Property, Residency and Law |
Property Purchase Law
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The Laws regarding House/Property Purchase and Capital Gains etc are quite involved and have changed fairly recently. Ideally you need not only an Escritura but also a Nota Simple and a Referencia Catastral. I would advise that at the least you purchase a book which outlines Spanish Law. One such is entitled, "You & the Law in Spain" by David Searl. Costing about £19.95, it incorporates his Spanish Property Guide and could save you a major headache. Ensure that you buy a recent edition.
The best advice is to retain a Lawyer (Abogado) In my opinion it is essential that you choose one who speaks your own language and who will supply you with the relevant documents translated into your chosen language.
Terms of Contract
The terms should not be limited solely to price but should cover in detail all your requirements like the completion date, the form of payment, etc...
It is customary to pay a deposit of ten per cent of the price on exchange of contracts, which is not normally refundable if the purchaser defaults.
Conversely, if the vendor fails to perform his obligations, you will be entitled to the resolution of the contract and either claim damages or demand the obligatory fulfillment of the contract.
Buying properties under development
Buying a property outright is relatively simple. But what happens if you are buying a property in Spain that is no more than an architect's blueprint and a developer's plan? When buying off-plan you will be asked to pay a deposit, and then to make three or four subsequent payments several months apart. You may know precisely when you have to make each payment or you may not. You may know exactly what proportion of the total price you have to pay each time or you may not.
Although the market might move in your favour during the months it will take to conclude the deal, equally it might move in the opposite direction. Unless you take precautions at the outset, you are putting your capital at risk. How can you avoid the gamble?
'Forward' transactions
You can arrange to transfer funds to Spain using the mechanism that all big businesses use to protect themselves when exchanging a large sum into a foreign currency: you use what is known as a forward transaction. There are two versions: the fixed forward and the forward time option. Here's how each one works:
- Forward pricing in practice: the Fixed Forward. This is a contract your foreign currency provider should suggest if you know in advance the dates on which you need to make your payments, and the amounts in every case.
Let's say you must pay a deposit of 10 per cent of the price of the property within the next few days; another 40 per cent in 3 months' time; another 20 per cent six months from now; and the balance at nine months. You provide your foreign currency provider with all the information, and he or she will be able to offer a price for each of those staged payments on a guaranteed basis.
- Forward pricing in practice: the Forward Time Option It's possible, however, that you know little more than the final price of the property and the developer has promised your house will probably be ready to move into in eight months' time. In this case your foreign currency provider should give you the option of fixing and guaranteeing a price in the future without restricting you to a fixed date for you to take delivery. For example, having the ability to draw 200000 Euros between September 1st and September the 15th.
Finally do make sure that the foreign currency provider you deal with keeps the whole process as simple as possible. Do not let technical jargon come in the way of your dealings with a currency provider because in reality the whole process be it spot deals or forwards is actually a simple product. Our suggestion would be to avoid foreign currency providers that try and make the whole process sound more complicated than it really is in order to make you feel that you cannot move forward without them. All the different contracts mentioned above are simple basic products and their strength in obtaining the best rate should be communicated to you in a simple transparent manner.
See my notes on International Money Transfer
Paying for Property in Spain
Under-declaring the true market value in Spanish property sales sounds unethical to the English mentality but in Spain it is a very common practice It is carried out because the seller is trying to reduce the taxes he has to pay - both the plus valia and capital gains tax - on his profits from the sale and the buyer is trying to reduce his 6% transfer tax. Normally but not always this is paid by the buyer.
The vendor enters a lower selling price on the property deed presented to the Notario than the actual purchasing price being asked of the purchaser: You may say it is for extras/furnishings etc. This practice is generally accepted as it usually works to the mutual benefit of both parties by lowering the tax burden. This practice can be queried by the Spanish Tax Authority and if there is a completely unrealistic declared value it can incur financial penalties.
Escritura
This is the most important document relating to payment for the property.
If you are not taking a mortgage and are not getting payment terms on the purchase of the property, it will be written into the escritura that the purchasing price has been fully paid. That document is the most firm and complete receipt. Should a sum lower than the seller’s real asking price have been declared in the deed, with this receipt, the vendor cannot claim any more money from the purchaser unless he takes a specific precaution.
Vendor protection
Where a lower declared payment is agreed, there are two ways of protecting the interests of both parties:-
Option 1. This is somewhat bizarre. It takes place in the Notary's Office, where the buying party hands over to the vendor large sums of money equal to the agreed difference. This is counted out and exchanged as the sale documents are signed. The Notary takes no part in this and takes no notice of what is going on. He rubber-stamps the sale transaction at the reduced price and everyone goes away happy.
Option 2. If full payment terms are agreed in the Escritura, what is normally added is called a clausula resolutoria whereby the vendor reserves his property rights until any additional payment agreed (named extras?) have been fully paid over in front of a solicitor and the Escritura passed to the buyer.
Warning for when you wish to resell the property
It is important to appreciate that if your declared value is substantially less than the actual value you could find yourself liable for a painful plus valía and capital gains bill when you come to re-sell the property; for within the passing years this practice of declaring lower than correct values may have disappeared completely or you may not be able to find a buyer who agrees to it. My advice, keep the price variation at a reasonable level.
Exceptions Some sellers are not liable to capital gains tax. For example, when the property is owned by pensioners or a company, there is little benefit in these situations to declare other than the correct valuation.
Planning New Additions when Buying a New Property
Buying a New Property also incurs stamp duty of 0.5%. If you are planning to make any additions to the property in the foreseeable future (putting in a pool or building a garage for example) I would advise having them included in the sale documents because otherwise you'll find yourself paying 16% tax on the new construction project. Buying a plot of land for development also incurs 16% tax plus 0.5% stamp duty.
Professional Fees
Abogado Fees
Legal Assistance in the Buying Process
It makes good sense to use a lawyer but do bear in mind that your lawyer will charge fees for his professional services, Do be sure before confirming his appointment to get a written quotation in understandable English on what his total fee charges will be together with confirmation that his searches will include all those that are outlined below. (see my property purchase check list) Fees can be approximately 1% of the sale price plus VAT (currently at 16%). although this can vary depending on whether any complications are liable.
Whilst choosing your lawyer, remember to consider making a Spanish will. It should be in both languages. (see my separate note on Spanish Wills)
Notario Fees
All property sales have to go before a Spanish Notary who will charge according to a fixed scale, approximately another 1% of the sale price. This is payable at the point of signing the purchase agreement.
There is also a Land Registry Fee to be paid for property registration - this equates to about 40-50% of the notary's fee. (See separate section on duties of a Notary )
Buying with a Mortgage
Spanish banks are Equity Lenders
Some will lend on valuation. Banks will usually only lend on declaration. Therefore if you are buying a resale property for example, a seller will generally insist on declaring the property at about 20% below your agreed price and the bank will only approve your mortgage for the money which is declared to the Notary.
You need to be aware that the undeclared money the vendor receives in cash is not recognised by the bank. So in effect, if the property you are buying is bought for £200k, then the seller will only want to declare the property value at about £160k, meaning if you have been approved for a 70% mortgage, then the bank may only lend against £160k NOT the £200k you are actually being asked to pay.
See my section on Spanish Banking for a bank specialising in assisting English speaking Émigré’s with its own branch office in London to assist with mortgage applications.
The Seller's Tax Liability
The seller is responsible for the payment of capital gains tax, and also for paying any fees relating to the cancellation of encumbrances on the property such as mortgages, outstanding bills, fines etc. unless it is otherwise agreed between buyer and seller that the buyer shall pay these fees either as part of the purchase price or if he takes up the seller's initial mortgage.
Tax deposit on non-resident property sale (Hacienda tax) If you are a non-resident wishing to sell your property located in Spain, bear in mind that you will have 5% of the declared sale price withheld and deposited with the Spanish Tax Office (Hacienda tax). This relates to the collection of your capital gains tax. Once your tax liability is assessed, you will either have to pay more to the Spanish Tax Office or will get a refund of the portion deposited, depending on the profit you have made. This requirement has been implemented in Spain to prevent non-resident property sellers taking the money and running. I would advise retaining an English speaking Spanish Lawyer to advise you in detail on the circumstances arising from the deposit and possible refund of this tax. Your age and length of ownership can affect this payment
Please review my page on Spanish Taxation for further information.
Real Estate Law
If you have the expertise you can draw up a design for your own house, however you will need the services of a qualified architect and his drawings to get your Spanish building permit. Without this licence you cannot legally start the building of your house.
If you are not building the house yourself you will need to find a reliable builder and agree a contract. I would suggest that the contract should make clear the payment terms, details of any staged payments structure. There will be penalties against you for late payment. There should also be penalties on the builder for late completion of each stage and final completion. Date slippage is a major cause for concern in Spain.
I consider it essential that your Spanish Lawyer check this contract in every detail.
A Clerk of Works (aparejador) will supervise the building and ensure that it complies with the construction standards. He will issue the architect's certificates to obtain the certificate of completion of the building and the certificate of occupancy.
Next step will be the registration of the house at the Spanish Property Registry, as your deed contains only the plot registration. You should make a declaration of new work (declaración de obra nueva) in order that your house appears in the deed. The building permit, the certificate of building completion and the certificate of occupancy will also be required.
See my separate pages for a description of Spanish properties being offered for sale by direct negotiation with the owners.
Property Purchase Check List
I have summarised the searches and checks which should be undertaken before you buy any Spanish property. Ensure that whoever advises you includes all of the points on this Spanish Property Purchase Checklist in their remit.
Notary
In Spain a Notario is a qualified public servant whose main function is to ensure and certify that all matters brought before him for signature are legal. He is not there to guard your interests. He will not tell you that something within a document "is not in your interest" if it is quite legal.
On the other hand he will refuse to notarise anything that is not fully legal. If you do not understand fully what a Notario tells you, say so. It is too late to complain after a document has been Notarised.
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Residencia
If you wish to stay in Spain for any length of time, you must have a Residencia or Residential Permit. This is easy to apply for, and does simplify dealings with the authorities as well as offering a number of benefits.
Please read Residencia - Benefits and How to Apply for Spanish Residency for detail of the advantages and application process.
NIE Number
Your NIE number is obtained from the main Police Station in any major town. Take your passport plus a photo copy and at least two passport size colour photos. Give the address of your residence. It can be a friend's property as long as they will accept you as living there. Remember to notify your change of address when you are settled in your final home.
Further information on NIE and NIF numbers and the registration process.
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