Buying Property in Spain
The following is a general guide to purchasing new and resale property in Spain. However, this guide does not attempt to cover all the legal and financial points and prospective purchasers are recommended to seek professional advice.
As in many E.U. countries property in Spain is registered on a property register.
When you have decided upon the property to purchase, the agreement will normally be contained in a private contract. The document should contain details of the agreed purchase price; payment of a deposit; provision for payment of the balance of the purchase monies; any extras that you have agreed to purchase and the intended date for completion together with all other relevant terms and conditions.
Once you have paid your deposit (usually 10%) there is then a binding agreement between both Seller and Buyer. A specific agreement (called arras) may be entered into between Seller and Buyer, where either party may rescind the contract, the Seller returning double the deposit or the Buyer losing the deposit.
The Community of Owners
When there is common ownership or sharing of facilities between owners, in every development in Spain a Community of Owners must be established through which community charges can be shared. If your development is contained in an apartment block then the law is that relating to the Horizontal Division (Ley de la Propiedad Horizontalâl).
If you are purchasing in a new development it is essential that both the Deed of Horizontal Division and the rules of the Community have been seen and explained to you and approved on your behalf as they are very important contributions to your future enjoyment of the property.
Conveyance (Escritura de Compraventa)
The sale and purchase of all property in Spain requires to be registered in the Land Registry. They maintain details of the property and record financial charges and other matters which may affect the title.
The Notary – el Notario – prepares the Conveyance – la Escritura – from the information supplied to him by the Seller or his lawyer – el Abogado. He will check compliance with Spanish law. However, the Notary does not check the title to the property, although he will make a check at the Land Registry immediately prior to the signing of the Escritura to ensure that there are no undisclosed charges on the property.
Before the completion the Notary will check to ensure that no adverse entries have been made beyond those disclosed or to which the purchase may be subject.
Once the formalities have been completed before the Notary, the Escritura Publica must be delivered to the Land Registry for title to be recorded in the Registry of Property – Registro de la Propiedad. Before doing so, however, it is necessary to ensure that all taxes have been paid.
There has been a custom for many years to understate the sale and purchase price enabling the Vendor to reduce his tax liability. You may also be told this will reduce your initial outgoings by a saving in stamp duty.
If this procedure is adopted you must realise that when the property is sold and the actual price then declared you will be liable to pay Capital Gains Tax on the additional profit. Obviously if the purchase price was understated the Capital Gains Tax will be higher. For non-residents of Spain, new legislation has decreed that for sales after 31st December 1991, a deduction of 5% must be made by the purchaser from the sale proceeds and deposited with the tax office pending agreement of the capital gain.
In the past, there have been circumstances when you could be compelled to accept an underdeclared value compared to the true value. New legislation has been enacted by virtue of which if a Tax Inspection establishes that the value of the property exceeds more than 20% of the value stated in the Escritura, and provided that the excess is more than Pt2,000,000, the excess will be taxed both for the Buyer and the Seller as if the excess was a donation or a gift (donations are taxed for the foreign recipient as gift tax which could be as high as 83%). Therefore understatement of the price cannot be recommended.
The total expenses incurred in the purchase should not, on average amount to more than 10% of the purchase price. The individual expenses and fees are as follows:
Stamp Duty (Transfer Tax): There is no stamp duty threshold and you will be required to pay at the appropriate rate based on the declared price. If you purchase a new residence from a developer I.V.A. (VAT) is charged at the rate of 7% on the declared price (4.5% in the Canaries). In addition, the so-called Legal Documented Acts Tax at a rate of 0.5% is also applicable. In other cases the stamp duty is charged at 7% of the declared price. If the property being purchased is solely land upon which a property is to be constructed and is bought from an established business the applicable rate is the full I.V.A. rate (currently 16%).
Land Registry Fees: The fees of the Property Registrar for registering your Escritura in the Register will be assessed on a scale fee related to the declared value.
Plus Valia: This tax is paid to the Local Authority and is a form of Capital Gains Tax that is payable on the increase in value of the land since the last purchase. It should be stressed that this tax is based on the increase in value of the land, and not on any buildings erected upon it.
Notarial Fees: A fee is charged by the Notary to prepare and legalise the Escritura. This is also a scale fee based on the declared value.
Legal Costs: Our estimate will be based on the true value of the property and the complexity of the work to be done. As a general guide you would normally expect the legal costs to be in the region of £750 or 1% of the purchase price, whichever is the greater, plus disbursements.
Spanish financial institutions will lend against the security of Spanish properties, but Spanish mortgages will generally be at a higher interest rate, for a shorter repayment term and the proportion of the loan to the purchase price will be lower. Mortgages on the Spanish property can usually be arranged in most of the major currencies over terms up to 15 years, although this may in exceptional circumstances be extended to 20 years.
You are strongly advised to make a Spanish Will to cover your Spanish estate. Whilst a foreign Will is recognised this may lead to delays and prove more costly in the long run. Wills in Spain are usually drawn up by a lawyer and executed before a Notary.
Valencia Land Grab Law
If you are considering buying property within the Valencia province of Spain beware!
After completing your purchase you could find yourself to be one of the owners who is forced to give part of your land back to the local authority and pay them considerable funds for the privilege of doing so.
So do not buy unless your solicitor has confirmed that it cannot happen to you. Ask your legal advisers if there are any problems that may arise from the Valencia Region legalised Land Grab law.
This is a law (the LRAU) passed in 1994 when the area involved was almost totally undeveloped. The concept was I believe to assist local authorities to improve the infrastructure of the area and build low cost houses. In recent years is has been used to seize land from property owners to aid development of new estates whilst creating great profit for both the local authorities and developers.
Acquiring land to be used to improve local amenities, water supply, sewage, etc. sounds commendable, however, unlike the English compulsory purchase scheme where you receive compensation (and can even appeal against the size of compensation) this Valencian law forces you, the property owner, to pay the developer for the privilege of what amounts to legally stealing your land.
I would point out that this is not an anti ex patriot law. It affects all nationalities including indigenous Spanish nationals. Many property owners have been forced into financial problems or even had to sell their property to pay for this land grab demand.