BUYERS GUIDE

This guide is correct to the best of our knowledge and belief at the time of publication. It is however, written as a general guide, so it is recommended that specific professional advice be sought before any action is taken, and therefore no responsibility whatsoever is assumed for the contents, including opinions, contained in this guide or for any actions based on such contents.

INTRODUCTION

The acquisition of properties in Spain, whether for holiday purposes or as an investment (i.e. buy to let), has experienced an unprecedented boom over the past years. The combination of factors such as Spain’s climate, Spanish lifestyle, the proximity of both countries thanks to the air transport industry and the strong UK economy has already encouraged more than 500,000 British citizens to own property in Spain.

Furthermore, the research of the Spanish Institute for Foreign Investment’s research suggests a very positive outlook for the next decade, showing increasing trends towards British property ownership in Spain, as more of the baby boomer generation retire and flexible working patterns become more widely adopted. It is even possible that the introduction of the euro together with Spain’s economic growth will encourage more people to consider working, setting up business or living in Spain.

ACQUIRING A PROPERTY IN SPAIN

Searching for a home in Spain is not more difficult than in the UK although you are likely to face additional challenges such as the language and legal and tax concepts, most of them foreign to the UK system.

Nevertheless, our experience is that despite the difficulties, the level of satisfaction of the foreign purchaser after acquisition is generally high.

There are certain recommendations to ensure a sound transaction, starting with choosing the right area to acquire the property.

Enlisting the help of a reputable real estate agent is a good way to find your property.

The next thing to consider is choosing a Spanish Lawyer (Abogado), specialising in property transactions and the various tax implications for the UK client. The Firm of Abogados that you use must be registered with the Spanish Local Law Society (Colegio de Abogados) and if they practice in England, regulated by the Law Society or Council of the Bar.

If you are using a Solicitor in England or Scotland the same principles will apply, and the Solicitor must be qualified to give advice in Spanish Property Law and Tax and registered as a European Lawyer in the Spanish Law Society.

The acquisition process in Spain starts with choosing the property until registering the Public Deed (Escritura) in the Land Registry (Registro de la Propiedad).

Every transaction must be considered taking into account the particular circumstances and the will of the parties. Bilingual skills, sound legal knowledge and a good understanding of both parties’ intention are crucial

The preliminary agreements - After selecting the property, the transaction process starts with the preliminary agreements. The vendor and the purchaser, without committing formally, express reciprocally the intention to draft a contract. Usually, pulling back at this stage does not create any obligation for the parties, if the nature of the agreements is clearly defined as not binding to the parties.

The term “preliminary arrangements” does not necessarily mean that you are not entering into a contractual relationship. It must be noted that once a payment has been made the contract is actually final and legally binding.

The private purchase contract

The proper contractual relationship starts when the property and the price have been determined and agreed by the parties. A private purchase contract (Contrato Privado de Compraventa) may be drafted at this point and the parties should fully understand and agree the nature of the obligations and rights arising from this contract, before signing it and make it executable. In Spain there is no requirement to witness the signature of the parties to a private contract.

Guarantees from developers and builders

When paying any monies on account for properties under construction, proper bank guarantees or insurance policies should be arranged. There are statutory provisions (Spanish Laws L 38/1999 and L 57/1968) for the developers and agents to guarantee the payments on account for properties in progress, until the completion stage. There are also statutory provisions to guarantee the properties themselves against any building defects up to ten years after the construction date.

The signature of the Public Deed - The private purchase contract cannot be registered in the Land Registry without the intervention of a Public Notary (Notario), who is the only person entitled to grant a Public Deed (Escritura de Compraventa) based on the terms privately negotiated by the parties in the private purchase contract.

The Land Registry - After signature, the notarised deed needs to be submitted to the local Land Registry (Registro de la Propiedad) and this is to be done by the lawyer. The registration of the deed provides the highest public level of protection.

The use of companies and trusts to acquire property in Spain

Using a Spanish company is an excellent option to purchase property in Spain. A limited company (Sociedad Limitada, SL) or a public one (Sociedad Anonima, SA) can be formed in Spain to own the property after the shareholders tax position has been discussed with a qualified tax adviser.

UK Limited Companies can be used but the Benefit In Kind position must be considered for the directors and potentially for the shareholders (shadow directors).

Foreign companies owning property in Spain and registered in a country with no Double Tax Treaty with Spain, will be charged a 3% annual tax on a deemed income based on the rateable value. Tax planning should be undertaken prior to proceeding with any corporate scheme.

Finally it is important to mention that the Trust as a legal entity is not recognised in Spanish legislation. Trusts cannot own property in Spain unless the acquisition is made by a corporate structure owned by the Trust. Otherwise, the trustees, beneficiary or settlor should make private arrangements to acquire the property in their own name, overriding the legal or tax advantages of the trust in England.

Anyone contemplating purchasing on behalf of a Trust should discuss the details involved in both jurisdictions with a qualified lawyer able to offer advice in all the jurisdictions involved.

LEGAL CONSIDERATIONS

As the property is located in Spain, most of the legal conflicts would be dealt with according to Spanish and English Law. Most of the contracts will state that Spanish Law would govern the transaction and establish that any claim must be brought to the Spanish Court where the property is located.

In respect of legal, financial or tax implications, the UK purchaser should be familiar with the different requirements involved in the conveyance and should proceed with the same care as when purchasing property in the UK. If this is not the case, it is strongly recommended to seek professional advice in the following areas

TAX RESIDENCE IN SPAIN

Spain applies a residence-based system of income taxation. All the Worldwide income or gains are taxable in Spain for the Spanish resident, even if they have not been remitted to Spain. The Spanish income tax returns should report the income of the taxpayer, spouse and dependants, although each member or the family can file independent tax returns. The residence position should be established after discussing carefully the UK

Income and Wealth Tax - The Spanish Parliament passed the Non-residents Income Tax Act (Ley 41/1998, Ley del Impuesto Sobre la Renta de No Residentes). According to this Act and the Self-Assessment regime, non-residents receiving any income or owning any assets in Spain must file a return every year, including all Spanish taxable income calculated according to certain rules. The value of the property is to be included in the Return and will have a small tax charge calculated according to the Cadastral Value. Wealth Tax is also applicable to non residents assets located in Spain

Capital Gains Tax - Transferring property located in Spain by a non-resident in Spain will be subjected to Capital Gains Tax in Spain, both according to Spanish legislation and to the provisions of the Double Treaty with the UK.

Council Tax (Impuesto sobre Bienes Inmuebles -"IBI") - This is a local tax payable to the town council by all property owners, residents and non-residents alike, similar to the rates payable in the UK.

Inheritance and Gift Tax (Impuesto sobre Sucesiones y Donaciones-ISD .- The acquisition by inheritance or gift of a property situated in Spain carries a real obligation to IHGT payable by the inheritors or the receiver of the gift. The beneficiary position- and not the transferor’s estate - should be considered for tax planning purposes.

A Spanish will is also recommended in order to avoid further delays in dealing with the estate distribution.

Social Security - By virtue of European Law, reciprocal agreements exist within the European Community member countries. It is possible for UK residents to enjoy the Health services provided by the Spanish Social Security Administration as well as to obtain other benefits if moving to Spain as a resident.

MORTGAGES AND BANK ACCOUNTS

Spanish Banks can offer mortgages to non resident individuals, usually in Euros. Spanish mortgages are repaid using the capital and interest repayment method. Interest only, endowment and pension-linked mortgages are not commonly available in Spanish banks.

Non-Spanish nationals may open a resident or non-resident bank account. When opening the bank account, you will need to show proof of identity, your residence card and may be asked for proof of income.

This Guide was written originally by Leon F Del Canto (Carretero International) for Deloitte & Touche and commissioned by the ICEX (Spanish Embassy) for Homespain 2002 and updated by Carretero International in January 2004.