Tax liabilities and costs on your Spanish investment property

When you purchase an investment property in Spain an important consideration is the tax liability you may have on your investment and we have tried to make this information as concise and as easy to understand as possible. To the best of our knowledge this information is accurate and up to date, but before you make a purchase always obtain professional legal advice.

We have included an explanation and breakdown of these costs below broken down into three sections.

Section 1 covers the initial taxes and costs payable when you purchase a Spanish property as an investment.

Section 2 explains the annual costs and taxes on your property due when it has been constructed.

Section 3 talks about taxes and costs payable when you decide to sell on your Spanish investment property.

Lastly there is a small appendix included for your further information.

We have also converted three separate non resident tax guides as PDF files for you to download. They have been taken from the official Spanish tax office website www.aeat.es and although they are repetitive may be of interest although our own text we hope is easier to understand.

These guides below are out of date as from 1 January 2007 and as soon we receive up to date information from the Spanish tax office we will update these PDFs.

1 - Taxation of urban property owned by individuals who are not resident in Spain
2 - Capital Gains from the sale of real estate property
3 – Owner of a dwelling used as their own housing

Section 1 - Initial taxes and costs payable on the purchase of an investment property

When you purchase a property there are a number of other costs involved in addition to the purchase price.

In some areas it is not easy to be precise specifically Notary and land registry fees, as the system for calculating these costs is not completely transparent and can also vary regionally.

For this reason it is commonly stated that you must approximate the total cost by adding a percentage to the purchase price, although we have tried to be more accurate where possible.

To cover all of these costs and give you an approximation of the total price as stated above the general rule of thumb is to add around another 10% to the purchase price.
In the Canaries this is usually more like 8% as the property sales tax is 2% lower at 5%.

Property sales tax - Impuesto Sobre el Valor Añadido or IVA
This is the Spanish equivalent of VAT. You will have to pay a property sales tax or IVA of 7% on all new properties in mainland Spain, although in Lanzarote this tax is lower at 5% and called IGIC.

Property transfer tax – ITP
On all re sale properties in mainland Spain a property transfer tax replaces the IVA tax charged on new property and is also charged at 7%.

Land registry fees - Gastos de Incricion
Land registry fees are difficult to estimate, although they usually total around 70% of the notary costs. Before you purchase a property your solicitor will have made enquiries through the Land Registry offices, and once you have completed your purchase you have to register the new ownership for your own safety. Additionally, some days before the title deeds are signed in the Notary, your solicitor will apply to the Land Registry for a "nota simple" an information sheet about the ownership, and include it in the Escritura (title deed). Since the moment it is applied for in the Land Registry, no related action can be registered in the Land Registry during a fixed period. This is to avoid a double sale.

Documents related to the property purchase, for example mortgage, charges, rents, and any judicial or administrative resolution that can affect it i.e. seizures, can also be stated in the Land Registry.

You will also have to pay fees to the Land Registry (Registro de la Propiedad) to register the Transfer Deed. Fees must be assessed on a case by case basis. The Land Registry Fee for a purchase of a property with a selling price of €230,000 would be approximately €800 plus IVA. In addition, if you are arranging a mortgage to purchase the property, the Land Registry will charge you a further fee for registration of the lender's charge.

Notary fees
The Notary is an independent official appointed by the Spanish Government to witness the signing of all legal public documents. When buying a property in Spain he will witness the signing of the Deeds (Escritoria). The Notary fees are paid at the time of the signing and your Solicitor will deal with this on your behalf. You will then receive a copy of the title deed which will be signed and stamped by the Notary. This is your official proof of ownership until the official title deed is processed.

Notaries charge according to a fixed scale. The higher the selling price of the property, the lower the percentage charged. The fees are based on several factors such as the number of clauses in the deeds and the value of property. An approximate figure for a declared value of 150,000 euros the fees would be around 600.00 euros in the Costa Blanca area.

Legal fees
Although it is possible to purchase without the use of a solicitor we believe that this is not an acceptable risk. Legal costs for property transactions in Spain tend to fluctuate between 1% and 2% of the total purchase price. Our recommended solicitor charges a flat rate of 1200.00 Euros plus 16% IVA (tax) that is payable on completion. If a second property is purchased within the same project the fees are halved for this and any subsequent purchases within the same development.

Stamp duty on property purchases- AJD
If you are buying a new residential property (i.e. where you are buying a residential property which has never been bought and sold before) you will have to pay to Hacienda (Spanish Inland Revenue) a tax of 1% of the total purchase price. This tax is known as Impuesto sobre los Actos Jurídicos Documentados.

Mortgage costs
You will have to pay a setup or arrangement fee of around 0.75 to 2% for a new mortgage, as well as additional notary fees to register the mortgage. Arrangement fees can be reduced or waived however if an existing mortgage is re assigned from either the developer, or the previous owner.

Further stamp duty on the loan will also be payable, although this cost can also be avoided if you take over an existing loan.

When a new mortgage is signed at the notary the borrow will be liable to pay stamp duty calculated as 1% of the total amount of the loan as well as any additional charges and interest that would accrue, should the loan fall into arrears and default. This would amount to approximately 170% of the mortgage amount.

Section 2 - Annual taxes due on your investment property

Property owners imputed income tax
This is based on the rateable value of your property or Valor Catastral where one has been issued, if a rateable value is not available then the declared value will be used initially.

For new properties the amount payable is calculated as 2% of the rateable value which is then taxed at a rate of 25% i.e. if the rateable value of a property is 180,000 euros 2% is 3,600 and 25% of this equals 900 euros which is then payable as income tax.

For properties where there is not yet available a rateable value a calculation is based on 1.1% of half of the declared value of the property.
This tax is payable annually for the period ending 31st December, payable on a pro rata basis if the property has been owned for less than a full year.

Annual Real Estate Tax – IBI
This is a local tax levied by Municipal Government, like the UK Council Tax. All property in Spain has an assigned or rateable value (cadastral value) and the amount of annual tax payable is calculated by applying the local rate to the cadastral value.

If a Cadastral value has not yet been issued then the declared value is used for this calculation. This payment is normally made by direct debit and arranged by your solicitor. For example in Javea a four bedroom villa on a large plot would currently have an annual charge of around 500 euros.

Rubbish collection charge
There is an annual fee payable for rubbish collection which will vary depending on your area. Expect to pay between 50 and 100 euros per annum which is payable at the same time as your annual council charges.

Wealth Tax – Impuesto extraordinario sobre el patrimonio
Non resident Property owners are liable to an annual taxation on capital assets which is based on the declared value of all property owned in Spain, minus the loan outstanding or mortgage.

It is declared on your annual tax return. Non residents are taxed at 0.2%, one fifth of one percent on up to 167,129 euros. The percentage increases above this level as shown in the table below.

Community fees
If you buy a property where there is shared space, for example in an apartment building this means the entrance, the staircases, the lift, the roof space, the grounds and any other shared spaces used by all the owners, then you will have to join a community of owners and share the costs for maintaining these areas. On an urbanisation it will include the roads, gardens, communal pools, lighting system, drains and other services.

The community of property owners is the Spanish system for regulating the joint ownership of common property. All costs are shared on a pro rata basis, for example if there are 10 equal sized units within the community then you will pay 10% of all costs.

The payments vary from around 250 euros per annum for a modest apartment building, although it must be stressed that the community is owned jointly by all of the property owners and non profit making.

Tax on rental income
The official line is that rental income is taxed at 25%, those who rent out their property are required by law to pay tax on that income, even if actually collected in the UK or outside of Spain.

Declared rental income is taxed as if you are a Spanish resident and you will have to pay 25% of gross income in tax. Unlike a Spanish resident, you can not offset any expenses against this income, loan interest or cleaning charges for example.

This is why many property owners choose to redirect their rental payments into an off shore account and not to declare it to the Spanish authorities.

Nevertheless Spanish income tax is due on any income arising within Spain.

Section 3 - Taxes and costs payable when you sell your Spanish investment property

Capital gains tax for non residents
Legislation introduced in 1991 (effective 1st January 1992) reinforced the requirement for non-residents having an economic interest in Spain to appoint a Fiscal Representative, resident in Spain, to assist in the administration of the non-resident’s tax affairs in Spain The requirement that a Fiscal Representative be appointed was relaxed at the end of 1993 in cases where the only asset in Spain is a dwelling.

Thousands of foreign investors or simply holiday home owners in Spain have sold their sunshine property for high profits in today’s real estate boom. These profits are subject to Spanish capital gains tax, a fact not often mentioned by estate agents.

The taxes payable were not new, but a considerable number of non-residents have in the past not paid them, largely due to ignorance of the taxes and the difficulty of obtaining information in Spain by owners that do not speak Spanish.

To make sure that the tax was paid, Spanish Tax law was amended for non-residents.

The result was that it is compulsory for a seller or their solicitor to retain 3% of the declared sale price, to be paid directly to the tax agency after the sale. This means that only 97% of the declared sale price is paid to the seller’s account. Any undeclared amount is obviously unaffected.

The other three per cent goes directly to the tax man as a pre payment towards capital gains tax liability. The true liability at present is 18% of the profit and the 3% is officially a retention in lieu of the CGT liability. The truth of the matter though is that payment of the 3% should ensure that no further CGT liability is sought from the Spanish authorities. In some cases 18% of the gain will be less than 3% of the total declared value and in this case a tax return to reclaim the difference would be beneficial.

NB: In the past there was an exemption for properties purchased before 1986, however this was been eliminated in January 2007.

Appendix

Declared and undeclared value
The declared value is the figure shown on the Escritura (title deeds) that is declared to the government and it is this amount that is taxable.

The undeclared value is the difference between the sale price and the declared value, or the balance that will be paid to the seller in cash.

What it amounts to is one price that is being paid for the property and another lower price that is declared to the tax office, or Spanish Government. It might all seem a little underhand, or unethical to us all from the UK, but you just have to accept the Spanish system if you want to buy or sell a property in Spain.

If you are purchasing an off plan property this is not really of importance until it is time to sell on your investment as the declared value will be the same as the purchase price. The sale price is shown in the purchase contract that is issued after the reservation fee has been paid, there are no cash payments.

When you come to sell on your investment property the declared value that you agree with your buyer will affect your CGT liability. For tax purposes the declared value is the sale price and the difference between that and your purchase price is your tax liability. Upon sale of an asset you will be required to pay a 3% retention of the declared sale price. Dependant upon your level of profit you will either leave it at that or submit a tax return for 18% of the gain.

Off shore bank accounts
Off shore bank accounts are mainly used to receive rental income and can be opened by post. You may be asked at the time of opening to deposit an initial sum of money however this may be withdrawn when the account is working. I you need any help with this please ask.

In the past off shore holding companies were used to reduce capital gains on Spanish owned properties, although currently the taxation levied on holding companies in Spain generally removes this option. The law covering this subject is very complicated, so always seek specialist advice.

Other options, reducing taxation
There are other options available, although it is imperative that professional advice is sought. We would be pleased to arrange a meeting for an expert in this field to review your financial situation in full.

The above information is to be used for guidance only. The Law in Spain is constantly subject to change so please ensure you obtain the correct information from the appropriate authorities or seek professional legal advice.