Buying property in Spain
Overseas buyers are often surprised to learn about the very high costs associated with property purchases in Spain. These taxes and fees vary widely and range from just under 10% to over 20% of the purchase price, depending on the type of property and the region where it is located. These fees are always paid by the buyer and are on top of the agreed sale price. Sellers don’t get off the hook either though, with Estate Agent’s fees ranging from 2-6%, Capital Gains Tax, Plus Valia tax and a 3% tax retention if they are a non-resident. With this in mind, and the numerous unscrupulous Estate agents targeting overseas buyers, it is important to have a basic understanding of the purchase process, legal fees, taxes and, of course, to get good legal advice!
The Purchase Process
Although most guides state that the process starts with a 10% deposit, it is quite common to pay a 1% ‘reservation fee’ or other small fee when making an offer. This may or may not be refundable, and I have heard stories of unscrupulous agents making a living from charging reservation fees to customer’s credit cards. If you do need to pay a reservation fee or ‘demonstration of interest’ fee, then make sure that it is refundable and that the agent taking the fee is reputable.
Once your offer has been accepted, you will need to sign a private contract and pay a deposit (typically 10%). Unlike the UK, this deposit is non-refundable – you will lose this money should you pull out of the deal. Conversely, if the seller backs out, they will have to pay you double the deposit. Before you pay the deposit, you will need to hire a lawyer – preferably not the one recommended by the Estate Agency (as that lawyer will be looking to keep the agency happy and continue receiving clients from them). The lawyer will perform some rudimentary checks on your behalf before advising you to transfer the deposit to a bonded or escrow client account.
Typically, Spanish banks will lend up to 70% of the property value if the buyer is non-resident. In practice, this means that the buyer will need to have saved at least 40-45% of the purchase price, since the he/she must also pay the 10-15% in taxes and legal fees.
e.g. Joe wishes to buy an apartment in Spain for €100,000. The bank have agreed to lend him 70% (€70,000), so Joe needs to find the remaining €30,000 plus €10,000 to cover the taxes and legal expenses.
Buyers should also be aware that Spanish Banks are now requiring customers to take out mortgage protection insurance and pay this in full at the beginning of the loan. The bank will ‘lend’ you the money to pay this, but it may be a significant amount (I was recently quoted €10,000 on a small mortgage).
Many of the horror stories associated with property in Spain relate to off-plan purchases, so additional caution should be exercised when buying a property that has not been completed. Typically issues arise when a builder goes under or when a development has been built illegally. There have even been cases where whole estates have been built seemingly legally with planning permission from the local council, when the council did not have the right to grant that permission because it contravened a regional plan. If you are buying off-plan, make sure that you get good impartial legal advice.
Rules governing the letting of properties to tourists vary from region to region, so do not take it as given that you can rent your property to tourists. And don’t just take the estate agent’s word for it – large fines are not unknown! Get good legal advice on requirements and whether or not the property can be legally let to tourists.
If the property is part of a complex or ‘urbanisation’, there will usually be monthly community fees. These fees pay for communal garden areas, street lighting and maintenance, though administration fees often account for a large chunk of the budget. Community fees vary widely, so make sure you find out how much they are before proceeding with the purchase. Other ongoing costs include the property tax (IBI), municipal rubbish charges and tax on any rental income. Note that if your property is not rented out, there will still be an implied tax due, which is based on the official valuation of the property. There may also be a wealth tax due, if an individual has assets valued at over €700,000 (€500,000 in Catalonia). If you are planning to let your property long-term, you should be aware that, in Spain, it is the owner that pays the municipal taxes and community fees, rather than the tenant.
The practice of paying part of the purchase price in cash to evade tax is, thankfully, not as prevalent as it once was, though a small amount of cash may still change hands to pay for the ‘furniture’. Buyers should be aware that, although it may seem like a good idea at the time, any savings that you make on tax at the time of purchase, will come back to haunt you in the form of higher capital gains tax when you sell.
Estate agents’ fees are much higher in Spain than in the UK, especially in the areas popular with foreign tourists. Typically they range from 3-5%, however the listing is not always exclusive (this is negotiable), so you can sell your property privately if you find the buyer yourself. Non-resident owners pay a 3% tax retention, which, in theory, is refundable, though only if the seller has paid all taxes due and submitted an annual tax declaration in Spain for every year that they owned the property. Sellers are also liable for a Plus Valia tax based on a theoretical increase in the land value of a property.
Buying Property as a Spanish Company
It may be possible to avoid IVA or Transmision/transfer tax (Impuesto sobre Transmisiones Patrimoniales) if the property is for commercial purposes (letting or a business) by setting up a Spanish company. Get some legal and financial advise to find out if this would be of benefit to you.