Foreign Property Investment

Purchasing a Spanish Property: An Overview of the Process & Costs Involved

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The Spanish Purchasing Process - An Overview:

(a) Estate Agents: should preferably be licensed (although not a legal requirement) by either the API (agente de la propiedad immobiliaria) or by GIPE (gestor imtermediario en promociones de edificiones). Of course, there are some perfectly reputable estate agents that are not members of either organisation but it is recommended that potential purchasers keep to members of either the API or GIPE. It should further always be borne in mind that, like the UK or Ireland, the primary obligation of the estate agent is to the seller and not the buyer.

Further, whilst good estate agents can be fountains of knowledge for a given area they should not be used to source key personnel such as lawyers, surveyors, etc. The reason is simply that recommended professionals tend to have an inherent 'conflict of interest' between the buyers interests and those that recommended them in the first place. In particular, buyers should be very wary of estate agents who have 'exclusives' with developers since such relationships can literally be worth millions of Euro to the estate agent and hence creating a serious potential 'conflict of interests'.

(b) Lawyers/abogados: Always use lawyers conversant with UK/Irish and Spanish Laws. A Spanish abogado might be an excellent lawyer but the needs of an investing/property purchasing expatriate, whether he/she is going to be fiscally resident or not, requires a holistic approach. It should also be remembered that as in England debts can attach to the property so not only should searches be carried out but also contracts should be properly drafted. For example, when you buy a property there should be a clause (cláusula) in the contract which states that you buy the property Free of any Charges or Incumbrances ('libre de cargas y gravámenes') meaning that the property does not carry any debts.

If both parties sign the contract and the property carries any debts you can always sue the person or legal entity that sold you the property as he or she would be in breach of the contract. It should also be noted, that under Spanish Law if you buy from a non-resident individual or company you are required to keep-back 5% of the purchase price for the benefit of the Spanish fiscal authorities. In effect, the Spanish are trying to make sure that non-resident property owners do not try and circumvent their tax obligations.

(c) Spanish Notaries: Most Spanish people simply use notaries to convey their properties without the use of a lawyer/abogado. For many Spanish people this is fine as they will have local knowledge and of course understand what are and (most importantly) what are not the obligations of a notary. Unfortunately, there have been many instances where British people have assumed that a notary occupies a similar position to that of a conveyancing solicitor in the UK.

In reality, notaries have no duty of care to either party and are only concerned with the validity of the paperwork, that certain government regulations have been satisfied including payment of duties/taxes. What the notary does do however is give legal veracity to the pertinent legal or conveyancing process - Without a properly adhered to notarial process there could be difficulties in enforcing any given agreement/contract. The normal chronology for the purchase of a property would be:

(i) The Signing of a Private Contract (Contrato de Compraventa) between the Buyer and Seller supported by an Initial Deposit. It should be noted that this initial Contract is identical (unless the Notary requires changes) to the later Escritura de Propriedad. One should also be careful as to the form of this contact as it is often supplied by either a developer (for new properties) or by the seller. In such situations a buyer should be aware that there is a potential conflict between the interests of a buyer and the developer/estate agent so caution should always be exercised.

(ii) The Approval and Witnessing of the proposed Property Deed (Escritura de Propiedad) by the Notary (Notario) ready for lodgement at the Property Registry (Registro de la Propiedad). At this stage, a wise purchaser will have requested a Nota Simple from the Registro de la Propiedad to confirm that there are no outstanding charges/mortgages leftover from the last owner as debts can be passed on with a property. Accepting that things have been done properly, a Notary - if the seller had a mortgage - would ask a representative of the mortgagor bank to sign off the mortgage at the time of the signing of the Escritura de Propiedad - A small fee will apply. If the purchaser intends also to have a loan/mortgage then the applicable bank will submit an Escritura de Préstamo Hipotecario to be signed together with the Escritura de Propiedad (See mortgages P40).

It is important to note that all contracts which are going to be registered in the Registro de la Propiedad should be signed together. Also very importantly it should be remembered that only those documents approved and witnessed by a Notary are legally able to be lodged with the Registro de la Propiedad.

(iii) Lodgement of the Property Deed (Escritura de Propiedad) and, if applicable, Mortgage Deed (Escritura de Préstamo Hipotecario) with the Property Registry (Registro de la Propiedad). It is at this stage that the escritura de propiedad becomes a Public Deed (Escritura Pública). It is important to note that the escritura pública is the only Guarantee of Title in Spain. Before buying a property one should always refer to the escritura pública as it will contain a brief description of the property, details on the owner and whether there are any mortgages or legal charges.

If more information is required (in reality this should always be done) then one should apply for a Nota Simple which would be equivalent to a full Land Registry Search in the UK. It should be noted that not all towns or villages will have their own Registro de la propiedad but there will always be a Registry within the locality ascribed responsibility (known as having a different circunscripción).

For example, the little village of Benijófar near Alicante is attached to the registro de la propiedad of a nearby town called Torrevieja. It does not matter which Notario you choose, it could be one from Madrid, but if you buy a house in Benijófar you must go to the registro de la propiedad located in Torrevieja.

(d) Surveyor: In Spain there is no direct equivalent to the British or Irish chartered surveyors profession and hence no equivalent to a 'contract subject to survey'. In many ways, this situation is strange as, if anything, extra care needs to be taken when buying real estate (bien inmueble) in Spain not less. Nevertheless, a professional advisor will always recommend that the following precautionary steps are taken:

(i) Confirm that the seller is the absolute owner of the property.

(ii) Make sure that the house is Free of Debts (cargas) or Mortgages (hipotecas).

(iii) Verify that the land where the bien inmueble is located is classified as suelo urbano (not rural but urban land).

(iv) Check the Urban Development Plans (planes de desarrollo urbano) of the locality including any future potential developments that may have applied for planning permission.

(v) Instruct a well known/respected local builder to check out the property for defects, sanitation, build quality, adherence to building and fire regulations, adherence to local planning rules and regulations etc. The process required to garner the required information may vary from area to area or from property to property but one would generally:

(vi) Apply for an Information Note (nota simple) in the Registro de la Propiedad. This is just a document saying who the proprietor (propietario) and title owner (titular) of the property are and whether the property is subject to any debts/charges or other incumbrances.

(vii) Check at the Council Planning Office (Ayuntamiento) for the Urban Clasification (clasificación urbana del suelo) and whether there are any known or intended future developments that may have a bearing on the purchase or on the future value of the applicable land (planes de desarrollo urbano).

(e) Who/what Should Own Your Spanish Property: For most people this is the crucial question as an incorrect decision could literally cost tens if not hundreds of thousands of Euro. Factors determining what is best in any given set of circumstances would include:

(i) The value of the property
(ii) Whether one is going to be fiscally resident in Spain or not
(iii) The centre of economic interest
(iv) Age
(v) Family interests and inheritance issues
(vi) Nationality and double taxation treaty provisions
(vii) Whether one intended to rent out the property
(ix) Whether a business is to be established in Spain, and
(x) One's overall wealth.

Depending on the answers to the above, a property can be bought directly by an individual or individuals, a local Spanish company, a branch of a UK or Irish company covered by the Spanish/UK/Irish double taxation treaties or directly or indirectly by an offshore company.

(f) Powers Of Attorney (poderes): These can be granted to a lawyer or other suitable party to sign the escritura documentation on your or your company's behalf but must be done before a UK notary public and then ratified by the UK Foreign & Commonwealth Office or the Department of Foreign Affairs in Dublin.

(g) Tax Identification Number: In Spain it is the law that all fiscally resident individuals have either a NIE (Número de Identificación de Extranjeros) or Foreigners Identification Number, or in some areas a NIF (Número de Identificación Fiscal) Fiscal Identification Number. Non-fiscally resident individuals but owning a property in their own name will also require a tax identification number. Non-fiscally resident individuals purchasing a Spanish property through a Spanish SL Company or a registered foreign company branch do not need their own identification number as the companies/branches themselves have their own
identification numbers.

(h) Costs Involved When Buying A Spanish Property: The overall cost of purchasing a Spanish property is dependent on whether a property is a New Property or a Second Hand/Resale Property. In the case of the former, the overall direct taxes/duties would be around 8% to 9.5% whilst the latter would generally come in a little lower at 7% to 8%. In addition, one must add the virtually universal property conveyancing fees of 1% plus various disbursements/surveyors/builders fees.

In other words, a realistic overall rate would be between 9% to 10.5% for New Property and 8% to 9% for Resale Property. By definition, these fees are a significant proportion of a property's overall value but as will be shown it is quite possible to mitigate the implementation of these taxes on future dispositions where appropriate tax planning structures are put in situe. It is primarily for this reason that 'aggressive' tax planning methods are quite commonly used for more expensive properties.

(i) Stamp Duty: ITC (impuesto sobre transmisiones patrimoniales) is roughly equivalent to UK Stamp Duty and is levied at between 6% to 7% of the purchase price depending on the Autonomous Region (Comunidad Autónoma) involved. However, it should be noted that the above DOES NOT apply to NEWLY BUILT PROPERTIES but just to privately owned or resale properties. The tax is paid by the buyer after the final exchange of contacts to the Tax Collection Agency (Agencia Tributaria).

or

(ii) Value Added Tax (Impuesto sobre el Valor Añadido or IVA) and DOCUMENTARY STAMP DUTY (Impuesto sobre Actos Jurídicos documentados or IAJD): These taxes DO apply to NEWLY BUILT PROPERTIES and are paid the first time a property is sold normally by the developer (comprador) of the property. The IVA rate is 7% of the selling price and the IAJD is fixed between the 0.5% and 1.5% of the selling price depending on the Autonomous Region (Comunidad Autónoma) involved. If a deposit is given beforesigning the Sales Deed (Escritura de Venta) a 7% IVA tax will apply. IVA and IAJD are paid directly by the seller to the Tax Collection Agency (Agencia Tributaria).

(iii) Notarial Fees: These operate on a set sliding scale becoming proportionally cheaper the more expensive the property; this is on the basis that the amount of notarial time involved does not increase with the value of the property. Thus, for example, for properties valued between €150,000 - €600,000 a notary will charge 0.5% whilst for properties over 600,000.00 the rate falls to 0.3% of the value of the property.

(iv) Land Registration Fees: Approximately 0.5% of the purchase price of a property. Where urban land is involved (with or without buildings) the Town Hall imposes a tax on the notional increase in the value of the land based on the inflation rate from the time of purchase to the time of sale. The applicable rates range between 20% and 30% of the inflation indexed price - The name of this very specific tax is Plusvalia or (impuesto sobre del incremento de valor de los terrenos de naturaleza urbana). In addition, Estate or Council Tax (Impuesto sobre bienes inmuebles, or IBI or sometimes known as Contributory Tax or Contribución, will also be payable each year.

It has to be paid to the appropriate Local Council (Ayuntamiento). This tax is normally paid from the 2nd of October to the 30th of November or 1st of January, depending on the Ayuntamientos. It can be a 0.4% for bienes de naturaleza urbana (urban areas) or a 0.3% for bienes de naturaleza rústica (rural areas).