Purchasing a Spanish property

Posted on March 1st, 2012 in Real Estate in Spain by editor

Why Choose Spain?

If you asked the hundreds of thousands of British homeowners already living in the country, why they have bought properties in Spain over the last 30 years, they’ll point to the country’s numerous attractions, making Spain one of Europe’s most popular expat markets.

Of late the Spanish property market has been in crisis though, partly because of oversupply on account of many British investors attempting to purchase too many off-plan properties and then being unable to obtain finance via the beleaguered UK mortgage market.

In some regions of Spain this has left many villas and apartments unsold. Spain’s housing industry also suffers from the aftermath of local councils granting licenses for large and small scale housing developments illegally in some regions. The burst property bubble led to the discovery of corruption and misdemeanours among the highest echelons of local governmental bodies.

The housing crisis may have prompted some investors to put their money to safer use elsewhere, but anyone looking for a change in lifestyle and wishing to relocate within Europe, will undoubtedly look to Spain first for its laid-back way of life and greater attractions than practically anywhere else in the world. The great variety of properties, from rustic fincas and snug apartments to villas on golf developments and beachfront mansions, makes Spain still one of the best options for buying a property abroad.

Firm Favourites with Buyers of Spanish Properties

When cheap package holidays abroad became first available back in the 1960s and the British love affair with Spain began, the Costa del Sol and Costa Blanca in particular became some of the favourite holiday and home ownership destinations. A period of decline followed in the 1970s and 1980s, particularly in some of the resorts like Marbella for example, until Mayor Jesus Gil stepped in and turned around the resort’s fortunes. Looking to its neighbour Marbella for guidance, other coastal resorts soon followed its lead and nowadays Spain’s resorts can compete with the best that France’s coastline has to offer.

Both the Canary and Balearic Island archipelagos have long been among the top ten tourist choices, but are also firm favourites with expats looking to combine a little glamour with a relaxed lifestyle. While British weather leaves a lot to be desired, the Canary Islands in particular, and the Spanish mainland in general, boast a warm and sunny climate throughout the year.

More and more investors have noticed the increased interest among holiday makers for city breaks. There is a chance to make a good investment by purchasing leisure properties in Spanish cities. Budget airlines have created a new market within Spain’s tourist industry by offering cheap flights to numerous cities. Some investors also look to university cities to capture the student lettings market.

Resorts at the Costa Blanca

Although one of the most popular holiday and home ownership destinations for Brits, the Costa Blanca is far from being a replica of the UK’s theme pubs and fish ‘n’ chips type resorts. Expats from various parts of Northern Europe come here, making the Costa Blanca a vibrant, cosmopolitan location for buyers to invest in.

There’s great diversity in the towns and villages along the coast as a result of the cosmopolitan nature of the expats living here. Benidorm may be a little loud with its clubbing and bright lights, but Moraira is sophisticated and chic. Families love Denia and Javea for its lovely beaches and laid-back lifestyle and there are as many different towns both along the coast and running alongside the shore further inland that all buyers should be able to find whatever they are looking for in an investment, leisure or permanent home.

The most established airport is Alicante, but budget airlines now also offer flights to the northern parts of the costa at an airport in Valencia, much improving the accessibility of the region throughout the seasons. Travelling by car is made easy by the Mediterranean motorway stretching for virtually the entire length of the Costa Blanca shoreline and offering plenty of inland connections, too.

Resorts at the Costa del Sol

Among Spain’s costas none is as famous as the Costa del Sol, stretching from the Rock of Gibraltar to Nerja. Its name is a synonym for fun and a climate that has attracted sun seekers from around the world for the last 40 years. Marbella at the Coast of the Sun often presents visitors with the interesting conundrum, if they are still in Spain or have been magically transported to some international resort quite separate from the rest of the globe.

The Costa del Sol has a plethora of attractions to offer to visitors. Gleaming-white facades are peeping out from among the verdant hillsides in villages like Casares and Manilva, two often overlooked points of interest by visitors coming to see the far more touristy resorts along the coast.

The only way to fully appreciate the diversity of culture, style and life at the costas is to go and see for yourself, what the Coast of the Sun is really like.

Investing in the Balearic Islands

Anyone interested in buying property in Spain should head for the islands of Mallorca, Menorca, Formentera and Ibiza, Spain’s erstwhile party capital. Each of the islands has a very distinct feel and look. Mallorca is more stately and regal than the other islands, with the splendid castle residence of King Juan Carlos in Palma and the cultural highlights at the Opera House attracting an international set of bright young things.

Menorca on the other hand offers a much more arid climate with a refreshing breeze preventing the summer heat to become stifling and oppressive. Financially and culturally quite independent, Menorca’s main industries, apart from tourism, revolve around gin and leather goods production.

Ibiza once suffered from a rather negative image of cheap package holidays and all night partying, but a firm municipal hand has changed the island’s image over the last two years. Now Ibiza wants to encourage house buyers in the same way that Mallorca attracts buyers from around the world.

Relaxed, intimate and private are three words that spring to mind when mentioning Formentera. Hiring a bicycle allows tourists to circumnavigate the island in a day. Formentera is a perfect hidey-hole for those wishing to get away and pass the time among picturesque old fincas and appropriately styled new housing developments.

How to Buy in Spain

Before anything happens at all with respect to buying, you’ll need to acquire a fiscal number (numero de identificacion de extranjeros) and it is important to hire an independent solicitor for the purchase, preferably one who can deal with the buying process in both English and Spanish.

Buyers opting to purchase off-plan need to pay a small holding fee and will be required to sign a reservation contract to ensure that the property will be taken off the market for a fixed period of time, which is typically 30 days. This time frame allows your solicitor to make legal enquiries and for a contract of sale to be drawn up (escritura de compraventa). At this point you will be asked to make stage payments, which will coincide with agreed stages in the construction process of the property development. The initial payment will be typically 10% or more of the overall purchase price. This is where it gets serious, since this fee is non-refundable.

If you are purchasing a second-hand home, you are asked to pay a small deposit as soon as the vendor has accepted your offer. The solicitor you have chosen will then make legal checks on the property and when these have been undertaken, you will be asked to sign the contract of sale. The contract must contain the overall purchase price and what this entails, must state the deposit payable (typically this will be around 10%) and when the deposit needs to be paid by. The contract of sale will also state the day that both parties have agreed upon for completion of the sale.

If the contract is breached by you, your deposit will be lost. If the vendor is in breach of the contract, you can expect to be compensated by twice the amount you paid as a deposit.

Upon completion the necessary taxes and a variety of fees will have to be paid. Once these payments have been made, the property is then registered by a notary at the Land Registry.

You should be aware that, when dealing with the authorities, some vendors will try to persuade you to under-declare the value of the second-hand home you are buying. You would then be asked to pay a part of the purchase price in cash to safeguard a reduced price for the property. The vendor is trying to avoid a proportion of the capital gains tax due on the property they are selling to you, and you should note that this is in fact illegal.

With the Spanish government looking to make the property market far more transparent, there has been a crackdown on the various corrupt and illegal practices connected to buying in Spain.

You can be prosecuted for tax avoidance and you can be ordered to pay the capital gains tax on the full amount of the difference between the value declared at the time of completion and when you are ready to sell the property later on. If you are faced with a situation, where the vendor of a second-hand property is asking for clandestine cash payments, it is better to negate on the deal and to walk away as fast as your flip-flops will allow.

The Cost of Buying a Property

Roughly speaking, buying a property in Spain will cost between 10% and 14% in addition to the agreed value of the real estate. This covers the Land Registry, the notary fees, the solicitor and various other taxes and legal fees.

As the buyer you will be required to pay:

  • The legal fees, which are typically between 1% and 2% of the purchase price
  • Stamp duty of around 0.5% to 1% on a new property and Spain’s equivalent of VAT, the IVA at approximately 7%
  • Stamp duty at the rate of 6% to 7%, depending on where your property is situated, for a second-hand home
  • Land Registry fees of around 1% and the notary fee

You should also factor in any service and maintenance charges that are payable in apartment or villa developments. These charges are due for maintaining the communal swimming pools, landscaped gardens and such.

Obtaining Finance via Spanish Institutions

Buyers from the UK have typically two options for financing their purchase of a property in Spain.

Firstly, they can re-mortgage their UK home via their own bank or, secondly, they can apply for a mortgage with a Spanish bank or with a UK lender. The costs for doing so are higher on overseas mortgages and can be as much as 3% to 4% of the overall amount borrowed. Spanish lenders are far more cautious in their approach than the rest of Western Europe and rarely agree to loans that exceed a borrower’s income by more than 35%.

Releasing equity in a UK home is often the better option, especially as re-mortgaging enables the buyer to make a cash offer for the Spanish real estate without having to apply for another mortgage. In the current economic climate this option may only be available to those, who own their UK home outright.

Some UK lenders offer Euro mortgages. These mortgages are tied to the interest rate set by the ECB (European Central Bank). Although at first these mortgages may appear attractive, you should first consider the volatile currency market and what losses you might sustain, if the currency works against you.

It is recommended to take up professional advice, when it comes to dealing in large amounts of foreign currencies and currency mortgages, since the turbulent markets and the complexity of the subject can hold many pitfalls.

Euro mortgages are also far less of an option for self-employed applicants, since most Euro lenders shy away from lending to self-certificated applicants.

Paying Local Taxes

The IBI (impuestosobrebienesinmuebles) is a property tax levied every year by your local municipality, who use the tax to provide a variety of local services. Just like the imputed income tax non-residents pay, this tax is calculated on the rateable value of your home (valorcatastral) and it depends largely on your individual circumstances on how much you will be asked to pay.

Some homeowners are asked to pay as little as £85 (€100) for a cosy little house in the country. Owners of luxury homes in exclusive beachfront residences in resorts like Marbella, however, will be asked to pay tax to the tune of £2,500 (€3,000) or more every year.

Spanish Property Taxation

Three levels of government must be appeased in Spain’s complex taxation system: firstly central government, then the autonomous regional government and lastly local municipalities. How much is payable on a property can be a minefield or guesswork and error, so you should seek professional advice on what is payable for your particular property.

Non-Residents Personal Taxation Issues

Non-residents are asked to pay a flat rate of 24% on income sourced from Spain: meaning income from either a business or rental property and any interest on deposits held with a Spanish bank.

Non-residents who do not receive an income in Spain but own a holiday home that they keep solely for their own personal use are taxed differently and they pay an income tax called imputed income tax. The tax relates back to the rateable value of your home and is calculated accordingly. You may not receive a rental income through your home, but Spanish taxation authorities regard your staying in the home as a benefit to you and therefore you need to be taxed on it.

Spanish assets also attract a wealth tax (patrimonio), which includes tax on property, and capital gains tax applies when you sell your property for a profit.

Various Money Issues

In line with other European countries Spain joined the “Eurozone” in 2002 and swapped the home-grown peseta with the imported Euro. Exchange rates fluctuate but at present 1 Euro equates approximately to 84 pence Sterling.

Although there is no limit on importing and exporting local currency, exporting sums of money exceeding the equivalent of €6,100 per person per trip to any country and in any currency will incur penalties unless you have obtained a declaration by the authorities that you are indeed permitted to do so.

When travelling with travellers’ cheques, it is usually best to opt for Euro travellers’ cheques, as this circumvents additional charges in exchange rate differences. Prepaid currency cards are also a good option and both Thomas Cook and Cash Passport issue such cards. Cashing travellers’ cheques in tourist hot spots and across Spain’s cities should not be a problem.

ATMs are widely available in cities, towns and most larger villages. Finding a Bureaux de Change can be more difficult in rural areas, but poses no difficulty in cities, larger towns and tourist hot spots. Throughout Spain debit and credit cards of nearly all known card providers are accepted.

Various Identification Issues

Visas and Passports

Visitors from EU member states with a valid EU passport do not require a visa for business or leisure trips lasting no longer than 90 days. Visitors from other countries outside the EU zone should check with their relevant embassy in Spain, what the requirements are.

Becoming a Resident

When Spain became a member of the European Union, the only formal requirement for visitors from EU member states was the residency card, when visitors wished to remain in Spain indefinitely. Recently, in line with other EU countries, Spain relaxed the ruling on residency cards for EU expats, although it is still compulsory for expat pensioners to have a residency card, when they begin their retirement in Spain.

People who have independent means and therefore do not work in Spain must firstly prove they can support themselves and secondly, obtain a residency card. This is also the case for non-EU dependants of an EU national, who must also prove that they or their families have sufficient means to support them, before they can acquire residency in Spain.

To complicate matters, there are two different residency cards, the issue of which depends on the length of stay. The temporary residency card is issued to people staying between 90 days and one year maximum in Spain. The residence card proper is valid for stays of a duration of between one and five years. Thereafter, the card can be renewed as required.

Having a residency card, even if you don’t actually fall into a category that requires you to obtain one, is not a bad idea, as it can help with a variety of administrative matters when first becoming a resident.

It is also a good idea to use the services of a gestor, a type of a relocation agent, who specialises in helping new expat residents to find their way through the maze of Spanish bureaucracy. The gestor takes care of all necessary documents, but it is highly recommended to request a written breakdown of all costs before allowing a gestor to deal with matters on your behalf.

Spain’s Economic Situation

Until the worldwide financial crisis set in and the housing bubble burst in 2008, Spain’s economy ranked fifth in Europe and sufficient foreign money from investors drove the economy onwards and upwards. However, since then Spain’s economy, in line with everyone else’s, has undergone transformation and in 2010 the country’s economy actually shrank by 0.1%, when the Spanish government was forced to cut spending in an attempt to deal with the national budget deficit and recession.

The property market was one of the largest casualties and recently the National Statistics Institute published the recorded figures for property transactions in 2010, which showed a 0.4% decline compared to 2009. The oversupply of unsold new housing stock makes Spain at present less of an investment opportunity and more of a change of lifestyle option.

To Summarise

A property purchase in Spain is not to be undertaken lightly, as it is a major decision and can be a life-changing one. To avoid the pitfalls you should:

  • Discuss the matter in detail with your friends and family before deciding anything;
  • Do your homework! Doing research is essential, before you decide on where to become a resident. Visit the region several times during different times of the year.
  • Once you have decided on the area and the type of property you’d most like to buy, sort out your finance. Moving your belongings from Britain to Spain can be expensive and must be factored into the overall cost.
  • Give yourself a break and don’t be rushed into signing anything until you are absolutely certain, you’re ready to do so.
  • If you plan to retire to Spain, it is essential to make sure that your pension can be transferred to a Spanish bank, that you have made a Will (in the UK and in Spain, if you still have assets in the UK) and that you have sufficient health insurance in place.
  • Perhaps most importantly of all, make sure that you have sufficient money to make the move back to the UK, should your new home in Spain not work out the way you hoped it would.

SOURCE: www.buyassociation.co.uk

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