price in private as far as it seems at the moment. This amount will raise up to 15,000 Euros when the party that settles an invoice is an individual non - resident and of course not acting as an entrepreneur or professional in Spain. The corresponding penalty will be imposed 25% of the base.  It is the target of this new regulation to prohibit money transfers in cash and to control more or less all transfers caused by contracts to fulfil the high standards of FART. Compared with Italy or Germany it is a more or less relativly “liberal” regulation. All parties involved should keep the proof of payment, for a period of five years from the date of payment on. People who are willing to invest in Spain should know the basics of these Money – Laundering - Regulations. The payer and the recipient, will be jointly liable for any committed infringement.

Be aware that the Spanish tax offices are actively on the hunt for non tax payers, so don’t play around with tax duties. You would be good advised to consult tax experts to avoid any problems.

3. Purchasing a new building from a developer: IVA & Actos Jurídicos Documentados

There some differences whether you buy an object from a developer or in private, regarding to the tax – situation, although the warranty claims in Civil Law (following Art. 1481 C.C. and L.O.E. = Law of Building Ordinances) are nearly the same. We will discuss civil – law - topics in a separate article in the near future.

The system itself is more or less simple to discribe: If you buy a Real Estate for residential purposes from a professional developer you have to pay 10 % IVA (VAT in Great Britain) from 01.01.2013 on (2012: 4 % IVA).  If a contractor was instructed to prepare a turnkey home, you have to pay 10 % IVA too. The same is with conversions. If one is the first buyer of a serviced plot to buy a new Real – Estate – Object you have to pay 18 % IVA in 2012 and 21 % IVA in 2013. It’s all the same, if such a serviced plot will be sold by a Businessman (or a Company) who has to pay IVA by himself. If one buys such an object from a private seller which was used before he has to pay Land Acquisition Tax instead of  IVA (ITP).

If a Spanish property will be sold by a non-resident owner this purchase will be charged with capital gains tax at 21%, with a 3% withholding provision, the so called “retención”. In this case the buyer is obliged to retain 3% of the price. He has to pay it immediately after the purchase to the tax authorities to cover the vendor’s tax liabilities. In problematic cases in can took years to get the money back. For example, this is possible, if the vendor’s tax bill is greater than the 3% retention.

In addition to this Stamp duty (known as AJD) is normally 1% of the price of the purchase. It might go up in some regions (Islas Baleares, from the 01.01.2013: 1,2 % AJD). Both VAT and Stamp Duty have to be paid by the buyer. Because of the European Regulations of VAT any deposit which is paid before the completion of the sale, will be subject to VAT at the moment of making the payment of this deposit. This situation is an argument to buy in 2012, if one wants to buy Property in Spain, but the time is getting shorter and shorter.

4. Purchasing “Second Hand”: Impuesto sobre Transmisiones Patrimoniales – ITP

This Land Acquisition Tax applies if the property you bought was sold before (so called: “Second Hand Purchase”). This Tax has to pay by the buyer and if any deposit is paid before completion of this sale it is not subject to ITP (Impuesto sobre Transmisiones Patrimoniales) pro rata, but the full amount of ITP has to be paid upon the completion of the sale. Stamp duty is already included in this tax.

This Transfer - Tax - Rate varies by autonomous regions and property value, actually between 7 and 10 %. There have been lots of rate changes in the last years since the economic crisis grows in Spain. In general ITP is at 7%, but because of the ongoing economic crisis and their consequences some autonomous regions raised it to 8% or higher.

For example - Islas Baleares: 7% (from 01.01.2013: 8 %) until a purchase price of 300.000 Euro. From 300.001 Euro until 500.000 Euro the tax is 8% and from 500.001 Euro until 700.000 Euro the tax is 9%. Above 700.001 Euro a buyer has to pay 10 %.

But take care: these tarifs are progressive. If your object has a value of 680.000 Euro you have to pay 7% (8%) for the first 300.000 Euro and 8% for the rest.  

5. Common costs for buyers and/or sellers

a) Real – Estate – Agency Fees

For usual agency fees or commissions has to be paid only by the seller. This is not a legal duty, but it’s a common use in Spain. The details are depending on the Agreement between Seller and the Real – Estate – Agent on one hand and between Buyer and Real – Estate – Agent on the other hand. Agencies handling official matters (Gestorias) have to be payed by the buyer. It’s a good advise to dig the services of such agencies, because they have the knowledge about the local bureaucracies, know the people with whom you have to deal with and they know “the spanish Labyrinth” very exactly.

It is far better to use agents to find property in Spain then to act without professional consulting. Sellers should be aware that agents charge between 2% and 15% of the sale price. If a buyer has not specifically agreed to pay the agent’s fee this cost will be built into the sale price and the details are part of the agreement between Seller and Real – Estate - Agent (so called: Inside Commission). For all parties it would be better to act on behalf of a written agreement.

b) Legal Fees

You are strongly advised to hire a lawyer (Abogado) to help you during the buying process.  There are a lot of lawyers from foreign countries in Spain, which do good work and even Lawyers outside of Spain with a good knowledge of Spanish Law. Your lawyer drafts and reviews contracts on your behalf and can explain all the legal and administrative issues you face, often in cooperation with a Gestoria and Tax Consultants. Your lawyer should also carry out any necessary due diligence (checking ownership claim of the seller, charges on the property, permits, etc.) and arrange all the required documents to complete the process (property registration, tax payments, etc.) until your date with a Spanish Notary and furthermore. 

A lawyer – Abogado in Spanish – will charge you according to the service you require. This will vary according to the complexity of the purchase. Many charges are around 1% of the purchase price in legal fees. Your best option is to try and find a good lawyer who is prepared to charge on an hourly basis. Legal fees for a smaller purchase without any complications and charged on an hourly basis should be fixed in the region of 1.000 to 2.500 Euros, but – of course – it depends on the complexity of the  purchase.

c) Mortgage costs

If you choose to buy with a mortgage then this will incur several additional costs. There are some differences if you will finance with a Bank from outside of Spain or a Bank in Spain. Since the financial crises begun, such Banks are taking a sharp look on the Buyers financial situation. This is for all parts of such a deal better than the opposite.

The maximum credit for Non – Residents is until 60 % at Maximum, while the maximum – credit for Residents will be until 80 % at Maximum in cases of very special credit worthiness. Some Banks – especially in Great Britain – offer 100 %, but this can get very risky for a buyer. After the proof of the credit worthiness of a potential buyer there will be a property valuation. The costs of the property valuation are normally paid by the buyer and can cost around 500 – 1.000 Euros. Normally this provement makes the purchase more secure, because banks normally don’t want to loose money. Then there will be the costs of the mortgage itself. This varies according to the provider, and even according to the particular branch, so a buyer should look around.

For usual there is some kind of opening fee of around 1% of the value of the mortgage and of course, a mortgage will increase the Notary expenses. Don’t worry if your bank isn’t present in your area. If so they will send special Gestoria to subscribe the deed in the name and in power of attorney for this bank.

Interest rates on mortgages in Spain are nearly always based on the Euribor, which is at a low rate at the moment (0.615 % in November 2012). Actually Spanish banks currently offer interesting rates from between 1% – 1.5% + Euribor, if there is enough credit worthiness. Some Mortgage Contracts have a running time of 5, 10, 15 or 20 years, but it depends on whether you are a resident or not. A lot of banks prefer contracts with a variable interest rate. The current variable rate is about 4.7% plus the usual early write-off fee of around 1%.

d) Notary Expenses

Notary expenses are nearly always paid by the buyer and are calculated in relation to the purchase price declared in the purchase contract. The expenses of a Spanish Notary are ruled legally in the regulatory scale of fees from 11/17/1989. If the value of deed is certain, the fees are between 0,3 -. 1,5 % of the purchase prize until a value of around 6.000.000 Euros. Beyond this mark it depends on a free agreement with a Notary. Below this mark there is for legal reason no possibility to negociate about the fees. Additional costs for executed copies and similiar things are possible. 

e) Property Registry Inscription Fees

Expenses related to inscribing the sale with the land registry are nearly always to pay by the buyer because of a clause in the notarized agreement. They are calculated in relation to the purchase price declared in the deeds of sale. You should calculate 1% of the purchase price declared in the deeds, but it depends upon the property and the area in Spain.

6. Costs of owning and selling property in Spain – a raw and incomplete overwiew

a) The renewed Annual Wealth Tax

Because of the great deficit of State in Spain the Spanish Government reactivated the Wealth Tax which was abolished in 2007 (01.01.2008) in April 2012, but only for 2011 and 2012 (prolongation possible). The critical mark is a wealth of more than 700.000 Euros. The Tax – Free – Allowance is much higher than in 2007 (108.182 Euro). Taxable are Properties, Cars, Bank – Accounts, Live – Insurances and similiar values. The first domicile where a taxable person lives as a Resident in Spain is free from this tax until a value of 300.000 Euro (2007: 150.000 Euros). This regulation is not applicable for Non – Residents. This tax is also not applicable if the property is owned by a company, which is a new argument for thinking of such strategies. It could be a good idea to search for an Advise from a Tax – Consultant or a Lawyer.

This Regulation wasn’t set up for Residents on Islas Baleares until now, because of concurrent legal competencies between the central Government of Spain and the Autonomies of Spain. Nothwithstanding the competencies of the Spanish Government in Madrid the Autonomias are able to modify these Tax, so it depends on the Autonomy in Spain (so far it’s nearly the same as with Inheritance Tax in Spain).  

From 2013 on Residents on Islas Baleares have to pay a Wealth Tax between 0,2 % and 0,5 %, so far they have a wealth from over 1.000.000 Euro until 2014. The background is the great budget deficit even in the richest Autonomy of Spain. This new Tax will concern roundabout 6000 Persons on these Islands. The Government hopes that they will have solved the economical problems in 2014 and we all wish that too.

b) Property Ownership Tax (Impuesto Sobre Bienes Inmuebles – IBI)

IBI is a local tax for owners of Property in Spain. As all Taxes in Spain they have to be payed on time. There are no extensions of deadlines for Tax – Payments in Spain, so you are good advised to look for a Tax Consultant in Spain as your Representant in tax related matters. This Tax has to be payed whether you are a Resident in Spain or not. It is calculated on the basis of the valor catastral. This is an administrative value which is normally lower than the market value, but sometimes it’s considerably so. This local Tax is set by the local town hall and goes from 0.4% – 1.1% of the valor catastral depending on the Spanish region. Normally is has to be payed quaterly.

c) Personal Income Tax for Non – Residents (Impuesto sobre la Renta de No Residentes – IRNR)

Non-residents who own property in Spain have to pay an annual income tax. It varies according to whether the property is rented out or not. We will give you the hint that short – time – renting-out to tourists is not allowed in all Communities for legal reasons because of the Tourism – Decret (Real Decreto 2877/1982) and local Regulations. You should look for such limitations if you have such plans.  

If Non – Resident – Property – Owners do not rent – out their property and will not have any other Insome – Sources in Spain they have to pay an Income Tax based on the value of their property, because the have a taxable benefit of their home, following the spanish legislation. This tax rate is fixed as 24,75% (in 2012 and 2013) of 2% of the valor catastral of the property. For several reasons every owner should know the valor catastral of his property. If your property has a valor catastral of 500,000 Euros the taxable base is 2% (= 10,000 Euros), so the Tax is (24,75% of this value) 2,475 Euros.

The calculation for non-residents is far different from that, if they rent out their property and receive an income in exchange for renting it out. In this case they are – for sure - obliged by law to declare this income and pay taxes on it. The income is the net rent per year, which is the tax base. The tax rate is at 24,75 % for 2012 und 2013 (until 2006 it was 25 %).

It’s not possible to say much more about this, because the result depends on your individual tax situation and each person’s particular circumstances. In many cases non-residents simply pay a flat rate of 25% of the gross income they earn from their property in Spain if they choose this alternative. The tax rate depends on the level of income.

d) Plusvalia

The Plusvalía - Tax is a special local / municipal tax. This tax only applies to a increase in value of the land upon which a urban properties are built, based on the level of value catastral at the time of the purchase of the property by a buyer. The amount depends on the period the seller has owned this property. Normally this tax has to be payed by the seller, but it is possible to shift that burden of tax to the buyer in the notarized purchase contract, differing from region to region. This practise is unsual in regions like Costa Brava and the Costa Dorada, but it is possible in the Costa Del Sol and the Islas Baleares and it depends on negoticians.

e) Profit – Gain – Taxes for Residents and Non - Residents

If a Non – Resident in Spain transfers his property he has to pay a special Income – Tax (Impuesto de la Ley de Impuestos sobre la renta de los No – Residentes, LIRNR, Ley 41/1998), which is completely separeted from Plusvalia, so these taxes should not mixed up with each other. Residents have to pay such a tax too, with some exemptions if the property is their main domicile or the seller is older than 65 years. Since January 2012 Residents have to pay 21 % until 6000 Euro profit - gain, 25 % for a profit – gain between 6.001 until 24.000 Euros and 27 % from 24.000,01 Euros on. Non – Residents have to pay 21 %, complety independent from any Double Taxation Treaties.

f) Income Taxes (only some general hints)

 
- Residents

 
Every person which has his domicile in Spain and gains an regularly income in Spain has in general the duty to make an Income Tax Return (declaración de la renta) year by year until the 2. of July for every year for the complete income (IRPF: Impuesta sobre la Renta de las Personas Físicas; Ley 35/2006 and Decreto Real 439/2007).

If you spend more than cumulative 183 days in Spain (or you have your centre of economic or vital interests there) during the tax period (calendar year) you will become a Spanish tax resident, if you like it or not. A resident of Spain is liable for tax on their worldwide income at scale rates after any available allowances and deductions. This tax duty depends not on a formal residence permit. This Rule is not a spanish speciality, because it is part of more or less lots of Double Tax Agreements, following the model code by OECD. The tarifs are (until 2014) between 24 % and 52 % at maximum at a yearly income above 300.000 Euros.

- Non – Residents

 
This duty belongs to Non – Residents too, if they have any regularly income in Spain (IRNR: Impuesto sobre la Renta de no Residentes, Decreto Real 5/2004). A non-resident of Spain is liable for Spanish income tax only on Spanish income. Six months after the change of his domicile he can choose for the next five years if he wants to be taxable following  IRPF or IRNR, but only if he works as an Employee in Spain. In this case the tax rate is 24,75 % at fixed rates, but with no allowances or deductions. This Income Tax Return has to be made until the 31.12. of every year. Normally it costs fines to cross this deadline.

7. Insurances are very important (House and Content Insurance)

Whatever Investment a Buyer will make in Spain, it is absolutely essential to have some information about house insurance in Spain. The policies differ a lot and there are different models for Holiday Houses (rented or not rented) and Insurance for permanent resident properties. Without a House Insurance it is not possible to get any Mortgage from any Bank. It is not necessary to take a Spanish insurance, because you can normally choose Insurance Companies in between the borders of the European Union. What insurance a Householder needs depends on the individual situation of the owner and – surely - the type of property he owns.

All kinds of Building Insurances generally cover the actual structure of a Property as outbuildings, walls, garages, gates and fences. It covers the owner of a Property both against indemnities and cost of repairs, debris removal and professional fees following loss or damage caused by fire, storm, flood and earthquakes. There are Spanish policies which may exclude swimming pools and outbuildings from coverage, so it makes sense to proove the policy very closely. The insurance depends not on the market value, but on the potential costs to rebuild the building completely in the present form. If your Property is part of a complex or apartment block (it might be an “Urbanización” after Spanish Law) it is possible that your condominium fees may include community buildings insurance. The coverage depends on the policy and they differ a lot, but in general this coverage is limited to communal areas (walkways, pipes, windows, etc.). Lots of community covers are very basic. In this case you may need an additional Insurance Solution to ensure that you are properly protected. Most policies will also include a level of third party liability cover. Third party liability in Spain is usually low relative to other countries, so there is every need to take a close look on the policy. It is no mistake at all to have a standalone Third Party Liability Insurance.

Concerning to Holiday Houses most Spanish house insurance policies exclude cover when a property is unoccupied and some others insist that the water system is drained during periods of unoccupancy, or the property is heated constantly to a certain minimum temperature in winter, so you should a policy that doesn't include complex unoccupancy requirements. Surely, the more you want to cover, the more it costs.

In addition to what is said before you need a Contents Insurance too. In general contents insurance covers typically include general contents within the home (furniture, electrical equipment, etc.). Most of the policies cover your contents in the event of storm, fire, flood and theft. The insurance sum depends on the costs to replace your contents on a new for old basis at today's prices. If you have a lot of IT – Sources in your house you should cover them with an IT – Insurance too. In addition to all of this it will be never a fault in Spain to have an Insurance against legal costs (Legal Expenses Insurance).