The Potential Pitfalls of Buying in Spain

Buying property in Spain can be a great choice when armed with a little knowledge about the local buying process...

Buying a property abroad can be very different to buying one back home. However, in any country there can be difficulties when buying property and sometimes a few local peculiarities that can catch some people out. These can change from country to country.

It can be just as safe buying a property in Spain as it can in your home country providing that you use an independent lawyer to help you through the process (not one provided by the builder or property agent). However, if you choose to go it alone, below are some of the issues that you may come across and which may initially seem strange.

Reservation Contracts

A reservation contract simply takes the property off the market for a short period of time (typically two weeks) and allows you time to carry out searches on the property and to negotiate the terms of the purchase contract. It doesn’t commit you to buying the property but does show that you are interested in it and stops the seller selling to somebody else. Typically you will pay a reservation fee of something like €3,000 to €6,000 for this which will be deducted from the purchase price should you proceed.

The problem with many reservation contracts is that they aren’t actually reservation contracts – they are actually full purchase contracts that commit you to buy but with the word “Reservation” written at the top. That doesn’t make it a true reservation contract and it is therefore vital that you take legal advice before signing any contract.

Lack of planning permission / building license / Habitation Certificate

Unfortunately there has been a history of some developers building properties without the proper paperwork. Even more unfortunate is that some buyers won’t check that the correct paperwork is in place and end up buying an illegal property. Some private owners even get involved in this process. They will build an extension or a swimming pool without the proper planning permission.

In Spain there is a limitation period for planning, meaning that if the authorities don’t find out about the illegal planning for a number of years they lose the right to have it knocked down. Some people even use the limitation period as a way of avoiding having to obtain planning permission in the first place.

Under-declarations

Luckily the practice of under-declarations has pretty much disappeared in Spain but it still happens from time to time. The way that this works is that the price that you declare in the title deeds for the purchase is less than you are actually paying for the property and the balance is paid in cash to the seller. The reason why this was done was to reduce the amount of Capital Gains Tax payable by the seller.

Obviously the practice of under-declaring the price to save tax is illegal and therefore cannot be condoned but this was very common at one point. There are also very good practical reasons why this shouldn’t be done;

You have to pay actual cash (because the transfer cannot therefore be traced), meaning that you don’t get a receipt. It also means that there is a risk that you could be mugged on the way to the Notary.
If you under-declare the price that you buy the property for then unless you can do a similar under-declaration when you sell then you will have created an artificial profit on the sale, meaning that you will have to pay tax on a profit that you didn’t actually make.
If the tax authorities find out you can be fined and charged interest on the tax that you should have paid, meaning that you end up paying more than you should.
If you get caught the tax authorities are likely to investigate your tax affairs every year for a number of years as they will assume that you are avoiding tax in other ways as well.

What happens if you pull out – double deposit

Generally speaking if you pull out of a purchase, whether you have signed a Reservation Contract or a full Purchase Contract you will lose the money that you have paid as a deposit. However, an interesting type of contract in Spain was designed to avoid gazumping and means that if the seller pulls out of the sale then he has to return double the deposit to you. This is a strong incentive to keep to the contract as any subsequent buyer would have to make an offer of considerably more money to make it worth the seller pulling out of your deal and selling to the new buyer.

Fractional ownership

Fractional ownership is a way in which several people can own a property together. It could be several couples, work colleagues or even complete strangers. It can be a way of sharing the costs of buying and running a property between you all and making sure that the property gets used more of the year round. Unfortunately. some timeshare companies try and sell their product as Fractional Ownership. Fractional ownership is not unfortunate but the sometimes-coercive sales tactics used by some timeshare companies can be.

3% Retention for tax

When non-resident foreigners sold property in Spain in the past they often did so leaving unpaid tax bills behind. They would return to their home country without paying the taxes due in Spain and would simply never return to the country as a way of “saving” tax. Unsurprisingly the authorities got fed up with this and introduced a measure to avoid this happening. Therefore when somebody sells a property it is the obligation of the buyer to pay part of the purchase price to the tax authorities instead of the seller. The seller can then reclaim this amount from the tax authorities if they can prove that they are up to date with their taxes.

Inheritance laws

Inheritance laws in Spain can be quite different to those that you may be used to. Spanish nationals have to leave their assets to certain designated people (Forced Heirs) whether they want to or not. There are only a few exceptions to this requirement.

Foreigners have often heard about these rules and get worried about them. This is unnecessary as Spanish Law allows foreigners to leave their assets in Spain in accordance with the law of their own nationality.

The rules are changing again in 2015 with the introduction of a Europe-wide law which tries to harmonise the laws throughout Europe on this subject, essentially mimicking the current Spanish rules. In Spain this is going to have little effect other than making it more important to set out your wishes in a Will.

Highlights

It can be just as safe buying abroad as it can back home, providing you:

Take independent legal advice
Do things legally and don’t get involved in illegal practices such as under declarations
Understand how the process works and therefore when something you are being told is not right (and if in doubt check with your lawyer)
Take advice on what to expect so that there are no nasty surprises
Take advice on tax and inheritance issues before you agree to buy.