Please note that the information provided in this article is of a general interest nature and intended as a basic outline only. You are well advised to contact a professional for advice specific to your circumstances. Nothing contained in this article should be seen or taken as the writer or publisher providing legal or financial advice. Over the last few years we have heard an increasing number, perhaps apocryphal tales of UK citizens “not recognising “ the country they grew up in. Feeling alienated in their own country and looking for a way out.
Whenever you commence an informative article about Spain, there is a tendency in the last couple of years to start with a negative. Well I am going to buck this trend. Here goes…. according to the promoters of “A Place in the Sun Live”, who conducted research at their recent (early summer 2006) event in the UK, which attracted over 21,000 potential investors, they found that Spain was the second most popular place to invest!
“Investment” is a word open to substantial interpretation.
The definition as established in English Statutes that govern the provision of financial services, pensions and share dealings may differs greatly from Joe Punter’s idea. The attractiveness of an investment may well be in the eye of the beholder!
An “investment” in an overseas property should deliver some kind of attractive return – we often hear the excellent expression “to wash its face”. We take this to mean the possibly some rental income to assist with the mortgage and community payments and over a period of years there should be an appreciable capital growth. Above all a dream property should deliver:
a. a great location where scores of friends and family can frustrate the hell out of each other on a local golf course,
b. a sports club where usually passive people can virtually come to blows on the tennis court whilst re-enacting the mid 1980’s Wimbledon exploits of John McEnroe,
c. the chance to drink a little too much of the local sub-€2 red wine, and get a taxi home with change from €20.
d. above all it should be a place where the risk of a mild sunburn is a palpable reality!
If all investment decisions were this easy…….
On the famous other hand…there are pitfalls to buying a property in Spain. It can be all too easy to feel rushed into purchasing a property, especially when faced with plans for that dream villa in Marbella or that wow factor apartment in Altea. However, purchasing a property in Spain can be as safe as purchasing a property in the UK, provided you have the essential services of an independent lawyer.
The Spanish legal system operates very differently from that of the UK, and the only way to avoid frustration, misunderstanding or even fraud is to secure the crucial services of an expert.
The following guide summarises the main stages involved in the purchase of a property in Spain and should be of assistance in illuminating the purchasing procedure. It almost goes without saying but these details must be regarded as a general guide and no substitute for specific legal advice that may vary according to the circumstances of your transaction.
Stage one: Identifying the right property
The sources of information available to the prospective Spanish property owner are virtually endless. In recent years the plethora of agents based in Spain has contracted to the extent that those that remain are increasingly expert in their part of the Costas from Barcelona in the East, Murcia and Almeria in the South East, Marbella in the South to Cadiz in the West. There are a few larger agencies that have sought to “own” Spain and do an admirable job with experienced and intelligent staff who’s job is not to door step any potential client or badger you into buying.
Before you start looking for your home in the sun, you must decide which area of Spain and what type of property will be most suitable for your needs.
Whatever your reasons for seeking a property in Spain, shop around and take advice. Perhaps you have friends who already own a property? They are almost certainly your best starting point in your quest for a second home.
It should be born in mind that the commission due to a seller’s Estate Agent will usually be paid by the seller. However, a custom has emerged in a number of regions for such commission to be paid 50/50 by the buyer and seller.
Many people structure their purchase decisions based on the prospect of rental income.
According to our colleague Iain Maitland at International Property Alerts, Barclays IESE Barometer is showing that Murcia is becoming increasingly popular with the British expats. It’s now in fourth place behind Alicante, Malaga and the Balearic Islands. The growth market is clearly golf lets. The good weather – about nine to ten months a year is keeping the rentals up.
We are seeing a developing market on the Costas Blanca and del Sol – which is growing out of the off plan market of three to four years ago. This involves recently completed properties in urbanisations that are increasingly mature in terms of gardens and infrastructure. A well managed rental operation with a great Internet presence and operated run from an offices local close to the urbanisation is a God send to absent owners seeking to maximise on the year round market.
Stage two: What can you afford?
Thousands are leaving their home countries every year. With UK property prices at an all-time high many are considering selling up, buying a home abroad and investing the remaining capital to provide for their retirement years. Equally, many are buying a second home. In both cases there are certain costs that must be taken into consideration in addition to the price of the property.
You may have your heart set on a particular region or style of property, but if you are on a tight budget it may be worth considering the alternatives - perhaps a neighbouring region or a resale rather than a new build. Likewise, certain types of property can seem very attractive, but you should be aware of their running costs, and whether they really suit your needs; consider the security implications, for example, if your second home is a detached villa rather than an apartment in a secure complex.
Having found a property and you have decided to make an offer, your first step will be to ensure that you have the funds available to pay the 10% deposit. You’ll also need to budget for the costs associated with your purchase. They can be a further 10% to 12% plus on top of the purchase price.
Sellers of pre-existing “resale” property, may seek to persuade you that a percentage of the purchase price should be paid “under the table “ in “black money” or cash. It is hard to resist but don’t be tempted down this route as it will result in an under declaration of the purchase price on the Escritura – or purchase deed – and leave you will an artificially inflated Capital Gains Tax burden when you come to sell. It is also illegal.
Mortgage funds may be available to meet the needs of purchasers in Spain. There are a variety of different options but self-certification and interest only products are starting to appear. These will, usually be based on highly competitive interest rates which still compare very favourably with the, for example the UK. Applying for a mortgage in Spain is a fairly complex procedure and I’d recommend that a bilingual broker be retained to represent your interests.
Stage three: Getting the best out of your Euros
When buying any property in the Euro zone, you will ultimately have to convert your hard-earned sterling into Euros to actually pay for your new home. This requires serious planning, especially if you are buying into a new off-plan development where there are several ‘stage payments’ that fall due during the construction of your property. Even those people buying a resale house will have to put down 10% of the purchase price when entering into a purchase contract.
You will know the price of your new home in Euros and this should not increase unless, for example, you upgrade the specification of your new-build villa by adding a swimming pool. However, you will not know how much it will ultimately cost in Sterling until you have bought all of the Euros to pay for it, and this will be determined by the timing of your currency purchase.
Be aware that the cost of Euros can fluctuate quite rapidly depending on global currency movements and political factors that lie outside your control.
The risk-free solution would be to buy all the Euros immediately, thus fixing the cost at the outset. You will not only know the price of the property but also the cost of the Euros to pay for it. Many people choose to appoint a specialist currency brokers who have teams dedicated to overseas purchasers - to buy Euros as soon as they hit a particular rate of exchange.
Generally speaking, the high street banks and building societies are not in the best position to devote the time and attention required advising you about buying currency.
Specialist currency brokers are the safest means of ensuring the conversion of your Sterling into Euros is done safely and with the minimum of risk. Offering a comprehensive service for moving money abroad, many brokers work closely with agents, developers and lawyers involved in the sale of Spanish real estate.
Once you have the necessary funds, and have decided which property to buy, your next step is to contact the vendors and instruct your legal representative to check that they have a good legal title to the property and carry out the relevant searches at the local Property Register.
Stage four: Protecting your interests
The Spanish Legal system is far removed from the British one when it comes to buying a property, so when seeking legal advice and deciding who should represent you for your purchase, there are a few key rules that should be observed.
Seek guidance from a specialist in Spanish law - ensure that the lawyer you appoint is an Abogado (Solicitor) - a member of the Colegio de Abogados local Spanish Bar or Law Society. A Gestor is not a lawyer but an administrator who works in a privately run office (a Gestoria) that deals with matters related to Spanish bureaucracy, including property issues and tax declarations.
There are also Spanish based specialists, such as, The Rights Group SL (TRG), which is run by the author. I am a local resident and an English trained Solicitor and have operated TRG in Spain for the last four years. We work for clients from all over the World who are looking to or have contracted to purchase property in Southern Spain.
TRG has an established network of currently, twenty-six member companies. They are all “test driven” and bilingual providers of professional services, and include Abogados, Accountants, Surveyors, currency, insurance and mortgage brokers and more recently the suppliers of bespoke furniture packages. We introduce our clients to the service provider and the service provider, for good legal reasons enters into a direct agreement with the TRG client to provide their services.
The advantage of using TRG is that once appointed we will “drive” the client’s purchase in Spain – becoming the client’s eyes and ears, asking the right questions and getting answers. This is achieved by TRG at no additional cost to the referred TRG client.
It is equally important to check that the law firm you have instructed is adequately covered by a professional indemnity policy. Abogados have insurance provided by their local Bar Association but more conscientious lawyers usually obtain a more comprehensive Professional Indemnity policies. This should give a client added comfort.
In addition, it is important to make sure you know exactly what work is covered by the quote you receive from the law firm. Some lawyers may cut corners in the conveyancing procedure, which could potentially lead to disastrous consequences and unpleasant surprises in the future. You need to make sure that you cover a wide variety of subjects in addition to the contract and the searches. For example, you should receive advice on who should own the property as this has an impact on taxes and inheritance arrangements.
Lawyer’s fees for a purchase or sale are usually based on a percentage of the purchase price and they vary between 0.75% and 1.5% - with applicable VAT equivalent and disbursements on top - with minima also applying.
Spain has a fairly pro-consumer legal system and legislation exists to protect a purchaser of an “off plan” property against the developer’s bankruptcy, for example, during construction and pre-completion. This is called an “Aval Bancario” or Bank Guarantee.
The law requires a developer to guarantee the amount of the deposit paid by the off plan purchaser plus 6% annualised interest. This should be achieved either through a bank guarantee of an insurance policy to the same value.
Your lawyer should ensure that evidence of the guarantee or insurance policy is obtained at the time of signing the Contrato de Compraventa (see below). A mechanism should also be agreed for the guaranteeing of additional sums paid by way of stage payments. This is a very important protection for the purchaser and without these guarantees being firmly in place your interests are obviously exposed.
Stage five: Checking your property
Once a legal representative is appointed the property you are considering buying should be thoroughly searched by your Spanish lawyer before any contract to purchase is signed. There are a number of formalities and checks that should be carried out. The first step is to check whose name appears on the title deeds and to confirm that the property was built with planning permission and that it definitely exists! Further checks should focus on the legal description of the property and its boundaries – and they actually accord with what you think you are buying.
All Spanish property must be registered in the name of the owner at the local Registro de la Propiedad or Property Register (the equivalent of the English Land Registry). The only people who are able to legally transfer full ownership of the property to the buyer are those who are registered as the legal owners. Therefore, an investigation at the Property Register will show who the legal owners are, and it is their names that must appear in the contract to purchase. The only exception to this is where the vendors are properly appointed agents for the legal owners, such as a sale following a death.
It is not uncommon for buyers to sign contracts to purchase where the vendors are estate agents. Be aware that the “seller” may not have a valid authority or Poder (Power of Attorney) to sell a particular property. Do not fall into this trap, as any money mistakenly paid to an agent who is unable to legally transfer title may well be unrecoverable. If there is a doubt ask your lawyer to obtain a copy of the Poder.
A further check should be run for any outstanding mortgage payments or other debts levied on the property. Proper steps need to be taken to ensure that any sums shown to be due are paid off in full before legal ownership of the property is transferred. We are aware of instances where buyers have lost their Spanish property because prior mortgage charges and other loans against the property have not been fully paid and cleared from the register.
Your lawyers should search at the Property Register which should also include details of building restrictions applied to, planning consents, building permits, road construction or extension projects are complied with, and that any fines charged by the local authority for breaches of planning controls have been paid in full.
If planning permission has not been granted for a particular development it will be deemed an illegal development in the eyes of the authorities, and at the very worst could be demolished. A search of the Property Register should also give you an idea about any pending public works, planning applications and projects that may affect the value of your property in the future.
Your lawyer should make certain that following the legal completion of your purchase that utilities, particularly electricity and water, are connected to the property, that there is satisfactory provision for disposal of sewage, no outstanding contribution to the costs of installing the infrastructure, roads etc. Further your lawyer should be able to advise you on likely costs of your occupation, community charges etc.
In additional to the checks to be conducted by your lawyer, prior to purchasing your property, you’ll need to obtain and NIE or Número de Identificación de Extranjeros. It is usual for the Abogado to arrange to obtain this number. You will need an NIE in order to work as an employee or to work self-employed; to open a telephone account; to purchase a car; to open an electricity or bank account and to purchase a property
Stage six: Compraventa – the conveyancing process
The first stage in property ownership is the Contrato de Compraventa - the private purchase contract – containing the conditions of the purchase/sale.
Due to the pace of the market, an “off plan” reservation contract, is now a more commonly first step. Signing of this document will involve the paying of a small deposit – perhaps €3000 or €6000 but it has the impact of removing the property from the market.
It is vital to know and understand what these conditions apply to your purchase before you proceed.
The Contrato de Compraventa is usually a short document containing details of the vendor and the purchaser, a legal description of the property, the purchase price, means of payment, date of completion. With a new build still under construction, there may also be a preliminary supplemental deed called the Contrato de Infraestructura - later confirmed by the Notary with a second Escritura called the Escritura de Obra Nueva - that relates to finalisation of the construction of the property.
Once both parties have signed the Contrato de Compraventa and the 10% deposit has been paid, it is binding. This means that the purchasers are committed to paying the balance of the purchase price, and the seller is committed to transferring the ownership of the land/property to the purchaser. The only protection in respect of off-plan property purchases is a proper and enforceable Bank Guarantee – see above.
The time between signing the Contrato de Compraventa and the Escritura Publica de Compraventa, which completes the purchase, varies. If the villa or apartment is physically constructed and both parties are ready - with all documents and purchase money in place - completion can take place within a matter of days after exchanging contracts. However, if a new build is being purchased which has not yet been constructed, completion will take place on the signing of the Escritura – a public document - in front of the Notary and the handing over of the keys by the developer or estate agent, which may be some months away.
Stage seven: New and “resale” properties
Buying a new rather than a resale property demands a different conveyance process. While a resale property requires the above background checks, purchasing a new property offers different pitfalls.
Legally, a Bank Guarantee must be supplied by a developer to the purchaser to cover the amounts advanced by the purchaser. Whilst this is a legal requirement, it will fall to purchaser’s lawyer to push the developers lawyer into receive written confirmation of the precise level of the guarantee. If a developer can avoid giving this they invariably will. This will leave a gap in your paperwork. The effect of this is to protect the purchaser’s investment should the developer go out of business before the property’s completion.
Obtaining a licence that stipulates you may occupy the property as a dwelling from a builder before handing over any final payment is also crucial. The lengthy procedure of producing documentation by a local Town Hall often means that money may be required before a new owner is in possession of these items. Finally the local town council will provide the purchasing client with a Valor Catastral which is a certificate quoting the value of your property and is required in the payment of your IBI – or local taxes - see below.
Stage eight: Completion of purchase/sale
In Spain there exists a system of a public Notaries. Attending before a Notary is the final stage in the purchase/sale of the property with the signing of the Escritura Publica de Compraventa and every title deed signed by both the seller and purchaser has to be completed in front of a Notary, who is essentially an official witness. It may be that either the buyer or seller provides a Poder (Power of Attorney) to a trusted representative to sign on their behalf.
Having completed the purchase, the Abogado then organises for the property to be registered in the name of the new owner. At this stage a number of property transfer taxes will have to be paid, together with the property register fees including the Notary’s and Abogado’s fees. The Spanish government fixes the Notary’s fees. A copy of the Escritura will be returned to the owner by the Property Register within about three months bearing the official stamps that confirm the property is yours and that your ownership is protected by law.
Stage nine: Purchase costs and taxes
The buyer is usually responsible for:
- Transfer Tax (or IVA (local VAT at 16%) plus Stamp Duty when buying from a developer)
- Property Registration Fees Notary Public Charges
- Legal Fees plus IVA
The seller is usually responsible for:
- Own Capital Gains Tax on any increase in Escritura value
- Plus Valia Tax – This is a local Town Hall tax based on the increase in the value of the land from when it was last sold. This is a one off payment. We have seen circumstances where this tax is paid in an agreed division between the buyer and seller or solely by the buyer. To avoid any confusion is important to decide at the outset of the purchase whether the buyer should be asked to shoulder none, part or all of it.
- Selling Agent Fees – plus IVA - as agreed with the Estate Agent
A usual breakdown of the above budget for costs and expenses, of the buyer are as follows:
- Notary Public Fees. These are charged on a scale of fees which, in turn, depend on the price of the property.
- Property Registration Fees - Land registry. These are around 40% of the Notary charges.
- Legal Fees - are normally charged at around 0.75% to 1.50% of the agreed purchase price plus 16% IVA. You should note, if purchasing off plan, lawyers have a tendency to charge 50% of their fees at the first stage being the signing of the private reservation contract and 50% upon the signing of the Escritura Publica de Compraventa.
- Mortgage Legal Costs. It is important to discuss with your lawyer whether you are seeking a mortgage to complete the purchase of your property. Some lawyers will waive any additional charges incurred in their dealing with the mortgage papers provided that you take a mortgage at the same time as your purchase. If, having purchased without mortgage funds, you subsequently wish to raise a mortgage on your Spanish property, or re-mortgage, expect to pay around 1% of the loan sought in legal fees.
- Transfer Tax – around 7% for second hand properties. Interestingly for younger purchasers, the transfer tax reduces to 3.5% if the buyer is below 35 years of age and the property is to be their main residence.
- IVA is charged at 7% for the purchase of a new property. However, if you are purchasing a Parcela or plot of land, garage or commercial building the IVA rate increases to 16%.
- Impuesto Actos Juridicos Documentados or “Stamp Duty” is around 1% for new properties.
- Plus Valia - according to the law it is the seller’s responsibility but please see above. Payment may from a few hundred €s for smaller properties to several thousand €s for large villas or plots. It must be remembered that this tax is calculated on the increase in value since last bought. You should therefore note that if the seller has held the property for a long time – particularly through the 1990’s and early 2000’s – a period of substantial growth - the Plus Valia may well be very high when calculated from last sales price to this sales price.
If you are planning to complete your purchase using mortgage funding, besides from the costs of servicing the borrowing you’ll need to budget for the following additional costs:
- Bank Valuation Fee - Calculated as a percentage of the valuation for smaller properties usually in the region of €400 to €750 plus IVA. Rising to 1% of the valuation for larger properties.
- Bank Arrangement Fee – Often 1% of the mortgage amount.
- Stamp Duty – Based on mortgage liability and usually around 1.8% of the loan.
- Notary Public Fees – The mortgage needs to be signed and witnessed in front of a Notary in order to be effective. Notary’s fees for this role are calculated as a percentage of the mortgage liability.
- Property Registration fees - Land Registry – The mortgage needs to be recorded as a charge against the property and fees will be due based on a percentage of the mortgage liability.
Step ten: Main annual taxes
A detailed discussion of annual taxes and Inheritance tax planning is outside the scope of this article but for your information the following may be useful:
If you own a property in Spain you must pay wealth tax or patrimony on all your Spanish assets. As a tax resident in Spain you are taxed on your world-wide wealth, if a non-tax resident, you will be taxed on your wealth in Spain.
All income for UK residents in Spain is taxable Tax rates vary depending on
Community fees and the community of owners
When buying a property in Spain with shared facilities, such as a communal entrance, swimming pool or other leisure facilities, it is a legal requirement that the purchaser becomes a member of the community of owners or the Comunidad de Propietarios. This would be termed a Residents’ Association in the UK, but it has the full weight of the law behind it.
Each Comunidad de Propietarios has its own rules, which will be set out in a separate document to the purchase contract, known as the Estatutos, or by-laws. In the case of a new development, it may not be finalised until building work is completed.
Owners of apartments or villas in a community are jointly responsible with the other owners for the expenses of the community. Each owner’s percentage of costs is fixed by the apartment or plot size, with the share being stated in the Estatutos. Expenses can vary substantially, according to the services required by the community, which might include a hall porter’s salary, garden and pool maintenance, servicing of lifts, repairs, electricity for lighting in common areas, insurance, refuse collection and management and administration fees. Accordingly, your lawyer should make enquiries on your behalf as to the method of setting the community fees, the amount payable and what provisions have been made for review of the charge.
By law the Comunidad de Propietarios elect their own Chairman or “President” from members of the community, and appoint an Administrator, who may be a paid official but is more often one of the residents of the development. Where a development consists mainly of holiday homes, it is generally a professional property manager who, at the annual general meeting, would present the budget for the forthcoming year. The Chairman and the Administrator agree together about the work to be done, instructing contractors and signing any documents that may be necessary.
Local rates - Impuesto Sobre Bienes Inmuebles or “IBI”
These must be paid in one payment due between 15th September and 15th November each year and is a municipal real estate tax. As property owner you must ensure that you pay this. It is also the owner’s responsibility to find out how much is owed which will vary but is usually 0.5% of the value of your property.
You can arrange for your bank to pay your IBI as well as your electricity and water bills. Payment by your bank involves filling in a form that authorises the tax demands to be sent to your bank rather than you. You must report your property purchase to the Delegación de Hacienda, or tax office for assessment of this tax.
We do hope that this piece helps you to come to grips with the detailed but not overly complicated process of buying in Spain. We look forward to seeing you here.