Formalities of Property Purchase in Spain

There are basic formalities you must take into account when completing your property buying process in Spain:

POWER OF ATTORNEY
In order for your lawyer to represent you, sign all relevant contracts and be your legal representative in Spain, it is essential for you to provide them with a Power of Attorney which should be signed in Spain, in the presence of a notary. This can be done in your country and should include the subsequent Apostille of the Hague with which the Power has to be stamped to be valid in Spain. You lawyer can be in charge of everything. N.I.E. (Spanish ID Number for Foreigners) The N.I.E. is the ID number that foreigners use in Spain, and is issued by police authorities. Without this ID number it is impossible to buy properties in Spain or obtain service contracts for utilities. Applications to obtain a N.I.E. number tend to take about 2 months to process, so it is very important to present your application for a number at the beginning of the buying process.

SPANISH BANK ACCOUNT
It is essential to have an account in a Spanish bank in order to contract utility services and to pay them by direct debit. Your lawyer or agent will be able to assist in opening a bank account for you in Spain.

SPANISH WILL
It is important to take into account the Spanish Inheritance Tax, which is the tax to be paid in "mortis causa" property ownership transfers, and to be aware of the ways of mitigating its effects. Although it is not obligatory to have a will in Spain, it is very advisable to have one. A Spanish will usually makes procedures easier and quicker in Spain. If you use your British will, you will not be able to take any action until your British will has been validated. This may take some time, especially if your British will or your estate presents any kind of complications. Without a Spanish will, finalising an inheritance procedure can take up to one and a half or two years. Spanish authorities apply tax penalisations if these matters are not dealt with promptly. According to Spanish law, when a property is jointly owned by two people and one of them dies, their part is not automatically transferred to the other title holder. It will be transferred in accordance with the will of the deceased, or, if there is no will, in accordance with laws on intestate succession. The purchase of a property in Spain involves - both for residents and non-residents - a series of fiscal obligations which must be met:

TAXES ON CONVEYANCE OF ASSETS AND DOCUMENTED LEGAL PROCEDURES (ITP-AID in its Spanish acronym) AND/OR IVA (Spanish equivalent to VAT): The IVA tax (equivalent to British VAT) is applicable to the purchase of newly built properties and urban plots which are immediately available for building. It amounts to 7% of the purchase price to the purchase of newly built properties, and 16% to purchase of urban plots which are immediately available for building. This tax must be paid on each instalment. In addition, the obtention of the title deed is also subject to Taxes on Conveyance of Assets and Documented Legal Procedures, 1%. It is necessary to pay the ITP-AJD taxes (taxes on Conveyance of Assets and Documented Legal Procedures), when IVA (Spanish VAT) is not applicable. The rate of ITP is 7% of the property purchase price. Remember the costs associated to a property sale transaction are normally between 8.5% and 12% depending whether a mortgage is required, of the purchase price, and one of the mentioned taxes is included in this %.

TAX ON REAL ESTATE
(IBI in its Spanish acronym) The IBI tax must be paid every year, in one payment to be made between September 15 and November 15. Failure to pay this tax may result in the initiation of sanction procedures. Your lawyer can ensure this payment is made by direct debit from your Spanish bank account, so as not to encounter any problems.

WEALTH TAX

If you are not resident in Spain, you must pay Wealth Tax (in Spanish, Impuesto sobre el Patrimonio), which is applicable to all the assets you have in Spain. Among these assets are real estate, bank accounts and other goods of a certain value. The rate of this tax is very low, usually around 0.20% (one fifth of a percentage point) of the total value of your assets.

PROPERTY INCOME TAX
Non-residents who own properties in Spain must file their tax return with the tax authorities. Spanish authorities are only interested in the amount earned by non-residents through their activities in Spain, rather than their global income. Non-residents must pay a single tax rate on any income generated in Spain. A typical example is the interests generated by deposits in accounts held in Spanish banks or the income obtained from renting properties. Any person who owns a property in Spain, but is not resident there the entire year, should designate a "fiscal representative" who will carry out all the procedures necessary before the tax authorities.

CAPITAL GAINS TAX
Capital gains tax is payable based upon the increase between the original purchase price of a property and the selling price. This tax applies to the seller is levied at 15% to all. Anyone purchasing a property from a non-resident must withhold 3% of the purchase price which is then paid to the tax authorities on account of any liability by the vendors. The vendor then has around two months in which to pay the Agencia Tributaria (spanish tax authorities) the rest of this tax. However, there are factors that can be taken into consideration to reduce the amount paid such as the costs incurred with the original purchase, and time elapsed between the initial purchase and the new sale etc.

MORTGAGES
In Spain it is possible for foreigners and non-residents to obtain a mortgage. An important issue is House insurance and the lender obliges the borrower to cover the property with household insurance. This is a legal requirement.

REQUIREMENTS
Obtaining a mortgage in these cases - as is the case with residents in Spain, entails meeting a series of requirements related to the client's ability to meet payments, as well as to the value of the properly that he or she wants to purchase. The quota will never exceed 30% or 35% of the net monthly income of the applicant. Taking into account the years when the mortgage loan can be returned, the maximum re-payment period is 30 years. In Spain, mortgages are given up to the age of 70.

WHAT AMOUNT SHOULD YOU REQUEST?
As part of your mortgage application process, the bank will commission an official, certified and independent valuation company to carry out a valuation. This company will provide an official report on the value of the property, becoming the guarantee for the recovery of the loan in case of non-payment. With regard to the mortgage amount, the official loans offered by banks are - as a general rule- up to 70% of the valuation value of the property for non-resident clients and up to 90% for residents. In a mortgage, the property acts as a guarantee; if the client cannot meet payments, the mortgage lender can repossess and sell the property to recover its money. This is why it is very important for the client to rigorously meet the monthly payments of the mortgage loan.

TYPES OF MORTGAGE
The most common type of mortgage in Spain is the capital and interest or repayment mortgage. However, in a competitive market, mortgages with an initial exclusion period are becoming increasingly popular. In capital and interest mortgages, the loan is returned by paying part of the capital monthly, together with the interests generated. This way, the loan is returned completely once the when the repayment period has ended. On the other hand, mortgages with an initial exclusion period consist in initially paying only the interests, and returning the capital at the end of the repayment period. During the initial period, clients only pay the interests on the loan, and none of the capital.

NECESSARY DOCUMENTS
You will need certain documents in order to apply for a loan, which vary depending on whether the applicant is employed, self-employed or retired

Employed: Last three pay slips. Tax return from last two tax years. Company certificate confirming salary and length of time at company. Bank statements for last three months. Reference letter from bank.

Self-employed: Tax returns for last two tax years. Report by accountant. Bank statements for last three months. Reference letter from bank.

Retired: Last three pension slips. Tax return from last two tax years. Bank statements for the last three months. Reference letter from bank.

MORTGAGE COSTS
In addition to valuation costs, there are other necessary costs related to setting up a mortgage in Spain, including the opening commission (normally between 1 and 1.25% of the loan amount), Notary's fees, Property Register, legal fees and the tax on Documented Legal Procedures.

TAX ISSUES

CHANGES IN WEALTH TAX LAW
MESSAGE ONLY FOR CLIENTS WITH A PROPERTY IN SPAIN PURCHASED PRIOR TO 31-12-2008.

Over the course of this year, we have received numerous queries from our clients asking about the abolition of Wealth Tax (Impuesto del Patrimonio) in Spain. We promised to send further information to everyone as soon as this law was published.

This year, the Spanish government indeed studied the possibility of withdrawing its Wealth Tax. Subsequently and by means of Law 4/2008 of December 23, published in the OSG of 25/12/2008, the Spanish Wealth Tax was finally abolished.
Until now, non-residents have been required to present the Form 214, the so-called "wealth tax return". The official name of this Form 214 is "Impuesto sobre el Patrimonio y sobre la Renta de No Residentes" ("Wealth and Income Tax Return for Non-Residents").

As its name suggests, this form was used to tax non-residents in regards to Wealth Tax and Income Tax. Th e form itself is divided into two clearly separate sections.

Following approval of this law, those non-resident individuals who have one or more properties in Spain are no longer required to pay Wealth Tax. However, they are still required to pay the Income Tax for Non-Residents.

Therefore, the publication of this law means the following for non-residents with property in Spain:
1) They are no longer required to present Form 214 as of 01 January 2009.
2) They are required to present a new form: Form 210 regarding Income Tax for Non-Residents.
3) A reduction to taxes due: the amount to be paid to the Spanish Tax Authorities (Hacienda) by means of the new form will be less than the amount resulting from the previous Form 214 given that only the Income Tax for Non-Residents is now applicable and the Wealth Tax has been abolished.
4) Deadlines for presentation: the period for filing this tax return runs from 01 January to 30 June of the following year . In other words, the deadline for paying taxes corresponding to 2008 is 30 June 2009 (6 months prior to the previously applicable deadline).