Basics of buying property in Spain
With the recent big drops in property values in Spain and the various problems rising from developments in areas without proper building and planning permission it is more important than ever be well organised before buying property in Spain.
First decide on how to structure the ownership of a property in Spain. There are various options depending on your circumstances:
There are different fiscal, tax and inheritance implications for each of these
options and associated costs. So proper professional advice is crucial.
Sole ownership and Joint ownership
Most British people will simply buy in their own names or in joint names with a spouse or partner. But, if so, it’s necessary to consider inheritance consequences and discuss these with your professional adviser. Inheritance rules in Spain are quite different to those in the UK. If buying a small inexpensive property it’s probably not worth going to any great length or cost, though even then best to be safe and let your adviser know your particular circumstances. The greater the investment so the greater the need to plan carefully. High net worth individuals with particular residence or domicile needs should consider personal and IHT tax consequences. In particular, if you have children, and/or you have been married more than once you should seek advice on the best structure for you and how to minimise your tax exposure.
Buying through a Spanish company
Buying through a Spanish limited company requires advance planning. Though, as in many jurisdictions, off-the-shelf companies can be bought in Spain, generally the process of setting up a company is longer and more expensive than in the UK. You will need a lawyer (abogado) to both set up the Spanish company and to buy the property. Foreign residents in the UK should be aware of the new imminent changes in tax law in the UK regarding residency and domicile, which could end up penalising UK residents who own property in Spain through a company. The UK government has recently announced that it will legislate the statutory residence test (SRT) to take effect from 5 April 2013 and intends to introduce reforms to ‘ordinary residence’ at the same time. If you are or will be tax resident in Spain then again you should consult your lawyer.
Buying through a UK company
This is no longer as straight forward as it once was. The idea was that by buying through a UK company there would be no Spanish formalities or taxes when the UK company (with the ownership of the property) was sold to another non Spanish resident, as the transaction (in the selling and buying of the shares) would be outside Spain. Spain then introduced legislation which requires such transfers to be reported. Buying a property through a UK company means that no personal non-resident Tax Declarations in Spain is required every December for owning the property in one’s own name, instead a Company Tax Declaration every January has to be submitted to the Spanish Tax Authorities at zero due to the European Treaties that Spain and the UK subscribe to. Spanish Inheritance Taxes for ones’ beneficiaries is removed as they will inherit the UK Company shares under UK law and not the property under Spanish Inheritance Tax Laws. When the UK company is sold there will be no 7% Purchase Tax in Spain to the buyer and no 3% Withholding Tax that would otherwise apply to an individual. If a buyer does not wish to purchase the company they can purchase the property from the company in the normal way. If the buyer purchases the UK company there is only modest UK Stamp Duty payable in the UK on the value of the shares. Shares in a UK private limited trading company are exempt from IHT in the UK and UK Capital Gains Tax when a trading company is sold is only 10%. But now under Spain's anti-avoidance legislation they could assess transfer tax based on the value of the property, because of the change of ownership, even if the change of ownership by stock transfer is in the UK. This is controlled by a CIF number that a UK company has to have to operate in Spain, just as an individual requires an NIE number. Once a UK company owns a property in Spain the company has a legal obligation to submit a Zero Tax Declaration every January to the tax office in Spain for the ownership of the property.
There is no "one size fits all" as clients’ circumstances are different. It is important to look at the circumstances of the case and the impact both in Spain and the UK in terms of taxes and costs. Although buying through a UK company has its advantages in terms of Inheritance tax and capital gains tax in Spain, you need to remember to consider what you are trying to achieve, your personal circumstances and your preferred inheritance wishes.
Open a bank account
You will need an account with a local bank in Spain to make the usual payments that are part and parcel of owing property in Spain. Many private vendors only accept a bank-guaranteed cheque drawn from an account in Spain. Developers selling new properties can also sometimes insist on payments being made from a local bank account as money-laundering regulations make accepting payments from other countries more complicated.
Open a foreign exchange trading account
Spain is part of the Euro-zone, so you will need Euros to buy property in Spain and you will need Euros to pay for all the costs (property and transaction costs). However, lately, because of the weakness of the Eurozone you need to tread carefully before committing to buying Euros.
Foreigner identity number – NIE (Número de identidad de extranjero)
All foreigners who are resident or own property in Spain have to have an NIE number from the Spanish government. It is now almost impossible to buy a property and pay the associated taxes on the basis of your passport number, so it is likely that you will need to obtain an NIE number before purchasing property in Spain. This takes from 2 to 6 weeks to obtain.
Income tax rates 2011/12 and 2012/13
Inheritance tax rates
Capital Gains tax
Inflation, RPI - national statistics