Finding a Property

It is very important to get to know the area before you choose a property. You should visit a number of different locations in order to make an informed decision about the kind of place where you would like to buy. Once you have established the area you are interested in, it is worth viewing a range of different properties before you make any decisions. This will give you an idea of what you can expect in terms of price and make you feel more secure when it comes to making an offer on a property.

Choosing a Lawyer

A lawyer can give you useful advice from the very beginning of the purchasing process. Your lawyer will make enquiries to ensure that all the parties involved, including the seller or developer, are acting legitimately. Later, he will take the necessary measures to guarantee that all the Spanish legal requirements are met and that the property is free of any encumbrances or liens that could affect your use of the land. He will also check that there are no outstanding debts for local taxes or service charges attached to the property.

It is not compulsory to contract a Spanish lawyer, but using a lawyer from your home country will probably result in a substantial increase in your legal fees and usually delays completion considerably.

Some Real Estate Agents recommend the use of their own lawyers or even put pressure on their clients offering discounts in legal fees. We advise you not to use these lawyers because in some cases they represent both parties (buyer and vendor) and will probably be working for the Agent, therefore not defending your interests properly. The ‘Malaga Bar Association’ rejects this option and strongly recommends to ALWAYS use an independent lawyer to defend your interests.

Step 1: Negotiating the Purchase

Negotiations with the seller over the purchase of a property should not be limited to agreeing on a price. Many other issues are involved at this bargaining stage and all your requirements should be covered in detail. You may be willing to accept all the seller’s terms, but in other cases it might be necessary to prepare a counter offer. Remember that this offer can be made subject to the approval of your lawyer or the bank that is going to provide your mortgage. Other issues that could form part of the negotiations are completion dates, methods of payment, fixtures, fittings and furniture or establishing who will pay the taxes involved in property transactions, like the Plusvalía.

Your estate agent, who has probably acted very efficiently in helping you to find a property, may not be so skilled when it comes to this kind of negotiation. He may at this stage suggest bringing in a lawyer who can use his expertise to ensure that the offer is legally sound and that any agreement is in your best interest.

Step 2: The Reservation Contract and Deposit

Once your estate agent and lawyer have discussed the purchasing terms and conditions with the seller and an agreement has been reached, the next step is to formalise this verbal understanding through a written contract. This document is known as the Reservation Contract (Contrato de Reserva) and should be signed by both you or your representative and the seller. It might also include details about payment terms, estimated dates for exchange of contracts and completion. If both parties accept the terms in the contract a binding agreement is created.

It is standard practice in Spain for this Reservation Contract to be accompanied by a sum of money which is paid by the buyer to demonstrate to the seller that there is a real intention to purchase. This money is known as a Reservation Deposit (Señal de Reserva) and usually amounts to between €3,000 and €12,000. Once this deposit has been paid, the property is taken off the market and the price is frozen for a specified period of time; usually about 30 days.

It is very important to remember that this deposit is usually non-refundable. In other words, if you do not exercise your option to purchase within the period of time established in the Reservation Contract the seller is under no obligation to return your money. However, if the seller backs out of the deal he will have to return your deposit.

There are two important pieces of advice to remember when you are at this stage in the transaction.

First, it is essential to have funds available when you travel to Spain to view properties. Any delay in paying the Reservation Deposit could result in you losing the property you want to buy.

Second, avoid paying the Reservation Deposit by cheque because it can take up to ten days for it to clear. During this time the seller is free to accept an offer from another purchaser who can pay cash. To avoid this situation it is advisable to pay the Reservation Deposit in cash or by credit card.

Step 3: Exchange of Private Purchase Contracts (Contrato Privado de Compraventa)

A private purchase contract is essentially the same as contracts you will have signed as part of the transaction to buy property at home. It creates a binding agreement between you and the seller, establishes a completion date and sets out the terms and conditions of the sale.

Some terms may not be explicitly mentioned in the contract because they are implied by the law governing transactions of this kind. The Private Purchase Contract is usually signed between two and four weeks after the Reservation Contract.

In the period before you sign the contract your lawyer will have completed the legal searches that you need before proceeding to completion. He will have obtained a certificate (nota simple) from the Property Registry (Registro de la Propiedad), where information such as the owner of the property, encumbrances on the land and mortgages are registered.

Your lawyer will also have been involved in negotiating the terms and conditions contained in the contract. In particular, he will have established a schedule for the payment of any outstanding debts connected with the property. It is essential that a formal agreement is established on the cancellation of these debts before proceeding to completion. This safeguards you as a buyer because if the seller reneges on the agreement you are entitled to withdraw from the sale and claim for damages incurred or deduct the debts from the sale price together with any related expenses.

At this stage it is customary to pay a percentage of the purchase price. If you are buying a resale property 10% of the purchase price is usually paid, if you are buying off-plan you will probably pay between 20% and 50%.

Step 4: Completion

A property purchase reaches formal completion when the Sales Contract (Escritura de Compraventa) is signed by both the purchaser and the seller in the presence of a Notary Public (Notario). A Notary is a public official who certifies that contracts are legal by checking that all the formalities involved in the transaction have been complied with. At this point the agreed sum is paid and possession of the property is handed over to the buyer.

Unless the parties have agreed to vary the terms beforehand, the Sales Contract always states that the property is free from all charges and encumbrances, that there are no outstanding debts connected to the property and that the seller is handing over vacant possession i.e. there are no tenants or other occupants.

If it is not possible for you to be present at this final appointment with the Notary there are two methods which allow your lawyer to sign on your behalf:

• granting a Power of Attorney (Poder). This formally allows another person (either your lawyer or somebody else that you trust) to sign on your behalf. You can have this document prepared while you are in Spain by making an appointment with the Notary who will oversee all the formalities. Alternatively, a power of attorney can be prepared by a Notary Public in your home country. This power of attorney will have to be legalised for use in Spain by having an Apostille certificate attached to it under the terms of the Hague Convention.
• granting an informal verbal mandate to your lawyer. It is important to remember that if you choose this option you must ratify the contract as soon as possible after completion. This can be done by appearing before a Notary, either in Spain or your home country. If ratification takes place in your home country, however, it will be necessary to obtain an Apostille certificate before it is legally recognised in Spain. Ratification is simply a matter of confirming the purchase and providing a sample signature, which will be kept on file at the Property Registry.

Step 5: Registration of the Title Deeds

Once the Sales Contract has been signed, the Notary will send a fax to the relevant Property Registry to begin the formal procedure for registration of the new title deeds. Although this process is not compulsory it is strongly recommended.

The whole process usually takes between one and three months, depending on the workload in each particular Property Registry. In the interim you can request a copy of the records (copia simple) from the Notary. When registration has been completed the Property Registry will get in touch with your lawyer to inform him that the title deed (Escritura Pública) is ready for collection.

Finally, as well as overseeing the registration of your title deeds, your lawyer will also arrange payment of the various taxes arising from your purchase. In addition, he can help you to make contracts with suppliers of utility services like water and electricity and arrange for your bills to be paid by standing order from your Spanish bank account.

Special Considerations When Buying Off-Plan

If you are considering buying off-plan, in other words you want to purchase a villa or apartment that has not yet been built, you should be especially careful. In this kind of transaction you are required to make a series of payments, before construction begins and whilst it is in progress. Obviously, buyers need a guarantee that some or all of their money will be returned if the project stalls, fails to complete on time or, in the worst case scenario, simply never gets off the ground. Most reputable developers will offer you a scheme whereby a bank guarantees that your money will be returned if anything goes wrong. Some of these schemes are offered free of charge; in other cases you will have to pay a small percentage.

When you complete the purchase of a new property from the developer, you will be liable to pay VAT (IVA) at a rate of 10% (since January 2013) and stamp duty at a rate of 1,5% on the purchase price (since June 2012).

It is standard practice in Spain for new-build properties to be handed over without utilities like water and electricity. You should include payment of a small fee for the connection of these services in your budget. You should also be aware that it can take some time, up to four weeks in many cases, for this to be carried out, so it is not advisable to make plans to use your new property during this time.

If you are buying a property from a promoter or developer it is extremely important to have professional legal representation.

Calculating the Costs

It is important that you are aware of the costs that are involved in buying a property in Spain. On average these expenses usually come to between 11% and 12% of the purchase price. You will be required to pay three fees and one or possibly two taxes which are explained below. Finally, some other miscellaneous expenses, which may be involved in the purchase of your property, are listed at the end of this section.

Fees

1. Legal Fees. These fees usually amount to about 1% of the purchase price + VAT, but your legal costs could increase if complications arise during the transaction. Your lawyer should be able to give you a detailed estimate of the costs that are likely to ensue from your particular case.

2. Notary Fees. This fee is fixed by an officially established scale which takes a number of different factors into account including the price of the property. The scale ranges from about €500 for lower priced properties to €2,000 for more expensive purchases.

3. Registro de la Propiedad Fees (The Property Registry) will also charge you a fee for entering your title deeds in the register. They use a scale that is related to the price stated in the title deed to assess the exact amount to be charged.

Taxes

1. Property Transfer Tax (Impuesto de Transmisiones Partrimoniales – ITP / VAT (IVA).) If you are buying a resale property your transfer tax will vary from 8% to 10% of the purchase price. If you are buying off-plan, purchasing directly from the developer, you also pay 10% of the purchase price, as mentioned before, but this is charged as VAT (IVA).

2. Municipal Tax on Property Sales (Plusvalía). This tax is paid to the local administration and is based on the increase in the value of the land since it was last sold. Logically, as the beneficiary of this increase in value, the seller takes charge of paying the Plusvalía.

This tax is based on the fiscal value of the land, which is always lower than the actual market value. The exact percentage depends on a number of factors including the location of the property and the length of time between sales. Local authorities periodically carry out valuations of land and maintain up-to-date records in order to calculate Plus Valía charges.

Other Expenses

Other costs that you should bear in mind when considering a property purchase in Spain are as follows:

• legal fees for making a will in Spain
• charges related to putting utility contracts in your name
• charges related to setting up direct debits for payment of utility bills
• connection charges for water and electricity
• insurance of your property and its contents
• fiscal advice and representation
• representation in negotiations with your prospective Residents’ Association (Comunidad de Propietarios)

Introduction

The legal procedure is basically the same as that described in "The Purchasing Process" In this chapter we will only focus on those aspects that are of particular relevance to the seller.

It is very important to choose a reputable estate agent to help you market and sell your property. He can also advise you on the market price of your property and guide you through the negotiations with the buyer. The terms and conditions offered by each estate agency may differ, so read the agreement carefully and check how much commission they are going to charge.

Complications that are outside the expertise of even the most competent estate agent may arise in any sale. It is, therefore, advisable to contract the services of a lawyer to represent you in the sales process. Your lawyer will take part in the negotiations with the buyer to fix the terms and conditions of the sale and will ensure that everything is legal and above board. More importantly he will prepare your Capital Gains Tax returns after the sale and negotiate with the buyer over who takes responsibility for the different payments involved.

Necessary Documents

Having all the necessary documents will help your sale to go smoothly. You should lodge the following documents with your lawyer or estate agent when you put your property up for sale; for absolute security you can make the documents available to both.

• copy of the Title Deed (Escritura Pública)
• copy of your latest Real Estate Tax receipt (Impuesto sobre Bienes Inmuebles, IBI)
• copy of the Certificate (Certificado Catastral) given to you by the Land Registry (Catastro). This contains your property’s official reference number (Referencia Catastral) with the Land Registry and gives a full description of the property
• copy of your latest Spanish Income Tax declaration (Declaración de la Renta) for residents or Form 210 for non-residents
• copy of your Residents’ Association (Comunidad de Propietarios) Statutes. This contains the address and phone number of the Residents’ Association
• copies of all your utility bills

Calculating the Costs

Basically, you should calculate for paying two fees and one or possibly two taxes. You will also have to cancel any debts, charges or liens which may be recorded against the title at the Property Registry.

Fees

1. Estate Agent’s Fee: Estate agents usually ask for between 3,5% and 7% of the purchase price as their commission, being 5% the most common fee.

2. Legal Fees: These fees usually amount to between 1% and 1.5% of the purchase price.

Taxes

1. Capital Gains Tax (Impuesto sobre las Rentas Derivadas de Transmisiones de Bienes Inmuebles):

Capital Gains Tax is payable on the profits arising from any property sale in Spain whether you are resident or non-resident. However, different rates and payment methods are applied to residents and non-residents. Residents can also benefit from a series of deductions, which reduce or even exempt them from liability, that are not available to the non-resident seller.

Both residents and non-residents are liable to pay Capital Gains Tax on their net profits.

If you are a non-resident, your buyer will have to retain a 3% of the purchase price to be paid directly to the Inland Revenue to ensure that any potential tax liability is met. In the event that your actual liability is lower than this 3% figure you can claim a refund of the excess once the sale has been completed. To do this you must complete tax form 210 and submit it to your Tax Office within 120 days of completion. The refund should be made between 12 and 18 months after completion. In contrast, if your actual liability amounts to more than 3% of the sales price you must complete form 210 and submit it to the Tax Office along with the amount you owe.

There are a number of factors that can reduce the figure that the Inland Revenue considers as your net profit for the purpose of calculating Capital Gains Tax.

 

2. Municipal Tax on Property Sales (Plusvalía):

This tax is paid to the local administration and is based on the increase in the value of the land since it was last sold. Logically, as the beneficiary of this increase in value, the seller usually takes charge of paying the Plusvalía. The Plusvalía is based on the official value of the land, which is always lower than the actual market value. The tax is charged at between 10% and 40% of the annual increase in the value of the land. The exact percentage depends on a number of factors including the location of the property and the length of time between sales. Local authorities periodically carry out valuations of land and maintain up-to-date records in order to calculate Plusvalía charges.

Service Charges - Community of Property Owners

It is the norm in Spain for communal facilities such as the garden, swimming pool, car park and lifts to be jointly owned by the individual proprietors of an apartment block or housing complex. When you buy your apartment or villa you also become the owner of a percentage of these facilities. The exact percentage depends on the value of your property within the complex as a whole. For example, in a complex of ten apartments with exactly the same surface area and value, each individual proprietor also owns one tenth of the swimming pool, garden, car park or any other communal facilities.

It therefore follows that each owner is also responsible for the upkeep and maintenance of his share or, more specifically, for the expenses arising from this. These expenses are similar to the service charges you may be familiar with at home. In Spain you and your neighbours form a legal body that is known as the "Comunidad de Propietarios", which is similar to the residents’ associations you may have dealt with in your home country.

Being a member of this "Comunidad de Propietarios" means that you have certain obligations and rights. Your obligations include:

• you must not damage the communal facilities
• you must maintain your own property in a state of good repair
• you must allow repairs to be carried out on your property which are of benefit to the community as a whole
• you must allow workmen to enter your property in order to carry out repairs related to points 1 – 3 above
• you must pay your share of the service charge
• you will be held accountable by the Community of Property Owners (Comunidad de Propietarios) if you fail to observe any community or statutory regulations

As a member of the "Comunidad de Propietarios" you have the right to vote and participate in making decisions and running your residents’ association.

Some Community of Property Owners are run better than others. Obviously this depends a lot on the initiative of the proprietors themselves. Problems can arise in complexes where there are a high number of non-resident owners with little or no representation and a few residents who tend to dominate the running of the association. In some cases this can result in an abuse of power.

Experience shows that professional representation is often the only way to deal with such residents’ associations. The alternative is a series of frustrating discussions and little decisive action. Non-residents can experience problems like being overcharged or finding that the services they have paid for are badly carried out or not provided at all. The situation is often further complicated because notifications of important meetings do not reach the non-resident because they are not sent to his home address or he cannot understand them because they are written in Spanish.

As a member of a Community of Property Owners you need professional representation to ensure that your opinions are heard, your vote counts, matters that concern you are dealt with and the association is run efficiently.

Our legal team’s long experience of representing non-resident members of "Comunidades de Propietarios" on the Costa del Sol has given us special expertise in this field.

Local Council Tax (Impuesto sobre Bienes Inmuebles, IBI)

This tax is very similar to the local rates or community charge that you pay to the local authorities in your home country. All property owners, both resident and non-resident, have to pay the tax annually to the local administration that covers the area where the property is located. The tax can be paid by standing order from your Spanish bank account and this is probably the most convenient method if you are a non-resident since late payment will result in surcharges being added to your bill.

The amount of tax you are liable for is calculated by referring to the official valuation (valor catastral) recorded by the Land Registry (Catastro) which is usually lower that the real market value. Other factors such as the location, size or nature of your property may also be taken into account. Because this is a municipal tax, rates vary from place to place.

Your local town hall will give you a receipt to show that the tax has been paid. This receipt is very important when it comes to selling your property for two reasons. First, because it shows the property’s reference number for the Land Registry (Referencia Catastral). Second, because this tax is attached to the property itself, not the person who holds the title deed. Therefore, if the property is sold with an outstanding debt for the Real Estate Tax, responsibility for payment plus surcharges is transferred to the new owner. Obviously any prospective buyer will want to ensure that the tax has been paid in full before proceeding to completion and the receipts for payment are proof that this is the case.

Rubbish Collection Tax (Tasa de Recogida y Tratamiento de Basura)

This tax is paid to your local authority to cover the costs of rubbish collection and disposal. It is paid twice a year and it is advisable for non-residents to arrange payment by standing order from a Spanish bank account.

If your property is newly constructed your local town hall may not immediately bill you for the tax. Sometimes it can take up to a year for them to send you notification, at which point they will backdate your payment to the original purchase date.

Property Income Tax (Impuesto sobre la Renta)

This is a tax that must be paid by non-resident property owners every year. Resident owners who can prove that their property in Spain is also their principal residence are exempt.

Non-residents are taxed on income received in Spain at a flat rrate of 24,75% (since 2012), but this percentage may be changed every few years. Where no actual income exists the Inland Revenue will impute an income usually based on a small percentage of the cadastral value of the property (valor catastral) which is registered at the Land Registry (Catastro).

Professional Representation for Property Income Tax

All foreigners who own property in Spain are obliged to present a personal tax return to the Inland Revenue (Hacienda) every year. This tax is the Property Income Tax.

Failure to pay this tax can result in fines and may even lead to an embargo being placed on your property. Our legal team can represent you in this respect.

Insurance

You should contract an insurance policy to protect your assets in Spain. If your property is mortgaged the bank will require you to do so. A standard insurance policy for an apartment worth about €300,000 with contents valued at €48,000 costs in the region of €280 a year.

In an apartment block or housing complex the Community of Property Owners (Comunidad de Propietarios) is required to insure the whole property for the cost of rebuilding. However, it is always advisable to also take out your own buildings insurance in case the "Comunidad de Propietarios’ "insurance is not comprehensive.

For a villa with a rebuild value of approximately €500,000 and contents worth €180,000, the insurance premium would be about €1,550.

Mortgages

The amount you can borrow will obviously depend on the value of your property. As a general guideline, non-residents can borrow up to between 60% and 70% of the property value, while for residents this figure rises to 80% of the value. It will also depend on your income. As a rule, banks will usually lend up to three times your gross annual income, but they rarely authorise a loan that will result in monthly repayments that exceed 33% of your net disposable income per month.

The maximum term for repayment of the loan is usually 15 years, but mortgages can sometimes be arranged that have 25-year terms. The crucial factor here is the age of the borrower. The borrower, or eldest partner in the case of a joint mortgage, must be under 70 at the end of the mortgage term. So, if the eldest partner in a couple is 55 the maximum repayment term a bank will be prepared to offer is 15 years.

Each bank requires slightly different documentation for a mortgage application, but the following is a general guide to the kind of paperwork you will be expected to supply.

For employed mortgage applicants:

• your last three wage slips & latest income tax return or evidence of your most recent tax assessment
• copies of your current bank account statements for the last six months
• a letter of reference from your employer confirming the dates of your employment and salary
• a copy of your passport or residence permit if you are a resident

For self-employed mortgage applicants:

• your latest income tax returns, where applicable
• copies of your accounts for the last 2 – 3 years
• a report from a Chartered Accountant confirming your personal income from business activities
• a copy of your passport or residence permit if you are a resident
• copies of your personal bank account statements

For retired applicants:

• last three pension slips
• tax return from last two tax years
• bank statements for the last three months
• reference letter from bank

It is important to remember that in Spain a mortgage is attached to the property rather than the person and is registered on the title deed (Escritura Pública) at the Property Registry (Registro de la Propiedad). If you are buying off plan the developer may have a mortgage already in place on the property and you simply take over the responsibility for paying it on completion. Obviously the lender will want to check your financial status before agreeing to this.

The fees for arranging a mortgage usually come to about 3% of the amount you borrow, but this will be lower if you are taking over the developer’s existing mortgage. These fees include the bank’s commission, and stamp duty as well as fees paid to your lawyer, the Notary and the Property Registry.

If you need further information on mortgages talk to a member of our team, who can explain and guide you through the best options available to you.

NIE Identification Number

By law all foreigners who have assets in Spain must have an NIE. This is your reference number with the Spanish Inland Revenue and you need it to complete your annual Income Tax and Capital Gains Tax returns.

It is also essential when you open a bank account, buy or sell property, apply for a loan or mortgage, or even take out an insurance policy.

Spanish Notaries demand that non-resident purchasers produce an NIE certificate before they will allow them to sign the completion contracts. If you do not have an NIE this can cause unexpected delays to completion at the last minute.

You can apply for an NIE certificate yourself, but the procedure is quite complicated, especially if you do not speak Spanish. One of our staff can handle your application, either by accompanying you to the relevant offices in the Police Headquarters or by dealing with the whole process on your behalf. This could save you an enormous amount of time and effort.

Making a will in Spain

Even if you have a will in your home country, it is also wise to make a Spanish will that disposes of your property here. Spanish succession law is quite complicated and may differ greatly from what you are used to at home.

The Spanish law on wills is designed primarily to protect heirs within the family. A number of restrictions are therefore placed on the testator’s freedom to dispose of his estate as he wishes. However, this is only applicable to Spanish citizens.

For non-Spanish citizens, their national law is applicable when signing a Spanish Will.

You may have made provisions in the will you made in your home country for the disposal of your assets in Spain and in theory these dispositions should be respected here too. However, the legal procedure to enforce this in Spain is very lengthy and expensive and any final decisions are subject to the discretion of the courts. Your heirs may become involved in protracted and distressing legal procedures. Furthermore, if you have a definite idea about how you would like your estate to be distributed it is imperative that you make a Spanish will.

Once you have made a will in Spain it is very important to ensure that your home country excludes your Spanish assets and that any subsequent wills made abroad do not supersede the provisions made in your Spanish will either.

Inheritance Tax

This tax is payable on inheritance of property by spouses, children or any other party who receives part of the deceased’s Spanish estate.

 

Inheritance is taxed on a sliding scale which starts at 7.67% rising to 34%.

 

The amount of tax a beneficiary is liable for depends on the net value of his share in the estate. This net value is calculated by establishing the current fiscal value of the property and then deducting any charges, debts (a mortgage for example) or expenses that may be applicable. 3% is usually added to this figure to cover contents and personal effects. It is important to note that in Spain, unlike other countries, tax is only raised on the beneficiary’s share of this net value, not on the total value of the estate that has been transferred.

There are some tax allowances for certain classes of beneficiary, such as spouses, parents, children, siblings, uncles, aunts, step-parents and step-children.

 

Minimising your Liability for Inheritance Tax

You should seek professional legal or fiscal advice from a lawyer or accountant specialising in Spanish tax regulations to discuss the most suitable arrangement for you and your heirs. These are some of the options that may be suggested.

 

Putting more members of the family, like your partner and children, on the title deeds is an alternative. By doing this you make each beneficiary’s share smaller and increase the number of tax allowances that are applicable thereby significantly reducing the tax your beneficiaries will have to pay. However, this option may become problematic if you want to sell the property because this requires the consent of all the titleholders.

Remortgaging the property may be advisable in some cases in order to minimise liability for inheritance tax.

Investment Opportunities on Spain

There are plenty of opportunities for profitable investment on Spain & the Costa del Sol. These range from purchasing a small apartment with the idea of renting it out to holidaymakers to huge projects such as housing complexes or marinas.

Transfer tax rates are different for commercial property and you should take professional advice to discuss your options if you are thinking about making this kind of investment.

Whatever investment you are interested in, whether it is small and relatively uncomplicated or a complex large-scale investment, our experienced legal team can give you independent financial guidance as well as advising you on other aspects involved, such as employment law.