Everything that a UK citizen should know when buying Spanish property

Everything that a UK citizen should know when buying Spanish property

The combination of cheaper property available and government incentives makes it a perfect time to snap up a bargain.
In spite of economic uncertainty having plagued the peripheral nations of Europe in recent years, Spain has been crowned the top the destination for Brits seeking to buy abroad. A survey conducted this year by Rightmove Overseas suggests that new holiday home buyers are looking more towards Spain than the traditional favourite, France.
The latest statistics from the Ministry of Development also show that the Spanish property market is making a definite recovery after years of decline. The combination of cheaper property available, a strong pound alongside cheap euro mortgages and government incentives such as the new “Golden Visa” makes it a perfect time to snap up a bargain for Brits and non-EU nationals alike.
However, there are various important differences between the Spanish system for buying property and the English system and further challenges may be faced as a non-Spanish citizen with regards to taxes and mortgages on offer. This essential step by step guide will take you through the process of buying Spanish property and warn against pitfalls Brits often fall into when embarking on this investment.Before buying.
The steps a buyer must undertake before making an offer will very much depend on the purpose for buying the property. If the purchase is with the intention of permanent relocation then the preliminary considerations will be very different to investment property or holiday homes. It is advisable as a starting point to make a comprehensive list of what you need from your property (e.g. rental profit, close to work, near good schools/amenities, on the coast) and then compare this to your budget. This will give you an initial idea what is most essential to you and what you can be flexible with when choosing a location or property type.
Once you have narrowed down your search to a particular area or areas it is best to seek the help of local estate agents as they will often provide more sound information and have better deals than online sites. If possible, it is strongly advisable to go and see the property before contracting to buy. This will generally ensure that the property matches the description and will give you a much better idea of the quality of the fittings and finishings as well as the luminosity and views of the property. This can normally be arranged through the estate agent.
It is essential to read the Land Registry extract (nota simple) to check that the property matches the details registered and the seller is the registered owner before parting with your money. This extract will also list any debts or charges that exist over the property such as mortgages, and any tenants in occupation. Knowing this information from the outset will save complications later on.
This extract will inform you as to whether the property is part of a council house scheme such as “Viviendas de Protección Oficial” which makes it eligible for lower tax rates. Certifying that the seller is up to date with service payments for communal areas and the IBI annual property tax (similar to council tax) will prevent you becoming liable for these costs. Local councils can charge new owners for unpaid IBI tax for up to 5 years arrears as well as additional penalties.
If buying a new build directly from plans through a developer, it is advisable that you seek the following information from them:
  • The company name, address and other information as listed on the commercial register “el Registro Mercantil”
  • Property plan and site plan, including key elements such as network coverage and fire escape measures
  • Detailed description of the interior of the property, the exterior, communal areas and services included
  • The materials used in the construction of the property including insulation methods
  • Instructions for the use and conservation of installations/appliances and for the evacuation of the property in case of emergency
  • Proof that the property has been entered on the ∫Property Register, or a declaration that it has not been registered
  • Total price of the property and services, and method of payment
For new builds or property currently in construction, extra precautions should be taken. Many UK buyers have faced issues recently with buying property that is in contravention of land planning law and have had their properties demolished. It is therefore crucial to check that your desired property is a legal build and there are no legal proceedings initiated against it. The local town hall will be able to inform you whether or not the construction has met all legal requirements. It is also worth checking to see if the developer has taken out appropriate insurance for structural defects.
If purchasing a new build you should confirm that the property has been certified as finished by a registered architect and registered as a new build on the Property Register.

The legal process

Once you have decided that your chosen property satisfies the legal requirements and is suited to your needs, then there are three main steps to be taken for the legal title to pass from the seller to yourself.
“El contrato de reserva.”
In this first phase the buyer gives a deposit directly to the seller to ensure that the seller reserves the property for them. The deposit is usually around 10% of the asking price. This step is optional and usually only engaged with if there is great demand for the property. This is a private contract so there is no need for a notary to present at this stage. However, the contract is still legally binding and both parties stand to lose money if for any reason they fail to engage in the sale. If the buyer no longer wishes to buy after the deposit has been given, then the seller is entitled to keep the money, and likewise, if the seller refuses to sell then he must give back double the value of the deposit. This stage is more common with properties that are in the process of being built.
“El contrato privado de compraventa”
This second stage is legally required in order for the property to be sold. This is the main contract for sale which should contain all the expressly agreed terms of the sale and should be signed by both parties. It should also state that the property has been registered and that the sellers are the listed owners of the property and it should list the charges (if any) that still exist over it. The terms of the contract should also make reference to who is responsible for paying the charges and various taxes that must be met in order for the sale to be complete.
“La escritura publica”
Because the contract for sale is a private contract, once it has been signed by both parties, the buyer will then need to sign a deed to make the sale public. This therefore has to be authorised by a public notary. The buyer can only register themselves as the new owner of the property on the Property Register if the deed has been signed. This stage is therefore essential to the process of sale, as it only once the buyer has been registered as the new owner that his rights are fully protected. This document should again reflect an accurate description of the property.

Tax

Property is taxed differently in Spain than in the UK. In Spain, there is a distinction between the type of tax imposed on a new build and a home with previous owners. Buyers of new builds have to pay 10% VAT to the government on the total price, unless it is a home with under a specific government protection plan (Viviendas de Protección Oficial de Regimen Especial VPO RE) in which case a reduced VAT rate of 4% is due. Previously owned properties do not have to pay VAT, but there is a transfer tax (Impuesto sobre Transmisiones Patrimoniales ITP) that must be paid. This tax is set by each autonomous region, but will oscillate between 4-10% of the value. It is important to note that the tax will be imposed on a percentage of the total price of the property as valued by the local council.
Further to this, buyers are required to pay an additional administrative tax (Impuesto sobre Actos Juridicos Documentados IAJD) for executing the public deed. This is set by each autonomous region but will generally be 1% of the value of the property. VPO properties are exempt from this tax.
Investors looking to buy property with a view to selling it for a profit should also be aware that there is a capital gains tax imposed on any profits made, though expenditure on improvements is often deductible. Spanish residents may qualify for an exemption on this tax if selling their main home and are investing in a new main home. Non-residents, however, will be subject to this mainstream capital gains tax, and additionally, buyers of their property must withhold 3% of the purchase price as an advance payment on capital gains on behalf of the vendor. Because of the double taxation agreement between the UK and Spain, capital gains tax will only be paid in Spain.

Visa and residency

As of September 2013 a new law has passed that allows for a Spanish Investment Visa to be granted to those who invest at least €500,000 in Spanish property, which may create an interesting opportunity for non-EU residents. The investment can be spread over several properties, and the amount does not include the additional costs associated with buying Spanish property as aforementioned. A Spanish Visa can be granted to investors and their immediate family, including their spouse and any children up to the age of 18. The visa only needs to be renewed after 5 years, at which point permanent residence can be granted if all the requirements have been met. After 5 years as a permanent resident Spanish citizenship will be granted, which automatically gives European citizenship. There are no minimum stay requirements so it is not necessary for the investor to be tax-resident in Spain.
The requirements for this visa:
Not to have entered or stayed illegally in a Spanish territory
To be 18 years or over
Not to have been refused entry into any of the Schengen countries
Have public or private health insurance authorised to operate in Spain
Have sufficient economic means to cover personal and family living expenses

Other costs

The costs of buying Spanish property can generally be divided into two tranches. The first being the costs associated with the sale and transfer of the property, and the second being the costs involved in obtaining finance for the purchase. The first of them can differ depending on whether the property is bought through an agent or directly from the seller or developer. Estate agent costs will fluctuate depending on the area the property is in, and the fees charged tend to vary between 1-3% of the value of the property.
There are various costs involved in the checks that need to be undertaken in order to verify the sale of the property. These include obtaining the Land Registry extract (nota simple) and cadastral certificates and copies of deeds. These costs can vary between €11 an €100 depending on the exact information sought.
The requirement of a notary for the execution of the deed reflects an important cost associated in buying a home. The cost of this will be set in relation to the value of the property. The cost of this will depend upon how many estates are being registered and any particular conditions of registration, but will generally come in at 1-2.5% of the purchase price. Legal fees to ensure the smooth running of the sale can cost approximately 1-2% of the purchase price.
When taking out mortgage finance from a Spanish bank there are certain costs that need to be met other than the cost of setting up the mortgage and the subsequent payments. The mortgage must be formalised as a public document and so another deed must be drawn up and signed by the buyer and lender. This charge on the property must then be registered on the property register at the same time as registration of the transfer of ownership.
Capital gains taxes are generally footed by the seller, but on top of this, the seller may also share the burden of paying the estate agent fees, and some of the costs involved in investigating the physical and legal state of the property. The seller is also in charge of clearing the property of any outstanding charges and debts which can cost around €300.

Financing your purchase

The most commonly used method of obtaining credit to purchase a home in Spain is also through mortgage finance from a bank. There should not be a significant disparity between the loans on offer to Spanish citizens and EU residents though this will be subject to each lender´s individual requirements.
Much like the UK, there are fixed-rate and variable rate mortgages as well combination mortgages where a portion of the interest varies in line with the Euribor base rate whilst the other portion remains fixed. Unlike the UK, fixed-rate mortgages in Spain are far less common and tend to be fixed for longer periods of time which creates a higher risk factor by being tied to one bank. Variable rates remain constant during a set period (quarterly or annually) and then are revised to follow suit with the base rate; the majority of loans in Spain are of this type.
Variable rate mortgages can also come in the form of a fixed fee, where the monthly payment due remains the same throughout the whole mortgage period. Fluctuating interest rates mean that the length of the borrowing period varies, rather than the monthly cost.
Another fee-type classification are mortgages where a set portion of the loan (generally around 30%) is due to be paid in the final instalment. This means that the monthly capital payments are significantly less but the portion of interest paid is much higher since it is calculated on the entire loan, most of which will be paid at the end. This is a high risk option as it requires the borrower to ensure that they have the set amount of the loan ready pay on the final instalment. Mortgages where the monthly payments due increase each year, normally by 1-2%, are also available.
Mortgage finance can also be obtained depending upon the type of client seeking the loan. For example, people under the age of 35 can often obtain loans with more advantageous conditions. Mortgages for non-residents may often have more stringent conditions attached to them and often require the buyer to have saved enough to cover the costs and around 50% of the purchase price. However, lenders do often see non-residents as a lucrative market and so Brits, particularly as EU citizens, can often benefit from favourable interest rates.
As a UK resident trying to obtain finance from Spanish lenders, it is important to have available various documents. These can include: a copy of your passport, recent bank statements and payslips, P60 or self assessment tax returns, employer or accountant reference etc.
fuente:money market uk

Nov 21, 2014

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