Purchase process
RESALE TRANSACTION. PURCHASE PROCESS
These are the three main stages of the purchase process in Spain:
1- Reservation agreement. Once that you have decided to buy a specific property in Spain, it is important to reserve it in your name, this way you will take it off the market and also freeze the price. The amount normally required is 6.000€, which will be deducted from the final payment.
The reservation agreement includes the main conditions of the sale including a payments schedule and _as this document is legally binding_ you must pay attention to the dates stipulated to make sure make sure you will not have any problems to meet them. However, vendors are usually flexible with the deadlines. The reservation deposit is usually kept by the Real Estate until the legal searches are completed and the Lawyers are sure that the property is completely in legal order.
2- Exchange of contracts. Contracts must be exchanged by the date stipulated on the reservation agreement. If you do not do it, the vendor is entitled to keep the reservation deposit. The usual amount requested to exchange contracts is 10% of the price.
It is not necessary to exchange contracts if both parties have agreed so on signing the reservation agreement. In this case completion will take place without needing to make any further payment.
3- Completion. The purchase must be completed by the date stipulated on the private contract/ reservation agreement. If you do not do it, the vendor is entitled to keep the 10% price paid on exchanging the contracts as well as the 6.000€ paid as reservation deposit. If you need a mortgage you must ensure that the deadline you agree on reserving the property can be fulfilled.
LEGAL SEARCHES
Once the reservation agreement has been signed, we request from the vendors’ legal representative all the relevant documents to make the pertinent searches. This process can take around seven / fifteen days. The searches normally consist on:
1- Checking at the Land Registry that the property is registered in the name of the vendor and that the property is free of any charges and encumbrances. It is very usual that there is a mortgage on the property but if you do not wish to take over it, the mortgage will be cancelled on/before completion so you will be buying a freehold property with a clear title.
2- Checking at the Town Hall that Council Tax & Rubbish collection Tax have been paid. This is important as these debts would go against the property.
3- Check at the Inland Tax Revenue whether the vendor is a fiscal resident or not. If the vendor is non resident on completion we will have to:
- Withhold 3% of the price on account of the vendor’s capital gains tax. If you don’t do it you will be liable for his CGT.
- Check the amount of the “plusvalia” tax, which is similar to the CGT, but which is paid to the Town hall (it is a Local Tax). This tax has to be paid by the vendor but if he is a non resident and he doesn’t pay the tax, the debt will go against your property.
4- Owners community fees: we must also check with the Residents association that there are not any outstanding community fees to be paid by the previous owner because if there were, you would be liable after completion.
5- Finally we must check that the electricity, water and telephone bills are up to date. If there were outstanding bills that is not a major problem because you would not be liable for them but we would have to cancel the contracts and sign new ones so the debts did not affect you, which is normally more expensive than just changing the title of the supply contract.
BUYING AN OFF PLAN PROPERTY
Same as when a resale property is bought, there are three steps involved:
- Reservation agreement:
- Exchange of contracts:
- Completion
However, the searches we must make in this case are completely different.
LEGAL SEARCHES:
a) Before we sign the Private Purchase Contract (PPC) we must check:
- Companies House: we must check that the developers’ company is duly registered at the Companies’ House and who is empowered by the company to act on its behalf and therefore who can sign the private purchase contracts and title deeds on behalf of the Company
- Land Registry: we must check that the land where the properties are to be built is registered in the name of the Developers’ Company and is free of any charges and encumbrances. It is very usual that there is a mortgage on the land since in most cases the Developers need a mortgage to finance the building works.
- Town Hall: we must check that the building permission is in place.
- Special bank account: under Spanish law when someone buys an off plan property and pays money in advance, the Developers have to open a special bank account where they have to deposit the purchasers’ money and they cannot withdraw money unless it is for the building works. Therefore we must check that they have opened this bank account and its details.
- Bank guarantee/insurance guarantee: Under Spanish law, when someone buys off plan and advances money, the Developers have to give the purchasers a Bank guarantee or insurance guarantee guaranteeing that if the Developers cannot complete the property , the Bank/ insurance company will reimburse the purchasers the deposits paid plus the legal interest. The legal interest is published every year by the Government and this year 2.008 is at 5,5%. The guarantees have to be in place until the First Occupancy Licence (FOL) is granted. Therefore we must check that the Developers have contracted theses guarantees either with a bank or with an Insurance Company and that the guarantee covers both the deposit paid and the legal interest and also that it is in place until the FOL has been issued.
- We must check the PPC to make sure all the clauses are legal and the Developers have not included abusive clauses such as that the increase value tax is paid by the purchasers, the cancellation of the Developers’ mortgage is paid by the purchasers etc.
b) Before completion we must check:
- That the Architect’s certificate of completion of the building work is in place
- That there is a ten year guarantee insurance, that covers construction defects of the structure
- That the First Occupancy Licence is in place
- We must also check the draft title deed to make sure that they do not include abusive clauses.
FORMALITIES TO BE FULFILLED IN BOTH KIND OF PURCHASES
1.- You will need to have an NIE certificate ready for completion, which is a tax identification number in Spain. In order to apply for the NIE numbers on your behalf we will need a power of attorney to be drawn up in our favour. The easiest way to do this is to sign it while your are in Spain as it’s quicker and cheaper but you can also sign it before a foreign notary. In this case, to be valid in Spain, the document has to be sent to the Foreign Commonwealth Office to get the Hague Apostille attached.
2.- Once the purchase transaction is completed you will need to have a Spanish bank account to set up direct debits to pay for water, electricity, owners community fees, council tax, etc.
LEGAL COSTS
Regarding the costs entailed in the purchase of a resale property in Spain, they are the following:
1- 7%- Transfer tax
2- 1%- Lawyers fees
3- Between 1 and 1,5% :Notary fees, Land registry fees, utilities connection etc
The costs are different when an off plan property is bought:
1.- You don’t pay Transfer Tax but 7% IVA (VAT).
2.- You must add 1% Stamp Duty on top of the Notary fees, Land registry fees, utilities connection and Lawyers’ fees.
In both cases you must add the following expenses if a mortgage has to be arranged to purchase the property:
1- 1,8% loan amount – Stamp Duties for the mortgage deed
2- Arrangement fee (bank commission)- it depends on the bank and is usually between 1-1,5% loan amount
3- Valuation fee, Notary fees and Land Registry fees for the mortgage deed: 1% loan amount, approx.
Sumarizing:
1- If you do not need a mortgage the total costs will be roughly 10% price
2- If you need a mortgage the total costs will amount to around 13% price, approx., depending on the mortgage conditions as well.
TAXES TO BE PAID ONCE YOUR OWN A PROPERTY IN SPAIN
Once you are the owner of a property in Spain you have to pay the following taxes here:
A.- Property Owner´s Imputed Income Tax (Impuesto sobre la Renta de No Residentes):
Up to 2008 all property owners in Spain were liable for two separate taxes every year, income tax and wealth tax. The good news is that the Wealth tax has been suppressed this year and therefore from 2.009 on, both residents and non residents just have to pay income tax. In effect, any non-resident individual with a property in his/her name is subject to an Income Tax of 24% of 2 per cent (or 1.1% if the cadastral value has been revised after 1.994) of the valor catastral, the official rated value of their property. The deadline for this tax is the 31st December of each year. It is important to be up to date in the payment of this tax since if you do not pay this tax (plus wealth tax up to 2.008), the tax authorities may check it when you sell your property and deduct from the excess of the capital gains tax retained in the sale, the amount you should have paid plus interests plus a fine.
B.- Council Tax (IBI): in Spain this tax is payable once a year and it is much lower than in the UK. It depends on the town where the property is and on the size of the property. When we get the documentation from the vendors we will be able to tell you the amount that you will have to pay every year.
SIGNING A SPANISH WILL IS NOT COMPULSORY BUT HIGHLY ADVISABLE
Finally I would like to mention that if you have a will in your country of origin it can be rendered valid in Spain. However, if you have a Spanish will for your Spanish assets you will save much time, money and unnecessary legal arrangements to be done both in Spain and in your country by your inheritors. The reason is that the foreign will would have to be legalised before a notary public in your countr, it would also have to be sent to the Foreign & Commonwealth Office to get the Hague Apostille attached and it would also have to be translated into Spanish by a swarm translator. Obviously this process takes longer than if the will _just including your Spanish assets_ was signed in Spain and it entails extra costs.
This article has been supplied by Clara del Saz-Orozco of CN ABOGADOS
If you have any further queries please contact
Clara del Saz-Orozco
Col. Nº 71.837 ICAM
CN ABOGADOS
Pº Jesus Santos Rein 2,
Edf. Ofisol, 3º A
29640 Fuengirola
Tlf: 951 702 649
Fax: 952 47 90 40
clara@cnspain.com
Regards
Andrew Bellés
