Mallorca & Spain – Buying Property guide
There are many questions which a new buyer may have when purchasing their first home either in Mallorca or in Spain. The team at Lifestyle are here to ensure that the buying process is both simple and smooth running through each aspect of the buying process. Lifestyle aim to provide you with as much information prior to buying the property of your dream.
- A) Choice of property
It is highly recommendable when considering acquiring a property, to use the services of an accredited Estate Agency like Lifestyle with the indispensable support of its experience in this sector. They will indicate the steps to be taken and will guide the buyer and seller in all the stages of the process, such as the effects of valuation, possible financing, guidance about possible reformations and restructuring of the property, information regarding public finance and tax payments, amongst others, as well as the actual sale and deeds, all of this with no cost on the part of the buyer.
- B) Sale options
There are several possibilities available at the time of purchasing a residence. In Spain a verbal agreement is now valid (although not frequent and not advisable), it is convenient to have some type of signed document of the selling to avoid any possible mistakes and misunderstandings. The following is a list of the most common types of contract.
B.1) Sales Agreement Contract
When the buyer needs time to clarify queries before formalizing the operation, the usual process is to resort to a Sales Agreement Contract. This is a document that commits the selling party not to sell to a third person that is not the signatory stakeholder, for a short period of time. It is common practice to pay a 10% holding deposit as a reservation in these cases. This deposit will be deducted in the event that the purchase is carried through, or it may be returned or forfeited if the buyer withdraws from the sale for any reason, this depends on the agreement between the two parties.
- 2) Option Contract
This type of contract is more binding than the previously mentioned contract as it commits both parties to sell and purchase with the conditions stipulated in the said contract. The drawing up of the contract is normally drafted by the buyers lawyer and states the deadlines and the payment or payments to formalise the said contract. Thanks to this, the seller is obliged to sell and the purchaser to buy or to the economic compensation. Normally a deposit of 10% is established which will be deducted from the final price, when the purchase takes place. If the purchase is not carried through because of the buyer’s decision, the deposit will not be returned. On the other hand, when the transaction is not carried through owing to the decision on the part of the seller, usually if there has been a sale of the property to a third person, the aforementioned deposit is returned plus an additional 10% of the deposit. A judicial demand can be made for the payment of this amount if this condition is not fulfilled and if it is reflected in the contract, or the fulfilment of the option can be demanded if it is so stated in the contract.
- B) Registration
Registration is when the new owner registers as the owner of the property at the Property Registry Office. To lodge the registration in the new owners name is very important as the deed contains a full description of the property together with the list of possible charges, burdens and easements in existence at that moment, as well as the price and mode of payment. The Notary is who, following his catalogue actions, will verify the identities of the buyer and seller, corroborates the registered details, controls the last payment of IBM (taxation on property) and, if the property is part of a community of neighbours, he insures that the new owner is aware of the community payments, after the President of the community has priory confirmed this information. It is important to know that it is possible to grant power, in the presence of a Notary, to another person albeit a legal entity or no, to stand in for transferring the title deed when the buyer, purchaser or both are unable to be present at the operation.
- C) Property Registry Office
The Notary will inform the Estate Agent who will then liaise with both the seller and purchaser and, at the same time, puts into motion the lodging at the Property Registry Office, so any other annotation for the said property is blocked, the period for inscribing at the Property Registry Office extends for about 60 working days more. Once the corresponding transfer tax has been paid at the Tax Office, it is then possible to proceed with the definite inscription in the Property Registry Office. In any event it is possible to ask the Notary to make a presentation entry via fax.
- E) Taxation
Expenses and taxes incurred from the purchase of a property in the Balearic Islands.
E.1) If the SELLER IS NOT A COMPANY BUSINESSMAN (is an ordinary person or an inactive dormant Company):
-The buyer must pay to Balearic Hacienda the TRANSFER TAX ONEROUS (ITP) applying a scale from 7% to 10% on the value of the property. So for example:
For the purchase of a property of 500,000 € a 7.40% would be paid = 37,000 €
For the purchase of a property of 1,000,000 € a 8.50% would be paid = 85,000 €
For the purchase of a property of 2,000,000 € a 9.25% would be paid = 185,000 €
For the purchase of a property of 5,000,000 € a 9.62% would be paid = 384,800 €
-As well as this tax, other expenses resulting from the purchase will have to be paid (notary, registration of the property, transference, lawyer if so desired, etc.) which could mean between an approximate 0.5% and 1.00% on the value of the property. The costs and taxes would be somewhat higher if the purchase is financed with a mortgage loan, around a 1.75% of the amount of the loan.
-To the required taxes approximately between a 0.5% and 1.00% for costs involved in the acquisition of the property (a little more when the purchase is financed with a mortgage loan, depending on the amount).
With this, the sellers that are not residents intend to obtain a certain tax advantage (and even not contribute in Spain for the gaining made from this sale) and the purchasers can expect to save the tax for the purchase, provided that they meet certain requirements, particularly that there are several purchasers and that no one buys more than a 50% of the company. In all events, it is an operation that has important legal and taxation risks for the buyer, for which reason, it is desirable to make a thorough study beforehand.
-IBI PROPERTY TAX is a tax that is paid annually to the Town Hall and can be about a 0.4% to a 1.1% on the CADASTRAL VALUE of the property (value which initially should be a maximum of half of the market price of the property).
-WEALTH TAX, is a tax which was eliminated in Spain in the year 2008 and which has been restored initially only for the years 2011 y 2012.
-INCOME TAX FOR NON-RESIDENTS:
If the property has been purchased directly by a non-resident, this tax will have to be paid every year. If the property is of own personal use, a fictitious rent will have to be calculated of 1.1% of the cadastral value, and pay a 24.75%. If the property is rented out, a 24.75% will have to be paid on the rents, although for the residents of the Common Market, the necessary costs can be deducted and this 24.75% be paid on the net return on lease.
If the property has been bought by a non-resident entity, this tax of a 24.75% will also have to be paid, if it is rented out, and also on the rented market price if the property is given to linked people (partners, administrators, etc.).
-SPECIAL TAX ON NON-RESIDENT PROPERTY:
If the property has been bought by a non-resident entity, it will be subject to this tax and should be submitted annually. The property will be totally exempt from the payment if with the annual declaration if there is a certification that the entity resides in a country which has a Double Taxation Imposition with Spain with an interchange of information (such as Germany) and that the persons in the last resort are owners of the company also reside in a country with a Double Taxation Imposition with Spain. If not, a 3% of the cadastral value of the property
-INCOME TAX FOR NON-RESIDENTS:
If instead of selling the property, a company is sold (Spanish or not) which directly or indirectly is the owner of the property, initially, taxation on the gains obtained will have to be paid in Spain, as this is Spanish law. However, the Double Taxation Impositions prevail over the Spanish law, and so for example, if the vendor resides in Germany with the existing agreement, the taxes will have to be paid in Germany and not in Spain, but with the new Agreement which could come into force in the year 2013, the taxes will have to be paid in Spain.
TAXES RESULTING FROM THE TRANSFER OF A PROPERTY in Spain for INHERITANCE
At present, with assets in Spain (properties, money, companies, etc.), if the deceased or heir are not residents, this tax has to be paid to the State Finance, applying a progressive scale from 7.65% to 34% of the actual value of the property, provided that the heir or heirs are direct family (from father to son or grandchildren, between spouses, etc.).
PROPERTY INHERITANCE TAX (€) VALUE (€) 1 direct inheritor(1*), 2 direct inheritors(2*), equal parts(3*)
( 500,000.00 )(1*) ( 110,484.09 )(2*) ( 81,120.62 )(3*)
( 1,500,000.00 )(1*) ( 447,997.34 )(2*) ( 374,180.69 )(3*)
( 3,000,000.00 )(1*) ( 973,297.34 )(2*) ( 895,994.67 )(3*)
( 4,000,000.00 )(1*) ( 1,323,497.34 )(2*) ( 1,246,194.67 )(3*)
A lot more has to be paid if the inheritance is in favour of non-direct family (brothers, nephews, etc.) or in favour of strangers. However, in case of inheritance between direct family who are residents in Spain or the Balearic Islands, a maximum of 1% Inheritance Tax is paid.
This implies a clear discrimination for the non-residents, and so on the 7th March 2012; the European Commission brought an expedient before the Common Market Court of Justice, (Issue C-127/12) against Spain. For this reason it is possible, in the medium term, that the regulations referring to non-resident direct family inheritance will be modified in Spain, so that they will not have to burden with such an elevated Inheritance Tax.
With the intention of avoiding this elevated Inheritance Tax, some non-residents buy properties through non-resident entities (for example, German companies) or through Spanish companies participated in turn by non-resident entities. Other non-residents try to reduce the tax buying properties with mortgage loans so that the debt can be deductible in the inheritance.
-MUNICIPAL CAPITAL GAINS:
For the direct transfer of urban hereditary properties, the heir will also have to pay this tax to the corresponding Town Hall.
- F) Important considerations
At the time of formalizing a transfer of this kind, it is important to take into account a number of very important details.
F.1) Tax Identification Code. (N.I.F.)
In Spain all people (resident or non-resident) have or should have a number for tax identification by law that must be recorded on tax statements and any communication directed to the tax administration authorities. Exactly the same applies to companies. The N.I.F number usually coincides with the number of the National Identity Document (DNI). For foreigners, the NIF is the Alien Identification Number (NIE). Nowadays, obtaining the NIE is rather tedious and it can take between 3 or 4 weeks to obtain it. For this reason, it is recommendable, once having signed the sale contract or option contract, to go to the Notary for him to obtain a certified photocopy of the Passport of the purchaser or purchasers, an indispensable requirement to be able to apply for the corresponding N.I.E.
F.2) Habitual Residence in Spain
Legally it is considered habitual residence in Spain when an individual lives for more than 183 days of a year in Spanish territory or the main nucleus or the base of their activities or economic interests, directly or indirectly, are rooted in Spain.
It is highly recommendable that a non-resident person who has purchased a property in Spain makes a Will before Notary with respect to their assets in the Kingdom of Spain. It is not only highly recommendable but also a fairly simple operation which resolves many problems, particularly bureaucratic ones, in case of death of the title holder or holders.