USEFUL TIPS

From J & A SPANISH LAWYERS

(see below for contact details)

 

LATEST!  Changes in the tax laws

There are a major changes planned to be brought by the Plan Against Fiscal Fraud that has been in operation for the last few years. A new Fiscal Reform Law is also set to take effect which, at present has passed the committee stage.

Basically the changes are as follows:

CAPITAL GAINS TAX for NON-RESIDENTS: It has been proposed that the base rate for the Tax on the sale of the property owned by a non-resident is reduced from the present rate of 35% to a new rate of 18% and that the deposit demanded by the Tax Office presented at the moment of the sale be lowered from 5% to 3% of the selling price.
INCOME TAX RATE for NON-RESIDENTS: This Tax is levied, in example when renting the property or working temporarily in Spain and is also to set to be reduced from 25% to 24%.

CHANGES FOR RESIDENTS This include an increase in personal allowances from 3.400 Euro to 5.050 Euro and increases in the allowances for pensioners. As a result of these increases the present five tax bands will be reduced to four with the removal of the 15% bracket and the decrease of the 45% bracket to 43%. There are also proposed changes in the treatment of Dividends, Capital Gains, Interest and Pension Plans.

The planned date for the introduction of the changes is January 1st 2007. Therefore, most of the modifications will not be noticed until 2008 when the Tax declarations corresponding to 2007 are presented.

 

INHERITANCE MATTERS

 

TAX PLANNING

English Wills are generally valid in Spain. However, generally speaking, it is advisable to make a separate Spanish Will.  This will facilitate the winding up of the Spanish estate and will allow the testator to become familiar with the relevant Spanish succession and inheritance tax regime.

A Spanish Will may be structured to take advantages of the peculiarities of Spanish inheritance tax laws.  The difficulties (tax-wise and otherwise) which would arise from setting up trusts or giving property to minors should be explained to clients.

Expert advice should be sought before the purchase of any property in Spain and before any decision to take up residency in Spain is made. Purchase in joint names, as life tenants or using a company or trust (offshore or otherwise) will need to be considered. Any potential liability for directors’ or shadow directors’ remuneration in kind can probably be avoided with a suitable bare trust.

The advantages of an English Enduring Power of Attorney should also be explained to clients.  This may prove very useful in the future (e.g. to sell property in Spain and remit the proceeds to the UK, thus taking advantage of the spouse exemption or the nil-rate band). This document can only be used once it has been registered with the Court of Protection. It must be legalised with the “Apostille” of the Hague Convention 5th October 1961, formally translated and a Notarial Certificate must be attached thereto explaining its legal meaning and the powers of the attorney under English law.

In respect of Enduring Powers of Attorney, it should be remembered that once the donor loses mental capacity and the document is registered with the Court of Protection, the attorney cannot delegate his/her power and must sign any documents personally.

 

FORMAL VALIDITY OF A WILL

Thus, an English Will which complies with the formalities required in English law would be regarded as a valid Will if the testator is English or if the Will was executed in England.

Therefore, an English Will dealing with the Worldwide estate of the testator will be accepted in Spain provided Probate has been obtained (or sometimes, if Probate is not required under English law, an appropriate Certificate of English law is issued by a Notary).

It is advisable to make a separate Spanish Will dealing exclusively with the deceased's Spanish estate. A Spanish Will can be signed in England or in Spain and must be registered at the Spanish Central Registry of Wills.

Care should be taken to ensure that any new English Will does not accidentally revoke any prior Spanish Will made by the client.

As a result of marriage or divorce not only your prior English Will but also your prior Spanish Will will be revoked. Accordingly, you should make new Wills.

 

ENTITLEMENT TO THE DECEASED’S ESTATE

Under Spanish law certain relatives are entitled to a share of the deceased’s estate (“statutory legacies”) and those relatives can successfully contest the Will if the deceased did not make appropriate provisions for them.

Spanish law, like English law, also contains a set of intestacy rules which come into play when the deceased died totally or partially intestate.

However, the above rules will be largely irrelevant for most non-Spanish deceased. In exceptional circumstances this may not be the case. One such case may arise if the deceased did not leave any real property in England or if the deceased’s whole estate was in Spain.

 

TAXES ON DEATH

A.- Local "plusvalía" tax.

This tax will normally be payable in respect of real property. This is a tax levied upon the increase in the value of land upon which a building is built (or the increase of the value of a building plot) since the property was acquired by the deceased.  It is not a fixed percentage tax and the amount will need to be calculated and advised by the Town Hall.

B.- Inheritance tax.

The following notes refer to the Spanish central government inheritance tax law, which is applicable to the estates of persons who were not resident in Spain.

  • Gifts on death are subject to Spanish Inheritance Tax (and lifetime gifts are subject to Spanish Gift Tax) provided that (a) the beneficiary (or donee) is resident in Spain for tax purposes; or (b) any part of the property transferred is situated in Spain.

 

  • If the beneficiary is resident in Spain for tax purposes, all property acquired, wherever it is situated, will be subject to the tax.  If a beneficiary is not resident for Spanish tax purposes, then only property situated in Spain (or the rights capable of being exercised or enforced there) will be subject to Spanish Inheritance Tax.

Double Taxation

  • It is the practice of the Inland Revenue in the UK to credit any inheritance tax paid in Spain against UK inheritance tax payable in respect of the same assets, thereby avoiding a double tax burden. 

 

Value of the estate

  • The amount of tax payable by a beneficiary will depend on the net value of his/her share in the estate; i.e. the actual market value of the assets less deductible charges, debts and expenses. 3% of the net value of the estate is normally added to take into account personal chattels.
  • Accordingly, in contrast to the practice in the UK, Spanish inheritance tax is not calculated on the total value of the estate or property transferred but, rather, on the value of the share acquired by each beneficiary.

Allowances.- 

There are tax-free allowances available to certain beneficiaries.

Group I:      direct issue and legally adopted children under 21 years of age: 15,956.87 Euros, plus 3,990.72 Euros for each year by which the beneficiary is under 21, up to a maximum of 47,858.59 Euros.
Group II:    direct issue and legally adopted children who are 21 years of age or older, spouses, parents and grandparents and adoptive parents: 15,956.87 Euros.
Group III:   siblings, uncles and aunts, step-parents and step-children: 7,993.46 Euros.
Group IV: cousins, distant relatives and unrelated persons. No tax-free allowance.

In addition to the above general allowances, there are other allowances for beneficiaries with a mental or physical handicap and other specific allowances (life assurance policies, business relief and main dwelling).

 

Tax Rate.-

The table of inheritance tax, in the form of a progressive or sliding scale, starts at 7.65% and it goes up to 34%. Depending on the pre-existing wealth of each beneficiary and the group to which he/she belongs as above, the resulting amount of tax may need to be multiplied by up to 2.4.

For those who are not resident in Spain for tax purposes, only property situated in Spain or rights capable of being exercised or enforced thereare classified as pre-existing wealth.

 

Time for payment.-

Inheritance tax is normally paid when the documents relating to the estate are filed, by self-assessment.

Tax payment or tax declaration must be filed within 6 months from the date of death; otherwise, surcharges and interest for late payments may apply. 

  • Taxes must normally be paid in full at the time of making the self-assessment although it is possible to obtain a deferment of payment of up to five years in certain cases, but interest will be charged. 

Tax authorities have a period of four and a half years within which they may review the self-assessment and request extra tax payments if they consider the value of the assets to be understated. 

 

Limitation Period.-

 

Liability for Spanish inheritance tax expires four and a half years following the death of the deceased. However, if a self-assessment is made or information or documentation is submitted to the tax authorities for an assessment, the prescription period is interrupted and starts again.

 

 

BUYING AND SELLING PROPERTY IN SPAIN

 

 

SOME HELPFUL FACTS

 

Generally speaking, Trusts do not exist in Spanish law.

  • Spanish law refers matters of succession (to both moveable and immovable property) to the law of nationality of the deceased. However, in certain circumstances Spanish law may apply to matters concerning succession of a non-Spanish national (e.g. if the deceased’s national law states that Spanish law is to be applied and as a result of this renvoi only Spanish law applies to the deceased’s worldwide estate).
  • Capacity to make a Will and to enter into any contracts is governed by the law of nationality (in the case of a British subject, by Scottish, N. Irish or English law).
  • Under Spanish law, a lifetime gift is always subject to Spanish tax; and the tax burden will normally be greater than if the same property had been acquired on death.
  • Transfers between spouses are not exempt.
  • There is no universal nil-rate band. Certain beneficiaries enjoy tax-free allowances, the amount of which will vary depending on the relationship between the beneficiary and the deceased and the age or disability of the beneficiary.
  • Spanish inheritance tax is paid by each beneficiary in respect of his/her share. Some beneficiaries may be tax resident in Spain whilst others may be non-resident. Spanish inheritance tax is applied in a different way depending on whether the beneficiary is resident in Spain or elsewhere.
  • Spanish inheritance tax is applied on a sliding scale. The size of the gift, the relationship between the deceased and the beneficiary and the pre-existing wealth of the beneficiary are taken into account when applying this scale.
  • Under Spanish law, a lifetime gift is always subject to Spanish tax; and the tax burden will normally be greater than if the same property had been acquired on death.

 

 

 

INTRODUCTION

1.- A contract for the purchase of land does not need to be in writing. A verbal contract is also binding.

2.- Property is always held as tenants in common.

3.- No prospective purchaser should ever consider acquiring a property in Spain without making a search at the Land Registry.  This will show ownership and whether there are any charges and encumbrances affecting the property. Sometimes land is not registered and careful assessment of the situation and options available will need to be explained to the clients. The office copy entries and the Escritura will confirm the description of the property and its boundaries. However, no property plan is likely to be part of the Escritura or the office copy entries.

4.- The first notarial copy of the seller's Escritura de Compraventa (title deed) should be obtained, and this will indicate whether there are any special conditions affecting the property and whether all the tax and registration procedures on the previous transfer have been completed. 

5.- Where there is construction on the land, it is necessary to check that the corresponding declaration of new building (‘Declaración de Obra Nueva’) has been executed and registered and that the surface area and description of the property in the title deeds are correct.

6.- Where land is being acquired it may also be advisable to inspect the ‘Catastro’ (mapping office) in order to check the surface area of the property.

7.- Searches should also be made at the local Town Hall in cases of land sold for building purposes or new properties to check that they have general and detailed planning permission. 

8.- New dwellings should have certificates, issued by the local planning office, confirming that they comply with planning rules and are fit for human habitation. 

9.- As certain taxes and debts are attached to the property, prospective purchasers should check that there are no outstanding payments.

10.- Flats and other properties forming part of a building or development complex will be subject to residents’ association rules and these should be examined by the prospective purchaser.

11.- The authorised use of the property will also need to be checked with the planning authorities to ensure that the property meets your needs. Thus, for example, if the property is part of a residential area, you may not be allowed to rent the property on a short holiday letting basis.

12. The coastal protection law (Ley de Costas) prohibits the building of properties within specific distances from the shoreline and imposes limitations on nearby properties.  It is important to check these matters before the property is purchased.

13.- Tax planning considerations: whether the property should be bought in joint names, as a life tenant, in the name of a company or using a trust will require careful consideration and should be decided before contracts are exchanged.

14.- Trusts cannot acquire property in Spain; however, companies incorporated by a trust and charities can acquire property.

15.- The concept of trust and the concept of legal and beneficial title to a property are alien to Spanish law.

16.- Bare trusts are not be recognised in Spain. However, they are normally upheld by the English Courts even if they refer to land in Spain if there is a relevant connection with England. An English judgment dealing with immovable property situated in Spain will not be directly enforceable in Spain, but if the judgment is construed as an issue of capacity of one of the parties (which under Spanish law is governed by that party’s law of nationality) or as a contractual debt, such judgment given in England will normally be effective in Spain. Thus, if a property in Spain is held by a person as a trustee for another, the beneficiary may be able to apply to the English Courts for relief if, for instance, the trustee fails to implement the beneficiary’s instructions as to the transfer of the legal title of the property. Even if the trustee fails to comply with the Court Order, the Judge may be able to sign the necessary Spanish Deed of Transfer on behalf of the trustee.

17.- Bare trusts may be an effective way of avoiding the UK rules on directors’ remuneration in kind where a Spanish property is bought in the name of an English company.

18.- Residency has relevance for tax purposes when buying or selling property in Spain.

19.- When dealing with property in Spain it is very important to ensure that any transactions are carried out using the usual Spanish formalities, the appropriate taxes are paid and the documents are registered at the Spanish Land Registry. Failure to do this will result in a defective title and any solicitor involved in the transaction may face claims for negligence, especially if time has elapsed and the transferor can no longer be found, or in the case of a company, it has been dissolved.

 

EXCHANGE OF CONTRACTS

  • It will often be necessary or advisable to exchange written private contracts before signing the Deed of Transfer (Escritura de Compraventa), which is prepared and executed before a Notary and registered in the Land Registry.  Care should be taken to ensure that the terms of the contract are suitable for clients’ needs. 
  • In accordance with Spanish consumer protection laws, purchasers who buy unfinished properties from developers are entitled to receive adequate insurance or bank guarantees to secure any staged payments.

 

COMPLETION

  • The Spanish Deed of Transfer (Escritura de Compraventa) is signed by the parties simultaneously before a Notary.  The Notary is independent and will ensure that the document is correctly drawn and completed and that the parties have sufficient legal capacity to act. 
  • A non-Spanish Notary's signature and seal must be legalised with the ‘Apostille’ legalisation under the Hague Convention of 5th October 1961.

 

FEES AND TAXES

  • The Notary charges a fee for preparing and completing the Spanish Deed of Transfer.  In addition, fees will be payable to the Land Registry for registration.
  • The purchase and sale of property in Spain is liable to tax on the following basis:

VAT (known as IVA in Spain) at 7% of the price (5% IGIC in the Canary Islands), in the case of a first transfer direct from a developer plus stamp duty normally at 1% (0.5% in the Canary Islands and some other parts of Spain).
Transfer tax normally at 7% (6% in the Canary Islands and some other parts of Spain) for second and subsequent transfers. 
VAT for commercial properties, parking spaces or purchases of building plots from a corporation or property developer will be assessed at the standard rate, which is currently 16%.
A Local Authority increased land value tax (Plusvalia) is also payable on the transaction, the amount depending on the surface area of the property.

  • Most taxes are paid by self-assessment.  However, the tax office can revise the amount of tax paid.  It has a period of four years to do this. 
  • Non-resident foreign individuals must obtain a Foreigner’s Identification Number (NIE).
  •  A Fiscal Representative may also have to be appointed. 

Liability for payment

  • Purchasers are usually required to pay all the expenses, costs and taxes of a transfer, including the Plusvalia tax.  As a rough estimate, the total cost of a transfer including tax will amount to some 10% of the price.
  • After signature, the official copy of the Spanish Deed of Transfer must be presented to the tax office within 30 working days of the date of execution, so that the transfer tax or stamp duty can be paid.  VAT or IGIC is paid to the vendor on completion, who must then account for this to the tax authorities. 

REGISTRATION

After the taxation procedures have been carried out, the Deed of Transfer should be sent to the Land Registry for registration. 

 

ONGOING EXPENSES

A prospective purchaser must take into account that there will be regular expenses affecting the property, such as:

  • Residents’ Association feeswhen the property is a flat or part of a development complex. Purchasers have to comply with the Residents’ Rules.
  • Refuse collection and council taxwill be charged annually by the Local Authority.
  • Gas, water, electricity, telephone.
  • Income tax: Non-resident foreigners are required to declare income earned in Spain. Property owners are deemed to obtain income from their property amounting to 2% of the property rateable value (a lower rate of 1.10% applies to certain property).  This notional income, together with any actual letting income obtained from the property, is taxed at 25% and an annual income tax return must be filed.
  • Wealth Tax: Non-resident foreigners are required to declare and pay wealth tax on their assets situated in Spain.  This tax is assessed on a sliding scale commencing at 0.2%. 
  • SELLING A PROPERTY. CAPITAL GAINS TAX.-
  • When a property is sold, the seller will be potentially liable to Spanish capital gains tax (CGT) at the rate of 35%.  The amount of the gain for individual sellers is calculated as described below:
  • Properties acquired on or before 31st December 1986 and which have not had improvement work done on them will be exempt from tax.
  • All other properties are subject to following rules:

1.-  Property acquired before 1st January 1997: the acquisition cost of the property (which includes the price paid for it plus the related expenses and the cost of any improvement work, having regard to the year when such work was done) is increased by applying to it the indexation rates published in the annual Finance Act. The difference between this increased acquisition cost and the selling price of the property is the initial capital gain. This initial gain is then further reduced by 11.11% for each year, discounting the first two during which the property has been owned by the seller, up to the 31st December 1996.

2.-  Property acquired after31st December 1996: no reduction (i.e. 11.11% p.a.) is applicable to the gain realised. Only the indexation rates published annually in the   Finance Acts will be applied to the acquisition cost.

Different rules apply when the seller is a company.

  • The Spanish tax office ensures that it collects this tax where the seller is non-resident by placing on the buyer the obligation to deduct 5% of the purchase price and pay it to the tax authorities. The seller must then lodge a self-assessment form for CGT and either claim a refund or pay any additional tax due.
  • The sale of a Spanish holiday property by a UK resident is also a chargeable disposal for English CGT purposes, although under the Anglo-Spanish Double Tax Treaty a tax credit is given for any Spanish CGT paid.

 

 

THIS INFORMATION WAS PROVIDED BY:

J&A SPANISH LAWYERS

 

Apartado de Correos 118, Algezares. Cp 30157. Murcia. Spain
Tel: 0034 653 03 64 17
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