Spain

Thursday, 22 May 2008 12:00 AM

Spain has long been the darling of the overseas international property market, with more Brit's buying in the country than in any other destination.

As a result some areas of the country have become overcrowded, yet others are looking like the hotspots of the future.

So, how would a potential buyer go about securing a property in Spain?

aboutproperty.co.uk takes potential buyers through the basics of investment on the Iberian peninsular.

Motive

The first, and often most important, factor when considering a property purchase overseas is to establish a clear and defined reason for buying.

Is the property a holiday home, an investment opportunity, or an emigration destination? All three options are likely to have distinct and disparate requirements, and thus motive represents the key dynamic of any purchase.

Buyers looking for a holiday home will have to consider how often they will need access to a property; the journey to and from the location (both in and out of season); the security of the property when residents are not present; and the amenities in the local area.

Investors will also need to consider the potential for capital gains on a property; the level of risk involved with an acquisition; and potential rental income as well as the time and commitment needed to manage the assets.

Again, those looking to emigrate must assess the lifestyle in their chosen destination; the security of their income; standards of healthcare and education overseas; and the proximity of the locale to friends and family.

Once the requirements of a property have been identified potential buyers can begin to examine possible locations.

Research

The Spanish property market is presently experiencing a major correction in prices after a period of unprecedented growth. In the longer-term this could prove to be a major boon to investors, yet presently a level of caution is recommended.

According to official statistics released by the Instituto Nacional de Estadística (INE) annual house price growth fell to just 3.8 percent in the first quarter of 2008 - the slowest rate in ten years and below Spain's 4.5 percent inflation rate.

Consequently, property could now lose value in real terms.

Before the slump began in early 2007 however, prices had increase by around 175 per cent in a little over a decade - in line with many booming western European economies - and are likely to have a substantial distance to fall.

While Spain's accession to the euro zone in 1999 provided the fuel for the fire - with homebuyers taking out increasingly affordable mortgages for first-time properties and subsequently to upgrade - the credit-fuelled boom grew unsustainable.

At one point the housing market was the financial powerhouse of the whole country, accounting for 7.5 per cent of the economy, according to a study by the BBVA bank; but - as with Britain - it was always a case of when, rather than if, the market would overheat.

Spanish journalists are now talking about the boom in the past tense, with the market in the midst of an apparently sharp and sustained downturn. Transaction levels fell 10.2 per cent month-on-month in February this year according to the INE, with just 55,462 urban property sales recorded.

This trend is likely to continue, with prices and sales expected to fall in the foreseeable future.

The International Monetary Fund (IMF) also views property prices in the country as 20 per cent overvalued - again in line with the majority of western Europe - creating substantial room for further falls.

While the INE accepts prices are set to fall in the medium term, a return to growth is anticipated during 2010 - but the ride looks to be a bumpy one for the foreseeable future.

Law

Having established a potential location, the legal implications of buying a property must be considered. Key here is to select an independent lawyer to offer advice on the Spanish legal process.

EU citizens (as well as those from Norway, Iceland, Liechtenstein and Switzerland) no longer need apply to for a Spanish residency card, following a change to regulations in 2003.

A passport from these nations should be sufficient for residence, as well as the purchase of property.

Once resident, it is essential to register with the local ayuntamiento (Town Hall), to secure inclusion on the local pardon (list of inhabitants). This will offer proof of residence and inclusion on municipal electoral rolls.

Those who wish to become a citizen of Spain must reside in the country for a minimum of ten years.

Finance

As with purchasing property in the UK it is beneficial to have a mortgage offer in place before beginning the search for a property.

Lenders will agree to an 'offer in principle' with a borrower, based on individual circumstances. This has the added benefit of placing a realistic limit on the funds available for purchase.

However, buyers must make a selection of where to seek the necessary finances - with the choice of either a Spanish or British lender.

It is less common to secure a loan on Spanish property in sterling, but the procedure can be considered relatively straight forward.

British banks are likely to offer 2.5 to three times a buyer's income in the current climate, minus any capital secured on an existing, domestic, mortgage. A further option is to take out a second mortgage on a British property, and use the funds to purchase a Spanish property.

The maximum loan-to-value (LTV) for this method of purchase is likely to be 90 per cent or less, while credit histories will be checked to ensure an individual is a sound investment.

A more common option is to seek a loan through a Spanish bank, with many companies offering products through UK and Spanish branches.

However, key differences separate Spanish banks from those in the UK.

A larger deposit is likely to be required, for example, usually around 30 per cent of the purchase price, forcing maximum LTVs downward. The Bank of Spain sets a maximum LTV of 80 per cent, and many mortgage products fall as low as 66 per cent.

A Spanish mortgage may also incur higher set-up charges than the equivalent product in the UK.

Borrowers will also have to declare their entire worldwide income and liabilities, and are likely to be assessed for 'affordability'.

Spanish banks will calculate a borrower's Spanish repayment requirements, along with UK commitments and add this to any other long-term borrowing requirements. This 'affordability' figure, when calculated, should be no more than 35 per cent of a buyer's income.

Repayment periods are also often shorter in Spain. A borrower must be under 75-years-of-age upon completion of the deal, and a fiscal identification number will be required to conclude a transaction.

Presently Spanish interest rates - which are set by the European Central Bank - sit around the four per cent mark. While this was lower than the UK in early 2008, the situation may be reversed by the end of the year.

Taking out a mortgage in euros also insulates buyers against a degree of risk.

If the mortgage and investment property are both priced in euros fluctuation in currency rates will be offset, as the value of a property and level of debt oscillate simultaneously.

It is possible to account for fluctuations in interest rates by securing a 'forward buying' arrangement with a currency specialist for the length of the mortgage.

There are also a host of other costs involved with a Spanish property purchase.

• Impuesto Sobre El Valor Añadido (IVA) and Actos Jurídicos Documentados (AJD) - The Spanish equivalent of Value Added Tax (VAT) is payable on new-build properties at a rate of seven per cent - four per cent in the Canary Islands - while the equivalent of stamp duty is charged at 0.5 per cent. Both are payable by the buyer.

• Impuesto sobre Transmisiones Patrimoniales (ITP) - The second transfer of a property incurs a tax rate of between six and seven per cent depending on geographical location. Again this is payable by the buyer.
• Land registry - Registration of the sale of a property with the Spanish land registry will cost the equivalent of one per cent of the purchase value. The buyer pays this fee.

• Legal fees - A Spanish abogado (lawyer) will charge a further one per cent of the sale value of a property. Again this cost is met by the buyer.

• Notary fees - Notary fees total around 0.5 and one per cent, dependant on the cost of the property as detailed in the Escritura de Compraventa (Deed of Conveyance). Again, met by the buyer.

• Agency fees - A cost is also incurred, of between two and 15 per cent, if an agent is employed to locate a suitable property.

Tax

If you spend more than 183 days (six months) per year in Spain you will be classed as a Spanish resident. At this point residents will require a Número de Identificación de Extranjeros (NIE), or tax identification number.

Furthermore, there is no tax-relief for those qualified as residents, even if they are from overseas. Consequently all residents are expected to pay on all pensions, private investments, dividends, wages and interest.

Those residing in Spain for less than half of the year are still liable for any income arising from investment in Spain - including income from rental properties.

A NIE can be obtained from the Oficinas de Extranjeros, Spanish consulates or national police headquarters. The document registers inhabitants with the Agencia Estatal de Administracion Tributaria, www.aeat.es where more information on taxation can be found.

Impuesto Sobre la Renta de las Personas Fisicas (Income Tax): This tax applies differently to residents and non-residents.

Non-residents need to make an annual tax declaration to the Spanish tax agency - covering everything from income from employment, investments or interest. This will be taxed at a flat rate of 24 per cent.

For residents there is a sliding scale of taxation. Income under ?17,360 will be taxed at 24 per cent, from ?17,391-31,360 a 28 per cent levy is charged, while between ?32,361-52,360 will forfeit 37 per cent.

Anything upward of ?52,361 will be taxed at 43 per cent.

Investors must also consider capital gains tax (CGT) when making an investment.

Impuesto sobre el Patrimonio (ISP) is payable on the net gain between the sale proceeds and acquisition costs, with deductions for fees incurred during the sale, and any improvements made to the property. A small reduction is also made for inflation.

Regardless of domicile status, ISP is charged at 18 per cent, with further relief available if the property was purchased before 1995.

However, this is just a taste of the Spanish taxation regime, and professional advice is a must before the consideration of a property purchase.

Currency

Spain removed its exchange control laws in 1992; consequently there is no limit to funds which can be taken into, or out of, the country. However, amounts over ?6,000 should be registered with customs within 30 days of movement.

Given this flexibility transferring currency between the two locations is not necessarily a complex process.

The simplest method of movement is through a banker's draft - essentially a cheque guaranteed by a domestic bank and cashed in Spain. When completing the purchase of a property in Spain it is advisable to present a banker's draft to the notary, made payable to the vendor in their domestic currency.

Money can also be transferred through a secure electronic system, including SWIFT (Society for Worldwide Interbank Financial Telecommunication) or Fedwire. However, the process can take several days and may incur a fee of 0.6 per cent from the receiving, Spanish bank. It can also difficult to ascertain the exchange rate before the completion of the process.

Perhaps most advisable is a specialist foreign exchange provider. Such providers can offer superior exchange rates when compared to banks, smaller commission charges and lower transfer fees. It is usually also possible to arrange a 'forward buying' arrangement - in which exchange rates are fixed until a certain point - removing concern over concerns over fluctuations in currency exchange rates, although if the rates move in your favour you miss out on any benefits.

It is also vital to remember, once a property purchase is made, demand for currency will not cease. Investors are still likely to require funds for mortgage payments, living costs and a host of other activities - thus a longer-term arrangement with a specialist foreign exchange provider.

Two leading examples of such organisations include Currencies Direct and HiFX.

Finally, it is important to remember funds sitting in a Spanish bank account are likely to attract little interest, so it is often beneficial to transfer just the necessary amount.

Selection

There is a wealth of material available for potential investors in Spanish property. Some of the most common include:

• Newspapers: Offering up-to-date information through news reporting and additional, in depth, coverage through supplements, newspapers can be some of the strongest sources of material for overseas investment ideas.

• Magazines: Bringing a great deal of depth to the market, magazines usually maintain a detailed classified section, presenting concrete choices of overseas investment. Features can also provide off-beat ideas for investment.

• Internet: Speed is the key element to the internet, allowing potential investors to proactively seek out information on their desired locations. Blogs and other user generated content can also offer a more realistic and balanced view of overseas developments.

• Property exhibitions: Live events are perhaps the best source of information for investors. Packed with developers, agents and other service providers, events of these kinds bring together all the specialists in one place, allowing buyers a chance to compare the industry quickly and efficiently.

Completion

Having followed the above steps buyers are ready to make a purchase, sit back and enjoy the fruits of their labour.

More information

For more information the International Law Partnership has a developed guide to buying a property in Spain, along with a buyers' Frequently Asked Questions section.

The Global Property Guide also has a wealth of information available for potential buyers.

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• country guides
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• property in europe
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• spain