Hi everybody. Something that has recently come to my attention and seems to be unknown by a great many people is the way one is considered by the tax office regarding payment of deposits and the names on contracts.
I currently have two clients who came to Spain on a viewing trip (approx 2 years ago) who paid their reservation deposits to purchase their dream holiday homes. Nothing unusual in that, except that in both cases the first visit was only one person from each of the couples. This seems to be something that happens fairly frequently and not out of the norm. Both properties are now approaching completion. Both parties have assumed that there has been no problem incorporating the other party onto the contract without incurring additional cost and their legal representatives have been aware of the addition of a name to the contract for some considerable time. However there now appears to be a problem.
Apparently
in the eyes of the tax office it is considered that as the reservation deposit and contract was only in one name to add an additional party means that there has been a transfer of 50% of the property value to the second person named and if that is what happens at point of completion, not only will there be 7% IVA to pay on the completion of the off plan purchase but additionally there will be a 7% transfer tax liability for adding the second person to the contract. Apparently the problem arises with the staged payment scenario - when you pay the deposit IVA is charged and the terms of the deal are registered and the IVA paid. Thus Mr Smith is buying at 200,000€ with 7% IVA to be paid. At completion Mr and Mrs Smith are recorded at the Registry and the anomaly arises that there is now another party on the contract - thus Mr Smith must have sold 50% of the property to Mrs Smith for 100,000€. Thus the logic that is followed is that there is the 7% TT to pay on 100k.
In the opinion of my clients' lawyers there should be no tax liability on the additional party as there was never any intention to do anything other than buy in joint names. My logic would also dictate that to be so. Nonetheless the two different developers in both instances are refusing to sign the contracts unless there is a clause in the contract stating that any additional tax liability is the responsibility of the second party added to the contract.
I have spoken to three lawyers about this and none of them appear to have been aware of this situation. I am told it is a situation that has always existed and is not new legislation, but until now it has not been enforced. However I am told that inspectors are starting to investigate this and it may be possible that they will retrospectively make a demand for the "unpaid" transfer tax. To date none of the lawyers I have spoken to about it (including the one who brought it to my attention) has actual first hand experience but my view is it is better to shut the door before the horse bolts so forewarned is forearmed. All the more important that one ensures the credentials of one's lawyer and that they are independent.
I am told that the situation has arisen and the authorities are clamping down on it because off plan investors who have sold on contracts prior to completion have not fulfilled their tax obligations hence the tax office are taking a far greater interest in the whole sale process.
It is unlikely to happen with a resale because most resales are sold to joint parties and the procedure is relatively quick and seamless and the 7% transfer tax does not get paid until completion. Any deposit is normally held in a lawyer escrow account until the day of completion and all due taxes are discharged on the day of completion. Thus the tax office effectively only ever sees the finished article - hope that makes sense.
Try to ensure that if you are buying a nearly finished property or off plan that from the point you start paying any monies it is recorded that everything is done in the names of those you want on the purchase deed.
Rgds