Below is the basic information you the buyer will need to know about purchasing a property in Spain.
1. Escritura Publica
The Escritura Publica is the registered title deed of the property. It is inscribed in the Registro de la Propiedad, the Property Registry, and it is the only absolute guarantee of title in Spain. If your seller cannot produce an escritura publica, something is wrong.
In this title deed you will find a description of the property, the details of the owner, and, if any mortgages or court embargoes exist against the property, they will be registered here as marginal notes. You want to see the seller's title deed, if only to make sure that he really is the owner of the property being sold to you. Your lawyer can obtain a nota simple from the Registry, containing the pertinent details and notes of any mortgages. However, it would be best if you could see a copy of the complete deed.
2. Check IBI Receipt
The Impuesto sobre Bienes Inmuebles (IBI) is the annual municipal real estate tax. When purchasing a new flat or house, it is your responsibility to make sure that the house is registered for this tax, and when purchasing from the second or third owner, you must always ask to see the latest paid-up receipt for the IBI before you sign any contract with the seller. If he doesn't have it, you may find yourself liable for back taxes and penalties.
The IBI receipt will show the property's catastral reference number and also your valor catastral, the official assessed value of the property. This is a very important figure because various taxes are based on it. Your annual real estate tax is charged by the municipality, and it can be as low as 20,000 pesetas if you own a small cottage in one of the typical villages, or as much as 300,000 pesetas a year if you own a new luxury villa on acres of land near Marbella
3. Referencia Catastral
As of 1997, every property sale must include a mention of the Referencia Catastral. As noted above, this reference number appears on your IBI receipt. The Catastro is a second system of property registration, concentrating on the exact location, physical description and boundaries of property, unlike the Property Registry, which focuses on ownership and title.
The Catastro is also concerned with the valuation of property and is the source of the famous valor catastral, the assessed value of property for tax purposes. These two systems, strangely enough, have never even communicated with each other, and we find that the catastral description of a property sometimes differs greatly from the one in the Property Registry, which makes no sense. It is a very good idea for the buyer to request the actual certification from the Catastro with a full description of the property.
4.Community Fees, Statutes and Minutes of AGM
If you are buying a flat, a townhouse, or a villa on an urbanization, ask also to see the latest paid-up receipt for community fees. These are the fees charged by your Comunidad de Propietarios, the Community of Property Owners, which is the Spanish term for "condominium", meaning the legal body that controls all the elements held in common to deal with Community problems. The receipt for Community fees assures you that the fees are paid and gives you a good idea of your monthly charges in the future. Read the Statutes of the community, too, as they will be binding on you once you have signed the purchase contract.
TRANSFER TAXES AND FEES: 10%
What are the taxes and fees going to cost you? They will probably be less than 10 per cent of the purchase price if the breaks are with you, but can go as high as 15 per cent if certain taxes turn out to be higher than usual in your individual case.
You have two taxes and two fees to pay on the transfer of property. The two fees are for the notarization of the deed and for its registry in the property registry. The two taxes are the transfer tax and a sort of capital gains tax on the increase in value of the land, usually called the plus valía tax. Notary: You pay the notario a fee fixed by an official scale. The fee varies according to the amount of land, the size of the dwelling and its price, but let's say between 50,000 and 70,000 pesetas.
Property Registry: Then there is a fee for the registry of the property in the official Registro de la Propiedad. This will be a similar amount. Transfer Tax: The transfer tax, called Impuesto de Transmisiones Patrimoniales in Spanish, is 6 per cent of the value declared in the contract. This ITP is charged on private sales. If you purchase from a property company, this tax will be IVA (value added tax), at 7 per cent because the sale is a business operation, not a private deal between two individuals. In addition to this, you pay a documents fee, or stamp duty, of one half of one per cent, so buying a new property will drawtax of 7.5 per cent. Plus Valía Alert: There is one more tax to which you should be alerted. This is the plus valía tax, a municipal charge, which the seller is supposed to pay. If he does not, however, it can be charged against the property itself.
SELLERS FACE CAPITAL GAINS TAX
Many sellers of Spanish property are surprised to find themselves liable for Spanish capital gains tax on their profits. Be warned. If you originally purchased your Spanish property before January 1, 1987, you are now free of Spanish capital gains tax. If you bought after that date and are now selling, you are liable for tax. However, a series of deductions is available relating to the time you
have owned the property. After the first two years of ownership and up to 1996, you can deduct 11.11 per cent per year from your profits. There is also an inflation correction factor which you can apply to your original purchase price, helping to bring it up to date in today's inflated pesetas. These deductions should help lower your tax, but it will never drop to zero, unless you bought by December 31, 1986. Further warning: If you underdeclared your purchase price when you bought your property, as many have done, you will now show a much larger profit on paper than you have actually made, if your new buyer insists on declaring the full price, as more and more buyers are doing. If you are a non-resident, your purchaser must withold 5 per cent of the total price, and pay this directly to the Spanish Tax Agency as a guarantee against any capital gains tax you owe. The non-resident pays at 35 per cent of his profits, while the resident is taxed at a maximum of 18 per cent.
TAXES YOU PAY EVERY YEAR
Form 214 is what you want to remember, if you are a non-resident property owner. Each year the non-resident property owner is liable for two Spanish estate taxes on his ownership.
Patrimonio Tax. This is a tax on capital assets. Residents have an exemption on the first 26 million pesetas of valuation for their principal home, but non-residents have no exemption and must pay.
Non-resident property owner's imputed income tax. For this tax, two per cent of the value of your property is treated as income and attributed to you. This imaginary income is taxed at 25 per cent, so you pay 25 per cent of two per cent every year. You file each year for these two taxes on Form 214. If you neglect to do this, the Spanish Tax Agency will catch up with you when you go to sell the property, and you will be charged for the preceding four years. On a property valued at 20 million pesetas, the two taxes together should cost you about 140,000 pesetas a year.
Then of course you have your municipal real estate tax, the IBI, which you pay every year to your town hall. This varies widely, according to the municipality and the worth of your property. It is based on that famous "valor catastral".
SPANISH INHERITANCE TAX
There are four points to bear in mind in connection with Spanish wills and inheritance tax:
You need to make a Spanish will disposing of your Spanish property in order to avoid time-consuming and expensive legal problems for your heirs. Make a separate will disposing of assets located outside of Spain. Use a Spanish lawyer.
As a foreigner, you will probably find that Spanish authorities do not oblige you to follow the Spanish law of compulsory heirs, in which you must leave two-thirds of your estate to your children. You can probably leave your estate to whomever you choose, but you will be subject to Spanish inheritance tax, which can be high when property is left to non-relatives.
There are very few ways around Spanish inheritance taxes and these legal ways require careful advance planning. Spanish law provides no large exemption from inheritance tax, such as most countries have when the family home is transferred. The tax is due after the first two and a half million pesetas.
However, if you are an officlal resident of Spain leaving your principal home to a spouse or child, you may be eligible for a 95 per cent reduction in the value of the property for inheritance tax calculation. This is not available to non-residents. Limit of 20million pesetas. The exemption, of 2.6 million pesetas, goes to each inheritor. If you have an estate worth 30 million pesetas and you leave it to your two children, each takes his exemption and the estate is valued at 25 million pesetas. This draws inheritance tax of about 3.8 million pesetas. If you are leaving your property to a non-relative, however, the tax is doubled, to 7.6 million pesetas. A Spanish lawyer can tell you exactly how much your tax will be when you go to have your will made.
For more complete information, see David Searl's books, "You and the Law in Spain" and "Spanish Property Guide" published by Santana Books and updated every year. Available from bookstores or Santana Books at www.santanabooks.com, or:
Ediciones Santana SL
David Searl can be consulted at Ubeda-Retana y Asociados, lawyers, gestoria, and tax consultants, in Fuengirola on the Costa del Sol.
or visit their website at www.lawtaxspain.com