19.01.09 BAG A BARGAIN IN SPAIN - BUT KEEP A VERY CLOSE EYE ON THE FINE PRINT

If you have cash to spare and don't need to borrow to buy a property in Spain, there will undoubtedly be bargains to be had.

Traditionally, most people have tended to buy new property off-plan rather than acquiring an existing building. This is because, in the main, Spanish estate agents have pushed the sale of new builds very heavily because of the profit element they can generate. The result has been a catastrophic building bubble with enormous overcapacity of new-build properties, especially in the costal areas.

Bear in mind too that buying as an investment in Spain is consequently a very, very long-term investment and may never come to fruition. However, if the motive is to acquire a second home - even possibly with a view to retiring there - that puts a different complexion on any purchase.

Leaving any language differences aside, Spain has its own legal system which is very different to ours in the UK. Lawyers is Spain tend to act more as document preparers, which need to be scrupulously checked for accuracy, and any transactions are undertaken before a Notary. It is the Notary who has the legal jurisdiction.

The question therefore arises as to how best to own any property. As in most European countries, there is the possibility of owning individually, or through an offshore or UK company.

Individual ownership is probably the most common way properties are owned. There is no concept of joint ownership as individuals in Spain. Each spouse therefore will own their own fractional share of the property. There is also the concept of forced heirship, although in practice for UK-resident property owners the Spanish legal system will generally give way to how any UK will disposes of the deceased's share of any property. In any event, a will should still be made in Spain stipulating how the UK resident wants their share to be disposed of.

The annual Spanish Wealth Tax has now been repealed (last tax paid by December 2008) making the use by high-net-worth individuals owning through a company less attractive. The various regional inheritance tax (IHT) rules are also being made more family-friendly under EU pressure. There is no automatic exemption between spouses as we have in the UK for example and the prevailing nil-rate band equivalent is a little under €16K (compare that to the £300K plus in the UK!) Spain is also divided up into various autonomous regions each of which has its own fiscal powers ceded to it, making the giving of general tax advice very difficult. Madrid for example has all but abolished IHT with other regions strating the journey.

Assuming you can sell your property at a gain, the prevailing tax rate has recently dropped to 18% (with 3% deducted by the Notary when the deed of sale is signed) and tax on rentals generated are at 24% of the gross rent with no allowable deductions payable 30 days after the rent comes due.

When it comes to company ownership, this simplified both the forced heirship issue and got around the annual wealth tax. A non-resident company pays capital gains tax at 18% (the same as an individual) and any income is taxed at 24%. Spanish resident companies pay tax at a general rate of 25% up to €12K and 30% thereafter.

There is no doubt that in tax terms there is little to choose from now between individual and company ownership. In addition, the performance of the pound versus the euro must have an effect on the decision to buy abroad and how any funding through borrowing is organised should it be needed.

There are plenty of currency specialists who can organise the conversion at far better rates than generally available and they can set up monthly debits, and the like.

In summary, remember any property purchase abroad will inevitably involve different cultural approaches and financial and legal systems, often with different approaches to what is and isn't acceptable practice. Specific advice needs to be taken tailored to your own needs. Don't skimp on fine detail and make sure that you have a reputable local lawyer to advise you at all stages.

Publication: The Press and Journal
Author: Bruce Wilson