Spanish inheritance tax now the same for EU- and non-EU members
As we stated in our post in February 2015, on 01/01/2015, the regulations governing Inheritance Tax were amended, EU citizens began paying the same Inheritance Tax as citizens resident in Spain. From that time EU citizens were able to pay tax in accordance with the regulations of the Autonomous Community where the assets are located. Remember that these regulations are much more beneficial than national regulations on Inheritance Tax, which were applied to EU citizens until that date. This amendment left non-EU citizens out, which were required to continue paying tax according to national regulations.
Supreme Court rules in favour of Non-EU members
However, two judgments of the Supreme Court, in February and March 2018, referring to residents in non-EU countries such as Canada or Switzerland, determined that there would be discrimination contrary to the free movement of capital if non-EU citizens were not allowed to opt for regional regulations in the same manner as EU citizens. Therefore, these non-EU citizens should also be treated in the same manner as EU citizens in terms of Inheritance and Donations Tax, also being eligible to receive regional tax benefits.
We should add that the free movement of capital is enshrined in article 63 of the Treaty on the Functioning of the European Union, which prohibits all restrictions on the movement of capital between Member States and between Member States and third countries, making the limitations for non-EU citizens in terms of Inheritance Tax contrary to the regulations of the European Union.
Since September 2018, the Spanish Tax Agency decided to comply with these rulings and started accepting settlements of Inheritance Tax for non-EU citizens, applying the regulations of the relevant autonomous community to these.
Benefits of tax calculations by Autonomous Communities
This change in tax criteria represents significant savings in terms of inheritance for non-EU citizens, as it should be noted that, in most Autonomous Communities in Spain -including Andalusia-, a widowed spouse, children and descendants, such as grandchildren, barely pay any Inheritance Tax, as they are eligible for significant bonuses. These bonuses in Andalusia were explained in detail in our article from January 2018.
Possibility to reclaim tax until four years back
Suffice it to say that this tax change opens the door to claims from non-EU heirs who have paid Inheritance and Donations Tax over the last few years, if a comparison between national and regional regulations were to show that they paid much more than an EU citizen would have. This claim may be filed provided that the right to claim has not been time-barred, the deadline being established at four years after the payment was made.
Brexit and British citizens
As a last note, considering the consequences of Brexit for British citizens with properties and assets in Spain, fortunately, even if they remain outside the European Union and would be considered non-EU citizens, they would be able to continue to benefit from bonuses and discounts in Inheritance and Donations Tax in the same manner as before.
It should be noted that there are many British homeowners and buyers with properties in Spain and, at least, their heirs will not be harmed in terms of taxes payable in a future inheritance procedure.
If you want to buy a property with a Spanish mortgage you should know that the standard in Spain is the variable interest. The Euro Interbank Offered Rate, also called Euribor, is the reference rate for variable-rate mortgages and is currently at very low levels. Most mortgages in Spain are established according to the Euribor plus the interest rate offered by the bank.
Some banks offer fixed-rate mortgages but the number of fixed-rate mortgages obtained in Spain is very low compared to that of variable-rate mortgages.
A mortgage in Spain or another country?
If you are non-tax resident in Spain and you are thinking of getting a mortgage to buy a home in Spain, it is very likely that a bank in your tax-residence country can offer you a better interest rate than a Spanish bank. Therefore, you should try to find out which banks in your country give mortgages in Spain.
Ways to reduce the interest rate
In Spanish mortgages with variable-interest usually offer a series of extra products are offered that may reduce the interest rate of your mortgage loan. Each of these financial products / conditions can reduce the interest rate between 0,25% - 0,50%, with a maximum of non residents of 0,75% en 1,00%.
Some of these products / conditions are:
Setting up a direct credit of your salary or pension
Keeping a minimum monthly balance in the account linked to the mortgage
Signing up online banking or a virtual mailbox
Direct debits of service companies (water, electricity, taxes, etc.)
Having a debit/credit card
Having a pension plan with a minimal yearly contribution
Taking a life insurance and a house insurance / contents insurance
Starting the procedure with the bank
If you already know the bank where you want to apply for your mortgage, we suggest that you apply for the financial approval of the mortgage.
At this stage you will provide the bank with a complete list of your income and loans as well as your employment status and the amount of the mortgage loan you need. The bank will enter all these details into the system and tell you if they would approve the mortgage at your income level.
Through this, you can save time and money since you can find out, right from the start, that the bank will not give you a mortgage and it will not be necessary for you to provide all the financial documentation at the beginning. Besides from this it´s not necessary yet to pay the taxation of the property by the bank. This documentation for the bank, by the way, needs to include an extract (´nota simple´) of the Land Book Registry, the Registro de la Propiedad, of the property you are interested in buying. If the bank analyses your financial detailsand cannot grant you a mortgage, you always have the possibility to go to a different bank.
Extra costs of the Spanish mortgage
Updated information due to the sentence of the Supreme Court in October 2018 as well as the change in the Spanish law based on which the banks pay most of the initial costs of the mortgage.
These are usually between 3% - 4% of the amount of the mortgage, but are since October 2018 paid for by the banks (and they can be claimed back for mortgages signed since October 2014). They refer to taxes, the notary´s invoice (the Mortgage Deeds are different from the Title Deeds and so they are charged separately), the invoice from the Land Book Registry and processing fees. These expenses are the same regardless of whether the mortgage is obtained from a Spanish or a foreign bank.
Even though you can negotiate your mortgage directly with the bank, it is advisable for your solicitor to help you with this process as you will obtain professional advice. Besides of this his work with the bank will be more efficient because he knows the different conditions of the banks, the can check the Spanish general Terms & Conditions and he can negotiate on your behalf.
Extra bank expenses:
Opening fee (usually 0,5% - 1% of the mortgage), obliged home insurance (contents insurance) and life insurance for each mortgage account holder.
On this point, I would like to make a special mention about the life insurance policy that most banks usually require to obtain. This insurance policy is obtained for the mortgaged amount and guarantees that the bank can collect the amount due to the bank from the insurance company in the event that the account holders die.
Life insurance is an interesting product for mortgage holders but it may involve a high premium, especially if the insured people are elderly or have any health problems. This is because, in these cases, the premium will be higher as the risk that the mortgage holders die increases. It´s important to know that after the first year you can switch from insurance company to one that offers you better conditions on your life insurance.
It is also common for some banks to require you to pay a single premium for this life insurance policy, i.e., when the mortgage is granted, the bank already charges you for the total insurance premium for the entire mortgage period.
It is important for you to have a summary chart of ALL mortgage costs, so you can know the net amount of the mortgage (after deducting expenses) you will have available to pay for the property.
Legally binding mortgage offer
Once the bank confirms that your mortgage is approved, the legal document that guarantees this is the binding offer (´oferta vinculante´). This bank document functions as a contract and binds the bank to giving you the mortgage under the terms established in the document. The binding offer is usually valid for one month but it may not be valid for less than ten days.
Recommendations when buying a property with a mortgage
Since the final approval of the mortgage by the bank will take 2 or 3 weeks. Therefore it´s wise to start the mortgage procedure as soon as possible, even if you haven´t selected a definitive property yet.
Have you already decided on the property you want to buy, but you do not yet know if you are going to obtain a mortgage? In this case you could try to negotiate with the seller that the reservation document and/or private purchase contract are ´subject to mortgage´. This clause avoids that you would lose your reservation fees and/or down payment if no bank in the end doesn´t grants you a mortgage loan. However, most (Spanish) sellers do not like to sign contracts that are subject to the mortgage so the best thing is to have everything prepared with the bank so that it takes as little as possible to receive a reply.
Also please keep in mind that not all banks are willing to grant mortgages for house in the countryside, or only for a limited percentage.
Saving money by subrogation of a mortgage
If you are a home owner with a Spanish mortgage than -after one year- you have the right to subrogate your mortgage to another band with a lower interest rate of better conditions. In this case the new bank will pay the rest of the loan plus the transfer commission (if this exists) to your current bank and you will pay your mortgage from that moment to the new bank according to the new conditions.
The subrogation cost is very low compared to the cost of signing a new mortgage. Therefore, if the interest rate that the bank offers you is lower, it is very likely for subrogation to be beneficial to you.
"Can I claim back AJD tax from my earlier Extincion de Condominio?"
It's usual when couples break up and they own a property at 50% -or in properties belonging to several heirs- that for various reasons one of the joint owners would want to sell his or her share and the other one would want keep the entire property. Said sale or purchase can be made effective through executing a Deed of co-ownership termination (Extincion de Condominio).
Over these deeds 1.5% AJD Tax (Actos Juridicos Documentados / Stamp Duty) is paid instead of the normal 8% ITP / Transfer Tax. There now is an important change that even lowers this AJD-tax and makes it possible to claim back money from the Spanish Tax Office.
What is the Extincion of Condominio and what are its benefits?
It's usual when couples break up and they own a property at 50% -or in properties belonging to several heirs- that for various reasons one of the joint owners would want to sell his or her share and the other one would want keep the entire property. Said sale or purchase can be made effective through executing a Deed of co-ownership termination (Extincion de Condominio). Co-ownership termination consists in transferring something that belongs to several owners, who agree to award it/sell it to one of them, with the other joint owner/buyer paying a price for acquiring the share that belonged to the others.Termination entails the end of joint ownership and this asset becomes the property of a single individual but it's only applicable to properties belonging to several owners, if they decide to sell everything to one of them. It wouldn't apply if the sale of this share goes to more than one owner, e.g. if there are three joint owners and two of them keep the other one's share.
Termination of co-ownership offers one main advantage over a sale: the tax paid by the buyer to acquire this share of the property is significantly lower. While in Andalusia the tax on asset transfers for the purchase of a home is 8%, the tax paid for termination of co-ownership is 1.5%, as Stamp Duty (AJD Actos Juridicos Documentados). In other words, to benefit from the tax rate for co-ownership termination, there can only be one owner of the property in the end as, otherwise, this would be considered a normal sale and be taxed at 8% ITP Transfer Tax.
% ITP tax
3 Couples have a joint property. 1 Couple sells their 33,33% on a 50-50 base to the other 2 couples. Both remaining couples pay 8% over their bought share because the property stays in co-ownership.
2 Couples have a property and 1 couple sells to the other couple that is married in separation of goods. They pay 8% ITP tax because the tax office sees this married couple as 2 parties.
3 Brothers inherit a property and 1 sells his part to 1 brother that then owns 66,66%. The buyer pays 8% ITP because there still is a co-ownership of the property.
1.5% AJD tax
A married couple gets divorced or 2 non-registered partners end their relationship. One sells to the other, so there is no co-ownership anymore and the remaining owner pays 1.5% AJD over the bought 50% of the property.
2 Couples have a property and 1 couple sells to the other couple that ismarried in joint assets. They pay 1,5% AJD tax because the tax office sees them as 1 party.
3 Brothers inherit a property and 2 sell their part to 1 brother that then owns 100%. The buyer pays 1.5% AJD over the bought share of 66,66% because there still is no co-ownership anymore.
The owner/buyer now pays less tax
Since 9 October 2018, thanks to a Judgment of the Spanish Supreme Court, the tax cost assessed for termination of co-ownership has been significantly reduced. Up to that date –incomprehensibly– the tax of 1.5% was paid on the entire value of the property, even if, for instance, the share transferred was just 50% of the property. However, with this judgment, a new approach is established, in which tax will only be paid according to the value of the share effectively being transferred, i.e. only on the price to be paid to the seller, thereby avoiding the extra cost that this type of transfer entailed when tax was paid for 100% of the property value, even if the share acquired was just 30%.
Possibility to claim previous payments
Likewise, this change in taxation through the aforementioned judgment can have positive consequences on Deeds of Co-Ownership Termination executed within the last four years. Owners who were already joint owners of a propertyand acquired the rest by paying the price and paying 1.5% tax on the total property value can file a refund claim for undue payments before the corresponding Tax Office. The tax office of the Andalusia Council is the oficina liquidadora.
They can claim a refund of the 1.5% paid for the share of the property they did not acquire, as they already owned that share. If they purchased 30% of the property two years ago and had to pay 1.5% of the total property value, they can claim a refund of the 1.5% paid for the 70% of the property they already owned when they purchased the remaining 30%.
Important: You can only claim back any tax paid within the four years prior to the date of filing the claim for undue payments, as this is the maximum time period to file a claim in accordance with Spanish tax law. I.e. the submission date of the claim cannot be later than four years after the due date of this tax, which is 30 days after the execution of the Deed of Co-Ownership Termination.
Renovating house in Andalusia: tips & save on Capital Gain Tax
One of the first things many people do when buying a property is renovate it.
The expenses from the renovation and improvement of a property can reduce the tax on capital gains in the event that it is evidenced in the future sale of the property. It is important to clarify that repair or preservation costs for the property are not deductible. Deductions only apply to renovations or improvements that increase the value of the property compared to before they were made.
The cost of improvements would be added to the price paid in the sale, resulting in lower capital gains due to the difference between the price to transfer the property and the purchase price, which means less tax would be paid to the Tax Agency. This will be so provided that such renovation and improvement works can be evidenced so that the Tax Agency can accept them. Below, you will find what I consider to be the most important aspects to be able to prove the works carried out for tax purposes.
Having an architect draft a project and oversee the execution of the works is not a minor issue. If the works to be carried out are of a certain scale, it is always best to have a professional perform follow-up and control since he or she would be liable if something goes wrong. Likewise, having carried out the works with a technical project and a final works certificate can be used to evidence the improvements made in be property before the Tax Agency.
If you are going to renovate a property, it is always necessary to get a building permit for both major and minor works. It is true that this is often not requested to save money, for instance when renovating the inside of a home or a room, as there are less chance you will be found out.
Having a building permit will help you on three important aspects:
To evidence the lawfulness of the works –provided that it complies with the permit granted–. Likewise, it is important for you to know that, if there is an accident at the building site, not having a permit may entail consequences of criminal liability for the owner.
When it comes to works where the distribution of the property will change, the constructed area will be enlarged or a new home will be built, the building permit –among other documents, such as the final works certificate and the permit for initial occupation– will be necessary to register this new construction in the Property Register.
When selling a home with profit, the building permit will serve to prove to the Tax Agency that improvements were made so as to request that these are taken into account as part of the purchase price of the home.
Having a building permit is more important in terms of urban-planning and criminal law than in terms of taxes.
It is very important to sign a contract for the works to be carried out with the builder. The construction contract will mainly evidence which is the construction company that performs the works, the type of works to be carried out, their estimated cost and the location where they will take place.
INVOICES AND PROOF OF PAYMENT
Without a doubt, in terms of taxation, this is the most important requirement for the Treasury to recognise this improvement or renovation.
We often find homeowners who have spent a lot of money on improving their properties but who have no invoices issued by the builder or proof of payment for these works. It is essential to prove to the Tax Agency that these amounts have been paid by bank transfer or personal cheques made out to the construction company. If you have no way to prove these payments, it will be impossible for you to include these improvements in the purchase price of the property. You must always request an invoice and keep proof of payment.
The costs of the improvements will be added to the purchase price because of which you will pay less Capital Gain tax. The Capital Gain tax of this moment is 19% over the profit between the purchase and sales price minus the deductions.
WORKS WITHOUT A PERMIT THAT CANNOT BE LEGALIZED
It is possible that, for the works you intend to carry out in your home, it is not possible to obtain a building permit, for instance in works to enlarge a home in non-urban land –rural land–, increasing the surface area beyond the development potential –such as when enclosing a balcony– or building to a height higher than that allowed. The first thing you should take into account is that, as the owner, you will assume the legal liability that may arise if legal proceedings are brought in connection with these works without a permit.
If you will be carrying out such works, it is important for you to sign a construction contract with the builder, for you to obtain an invoice for each payment and for payments to be made by bank transfer or cheque. Even if you do not have a permit, it would be possible for these improvements to be taken into account when selling the property.
The Tax Agency cannot reject improvement works for not having a building permit –inspecting urban planning law is outside their jurisdiction–, for which reason it is important for you to be able to evidence the works that were effectively carried out, what their cost was and submit payment documents.
In these cases, it would not be a bad idea to have a technician draw up some type of report –not a project– explaining how the property was before and the works that have been performed, providing photographs and documentation from the owner. This is an additional document that can be used to prove improvement works.
NEW CONSTRUCTION DEED
The New Construction Deed is a document signed before a Notary Public to register a building in the Property Register in Spain. Even when the construction does not have a building permit, it is possible for it to access the Property Register in Spain –which does not mean it is legal– provided that a series of requirements are met.
If you have built a pool, garage, storeroom, etc. in Andalusia without a licence, it is possible for you to get an architect to issue a certificate of age six years after completion, to evidence the new construction and its age. This certificate can be used to sign a Deed of Declaration of New Construction before a Notary Public and register the construction in the Property Register. In some cases, it would not be possible to register it in the Register, such as when the land is especially protected.
VALUE OF THE CONSTRUCTION DECLARED IN THE DEED
The value of New Construction assigned in the Deed cannot in itself be used to prove to the Treasury how much was spent on the property at the moment of selling.
For instance, if you declare, in the Deed, that you have spent 50,000 euros on the pool and garage you built, unless you have proof of payment and invoices from the construction company, the Treasury will reject this expense. This is so because what you do before the notary is nothing more than a statement, which means that the Notary does not check if you really spent that amount or if it was more or less –and isn't required to do so–.
In my opinion, if you are going to do a Declaration of New Construction for works without a licence, you should include a copy of the invoices and/or proof of payment to the constructor in the Deed, as this would evidence the value you declared and make it easier for the Treasury to accept it when selling the property.
Lastly, if you are thinking about doing any work on your property, I wish you all the luck in the world and, most of all, lots of patience; I almost ran out of it myself when I renovated mine...
On 1 January 2018, a new reform of Inheritance Tax entered into force in Andalusia, the main change of which was to raise the tax-exempt amount to one million euros. This new reform changes the reform introduced a year ago, which we explained in our post of November 2016.
Which heirs would be exempt from Inheritance Tax?
Heirs that meet each one of the following requirements would be exempt:
For the heir to be included in groups I and II as established in the regulation governing this tax, the heir needs to be the spouse, child, grandchild or parent of the deceased
For the value of the estate to be inherited per heir does not exceed one million euros
For the pre-existing assets of the heir to be less than one million euros
For the heir to be a citizen of a Member State of the European Union or, if they are citizen from outside the European Union, both the deceased and the heir must reside in Andalusia
What happens with other family members who inherit?
All other heirs, such as siblings, nephews, nieces, uncles, aunts and cousins of the deceased are included in groups III and IV of the Inheritance Tax and will continue to pay the same amounts.
In other words, these heirs will pay inheritance tax from the first euro they inherit except for heirs in group III, who are able to deduct an amount of 7,993.46 euros. This means, for example, that if John leaves his nephew his Nerja property valued at 240,000 euros as inheritance, his nephew will have to pay about 63,000 euros in Inheritance Tax.
What happens if you inherit from your best friend?
You would be included in group IV of this regulation. This means that if John, instead of leaving the 240,000-euro property to his nephew leaves it to his best friend, he or she will have to pay about 80,000 euros in Inheritance Tax.
Every year, the Regional Government of Andalusia publishes a regulation that establishes certain coefficients to update the values of urban properties located in Andalusia. These coefficients are applied to the cadastral value of the property; this you can find in your Property Tax receipts. The result of applying these coefficients to the cadastral value is what we call the minimum taxable value.
The regulation explained above deals with the minimum taxable value of urban property but, in the case of rural property, this isn´t applicable. Therefore it is necessary to obtain a valuation from the technicians of the Regional Government of Andalusia to calculate the minimum taxable value. However, the Regional Government of Andalusia in the province of Malaga uses the coefficients published every year by the College of Architects of Malaga to calculate the value of rural properties.
Regarding the means used by the administration to calculate the minimum taxable value of properties in Andalusia –as well as other Autonomous Communities–, there is much controversy in general and there is the possibility to challenge those values in the event that the person liable to pay the tax deems them excessive or not adjusted to reality. This topic is complex enough to be covered in a whole new article.
UNMARRIED OR UNREGISTERED COUPLES IN ANDALUSIA
Who are we talking about?
In the event that a couple is not married –either in their country of origin or in Spain–, if one of them dies and leaves the other member of the couple as an heir, for the purposes of Inheritance Tax this person would be considered to be in group IV. In other words, in this case the partner is considered to be just a friend putting the person in the group with the highest rate of Inheritance Tax.
What happens to common-law partners registerd in Andalucia?
In Andalusia, couples registered in the Registry of Common-Law Partners of Andalusia are equivalent to married couples for the purposes of Inheritance Tax, for which reason they would benefit from the deductions for spouses explained above.
What happens to common-law partners registered in another Member State of the European Union?
In this case, the Regional Government of Andalusia does not recognise such registration for the purpose of Inheritance Tax, for which reason those couples would pay tax as though they had received inheritance from a friend, leaving them in the group taxed at the highest rate.
If John leaves his partner Mark 50% of the property they both purchased in Almuñecar in 2005 and if the fiscal value of that 50% is 120,000 euros, Mark, the heir, would have to pay about 30,000 euros in Inheritance Tax for inheriting 50% of that property.
If John and Mark had been married or registered in the registry of common-law partners of Andalusia, Mark would not pay a single euro for inheriting 50% of the property from John.
What should be done in this case?
If you have property in Spain with your partner and you would like him or her to inherit your part and you are unmarried, we advise that you get married (either in Spain or in your country of origin) so that you can benefit from Inheritance Tax reductions. Those who don´t want to get married, can register themselves in the Registry of Common-Law Partners of Andalusia (Registro de Pareja de Hecho) and then the status would be equivalent to that of a married couple.
Property owners who are not citizens of a Member State of the European Union
In this case, heirs may not benefit from reductions for spouses, children, grandchildren and parents of the deceased, so they would pay Inheritance Tax in the event that they inherit. They can only avoid this if both the deceased and the heir are resident in Andalusia.
Lately, in the purchase of rural homes, one of the most important points discussed between buyers and sellers is the procedure “Asimilado Fuera de Ordenación”, –DAFO or SAFO–. What it is, what its consequences are, who does it, who assumes the cost, etc.
Basic rules to buy in the countryside in Andalusia
Before talking about this procedure, and based on my experience with clients looking for a home in the countryside, it is necessary to mention that, in non-development land in Andalusia –rural land–, it is not possible:
To build homes, unless the intention is to engage in agricultural or livestock-farming activities in a professional capacity on the parcel.
Existing buildings may not be expandedand/or remodelled, both inside and outside. People have to purchase what is already built and no changes are legally allowed.
It is permitted to build with the intention to operate rural accommodation or a bed & breakfast, but it is necessary to carry out a preliminary operational project – called in Proyecto de Actuación -, that the Government of Andalusia must approve. This procedure can take over 6 months and it is difficult to obtain a positive response from the Regional Government.
It is necessary to take into account that most homes currently sold in the Andalusian countryside are illegal or irregular, i.e. if the authorities had done their work, they should not have allowed construction and, therefore, they should not exist.
The case is that, for most buildings, it is not possible to start any penalty procedures against buildings built without a licence or with an illegal licence on non-development land due to the time elapsed.
This means that legal responsibility is time-barred since over six years have elapsed since the end of construction. When we refer to non-development land with any special protection, the period of six years does not apply.
What buildings can and cannot be constructed in the countryside
In non-development land, a construction licence cannot be granted to remodel or rebuild. For instance, in the event of a fire when the home would be completely destroyed, it´s not allowed be rebuilt.
It is possible to grant a licence for small repairs or modifications necessary for the habitability and safety of the home, such as, for instance, replacing part of the roof or a wall that has been damaged or has collapsed.
Why was DAFO/SAFO created?
Because of the above, the Government of Andalusia approved regulations in 2012 with the idea to regularise, not legalise, thousands of homes built on non-development land –rural land–, in breach of urban-planning regulations. Since 2012, City Councils have started to create internal regulations to govern this procedure.
Speaking colloquially, with the resolution of Assimilated out of Ordination – Asimilado Fuera de Ordenación -, the goal is to have a record with a specific date of what has been built on that property –both inside and outside each building–, how many years have elapsed since construction and to certify that the home can continue to exist without penalties in the future, even though it will not be possible to expand it and/or remodel it or to build new structures.
This is not a legalisation because the home is left outside urban regulations –as it was built illegally– but it is a regularisation as the City Council itself certifies this legal situation and confirms in writing that it will not be possible for this home to be subject to a penalty due to the time elapsed.
The legal situation of a home in non-development land does not change after receiving the resolution of DAFO/SAFO from City Hall, i.e. the home will continue to be illegal as it was built on land where construction is not allowed but, since the time limit established by law to issue a penalty for this infringement has elapsed, this procedure against the owner cannot be started due to this situation. With or without a DAFO certificate, the legal situation remains the same.
In this procedure, it is necessary to have a project by an architect, to pay a fee on the value of the building on the date it was built, which may range from 2.5% to 4.5% depending on the City Council where the property is located, and the City Council will also verify the water and electricity supply as well as the need for a septic tank so that the home can comply with regulations.
It will actually be the architect paid by the owner who will inform, in his or her project, everything necessary for the home to be eligible for a DAFO certificate. Once the project has been submitted, the architect from the City Council will visit the property to inspectit and verify whether it complies with the requirements for a DAFO certificate.
Once this procedure is completed, which may take between 4 and 6 months, the City Council will issue a resolution certifying Assimilated out of Ordination – Asimilado Fuera de Ordenación -, from Regulation for that home and all structures built on the plot.
Is DAFO mandatory for the sale of a home?
To buy or sell a property, holding a DAFO/SAFO certificate is not a legal requirement. That being said: is obtaining a DAFO/SAFO certificate for a property good or bad?
In favour of the DAFO certificate, we can mention that buyers will have the certainty that what has been built already cannot be subject to a penalty and/or demolished because it is accredited in writing that legal responsibility is time-barred, with the certificate from the City Council granting the DAFO certificate. Likewise, it will provide certainty that the City Council will not require you to obtain a DAFO/SAFO certificate for the home in the future, as the procedure was already completed at the time of purchase.
It should be taken into account that, currently, nearly no City Council offers any information in writing regarding a property built on non-development land unless it holds a DAFO certificate or processes it.
This means that, if you go to get something in writing, they tell you that you certainly can but you first need to process the DAFO certificate for your home. This means that, if you do not want to obtain a DAFO certificate for any reason, it will be very difficult for buyers or their lawyers to obtain information in writing about the property.
The downside of having the DAFO is that, if there are any structures or remodelling –inside or outside– completed within the last six years or if the land on which the property is located is subject to any type of protection (and it can´t be proven that the buildings are old enough), applying for this procedure can only cause problems to the owner as the City Council will be required to initiate penalty procedures.
Likewise, if the new owner is thinking about remodelling after buying the home –ignoring the advice of a good lawyer–, the City Council will already be perfectly aware of what had been built before and it will be easier for them to prove that the structure has been remodelled or some variation has taken place.
It is also necessary to take into account that it may be possible for a property to obtain a DAFO certificate in 2016 and remodelling or expansion of that home to take place in 2017. What I mean with this is that complete certainty in this sense can never be achieved.
Current status of the DAFO certificate
It is true that the processing of this certificate is starting to become common at City Councils because they have also realised that it´s tax payment is an important source of income.
Many City Councils have an unwritten rule to start an application automatically when they receive or someone requests any type of information and/or documentation about a property on rural land, so we can say the owner would be obliged to make the DAFO.
In the situation mentioned above, many buyers want to prevent having to pay for the cost of the procedure themselves, which has resulted in an increasing number of buyers requiring the seller to process it and pay for it.
It is also true that, in some sale transactions where a DAFO certificate is not desired, a reduction in the sale price is usually agreed with the seller and the new owner will decide whether to apply for it in the future.
Is possible to get a mortgage in a property with DAFO?
Another issue that some clients ask about, is whether it is possible to grant a mortgage for a property with a DAFO certificate.
On this matter, the reality of the property market goes beyond the legal limitations in force since 2009 as, even though it is not theoretically possible to grant a mortgage for buildings or structures exempt from regulations, the reality is that there are banking entities that do grant mortgages for properties out of ordination or assimilated out of ordination, i.e. rural properties.
In my opinion, if there is money to be made, banks will not stop granting mortgages for properties of this type -with or without DAFO- regardless of what the Decree of 2009 says. Obviously, mortgages approved for these properties usually offer a lower loan amount and not all banks offer mortgages on rural land.
Buying and selling homes in rural land
When buying and selling homes in non-development land, for them to be able to be included in the property market, with or without a DAFO certificate, there are no limitations or restrictions. This means that most of these properties are registered in the Property Registry and in the Cadastre and have already been sold or bought on different occasions even though few yet hold a DAFO certificate.
Currently, there continues to be an important portfolio of potential buyers interested in properties in the countryside.
The important thing, when someone is looking to buy a property on rural land, is for buyers to know what they are buying, be aware of the legal limitations of properties on rural land, and receive specific legal information about the property, with or without a DAFO certificate. This will enable them to make a decision with full awareness of the legal status of the property.
Lastly, it's not that we're trying to promote our services –well, maybe a little–, but in the purchase of a home, especially for homes like these, having a lawyer is never a bad idea as his or her fee will cost very little in comparison to the purchase price and can save you from many headaches or costly problems in the future.
If you are a non-resident in Spain and own a property there, you are liable to Spanish Income Tax for Non-Residents payment (Spanish IRNR). This issue was already considered in former articles on our website in November 2010 and October 2013:
When a property is owned by a married couple or several persons, each of them becomes an independent taxpayer, so that they should file tax returns separately according to the ownership interest they have on this property.
Depending on the property final use, the income subject to tax payment may be distinguished between:
1.- INCOME FROM LEASED PROPERTY: when the property is leased, the income to be declared will be the whole amount received, excluding Spanish VAT.
2.- TAXABLE INCOME OF URBAN REAL PROPERTY FOR PERSONAL USE: asthis is the most common case, it will be deeply analyzed below:
The income to be declared is the amount resulting from the application of the following percentages to the property cadastral value:
Generally, 2 per 100.
In the event of property with a revised or modified cadastral value, 1.1 per 100 from the 1st of January 1994.
Once these percentages are applied, the final payable amount should be calculated for each of the owners pursuant to how long they have been owners of the property during the year.
Tax form 210 is used to pay this tax and it can be downloaded from the official web of the Spanish Tax Authority (A.E.A.T.), including the steps in English to fill it in. It is worthy mentioning that it is not easy to understand them.
Our office is currently dealing with the IRNR season 2012. The deadline to file this tax return expires on the 31st of December of this year. Although if you want to place the payment as a direct debit in your bank account the form must be filled before the 22nd of December. Thus, if you have owned a property in 2012, you should contact your tax advisor to fulfill this tax liability as soon as possible.
If you need our advice, we will be pleased to help you.
Author: Francisco Delgado Montilla, C&D Solicitors (lawyers)
Torrox-Costa (Malaga/Costa del Sol/Andalucia)
In recent years, during the course of our work, we have met many foreign customers interested in living in Andalusia Spain, preferably in coastal areas and having their own rural hotel, hostel or Bed & Breakfast (B&B). Many of these customers consider this option due to their attraction to Andalusian climate and culture, with the dream of changing their lives and enjoying life in an extremely charming country.
Taking over a business or starting up yourself?
The main option that customers interested in opening a B&B in Andalusiacontemplate is to buy a business already in operation, with fewer people seeking to buy property to build the business from the ground up.
If you look on the Internet, there are quite a few ads for the sale of rural hotels and B&B´s. Many of these ads offer the method of transferring a business that is already operating, along with the rental or sale of the property where the activity takes place.
During the transfer of the business, its assets, such as customer portfolio, fixed assets, provisions, etc. are valued. This serves the purpose of establishing a transfer price for the business, which must be paid by the new owner interested in continuing the operations.
What is a reasonable ´traspaso´ price for buying an existing B&B?
The valuation of the business (traspaso) is usually based on its income during recent years and on net profit, as well as the value of its fixed assets, i.e., all remodelling, improvements and provisions acquired for said business. Obviously, licences and legal permits required for engaging in such an activity are a key part of the transfer value.
In the transfer method, the rental of the property is usually established, most often with a lease option, or the property may be sold directly to the new owner. It seems more reasonable to choose rental with a lease option for the property during the first years of the business as if, for any reason, the business is not what was expected and the profits or workload are not worth the effort, we would lose the amount paid for the transfer but would not have to remain the owners of a property we acquired for a business we no longer wish to operate.
As you may infer, the operational cost of a B&B may be high enough to justify carrying out, prior to its purchase, a due diligence process about it for the purpose of determining whether the asking price (traspaso) is reasonable. I consider three lines of action very important in this regard:
VALUE OF THE BUSINESS.
You should hire an economist, expert, or tax consultant to study the accounting of the business during recent years, including all tax documentation, as well as the accounts submitted at the Commercial Register. With this report, an objective professional, knowledgeable on the matter, will take a snapshot of the financial situation of the business.
In order to check whether the B&B you are seeking to purchase has all the necessary business licences, it is important for an architect to visit city hall and check whether the business is in order and complies with all the legal requirements for its operation. The architect will visit the property to verify that the infrastructure and installations are those legally required for this business and will issue a report of his or her findings.
PURCHASE OF THE BUSINESS.
Once you have decided to acquire the business, when preparing all the documentation for the transfer and rental/purchase of the property, it is important for an attorney to intervene so as to guarantee all the obligations of the parties, establish the payment method and protect the buyer from potential problems during its execution. If the property where the business will operate is located in a rural area, as is the case for many of these hotels, the intervention of an attorney is even more important, as these areas are subject to a series of legal limitations that must be reviewed.
Professional advice for your investment will pay back
It is obvious that this complete due diligence process for the B&B makes buying the business more expensive as you may spend a significant amount of money on these professionals and you may end up not buying the business. However, you must consider that spending thousands and thousands of euros, often from your savings or a bank loan, on something, before verifying its value, can lead to a very difficult financial and personal situation.
It is also a good idea to get informed about tourism in that area and expectations for the future. There are statistical data about the occupancy rates for rural accommodation that may help you. For instance, the Institute of National Statistics (INE) periodically publishes detailed occupancy surveys for rural tourism and any other type of accommodation and all this information, in detail and broken down by regions, can be accessed from its website.
New business changes after recession in Andalusia
For instance, on the 1 September, www.escapadarural.com published that rural tourism in Andalusia reached an occupancy rate of 36% in July and August. At the provincial level, 49% of businesses in Malaga were fully booked.
Compensation demolition Andalucian home owners in good faith
Last 24 June, the Senate approved an amendment that provides greater protection to third-party homeowners acting in good faith in administrative proceedings. This amendment was approved with the favourable votes of the main political groups and introduces a third paragraph in article 108 of Law 29/1998, of 13 July, which regulates contentious-administrative proceedings in Spain.
This new third paragraph provides that: “The Judge or Court, in the cases where, in addition to declaring the construction of a property to violate regulations, it issues a reasoned order to demolish the works and restore the physical reality altered, shall require, as a condition prior to demolition and unless a situation of imminent danger prevents it, the provision of sufficient guarantees to respond to payment of compensation due to third parties acting in good faith.”
In other words, with this paragraph, it is guaranteed that the judge ordering the demolition of a building in administrative proceedings must ensure, prior to the demolition, that third parties acting in good faith that will be damaged by the demolition of their homes will receive compensation. This means that, what this new subsection regulates is that a home may not be demolished if the homeowner cannot be compensated in advance, as it is understood that the homeowner has no reason to suffer these damages when the party responsible for the unlawful act committed by building the home was someone else.
The approval of this new subsection equates the handling of the enforcement of judgments on buildings, which entail their demolition, in administrative and criminal proceedings since, as we explained in our article from March, the criminal code has also been amended in this sense.
The amendment in the administrative field, which gives greater protection to third parties acting in good faith, is even more logical, from a legal standpoint, than the one in the criminal field and, needless to say, represents the correction of a regulatory mistake that resulted in great injustice.
It should be noted that, in contentious-administrative proceedings, courts examine building licences granted by the City and which have been unlawfully granted due to being contrary to the plan of the municipality.
Before this amendment, when a judgment nullifying a licence of this type was handed down, usually, one of the consequences of this nullification was the obligation to demolish the works completed under the licence declared null, without compensating homeowners acting in good faith at the time of demolition in these proceedings. The only option for these homeowners was to start different judicial proceedings either against the City or against the seller of the property, which could take years to be solved and provided no certainty of recovering the investment made. We can thus prevent cases as regrettable as that of Mr and Mrs Prior.
We can affirm that, in judicial proceedings related to buildings, both in the administrative and criminal fields, thanks to these legislative amendments, homeowners who purchase or will purchase a property in good faith, not being responsible for any unlawful act, will enjoy greater protection of their assets and property rights.
Part of what we denounced and explained in an article published in 2013 has been addressed by these changes, even though there is still some way to go and more legislative changes are expected.
This legislative amendment, as the one introduced in the criminal code in March, has been made possible thanks to the work of several associations of people affected from many different areas in Spain, including: AUAN, AMA and SOHA. The continued and persistent work of these associations, their representatives and the lawyers involved have made it possible for all homeowners in Spain who are third parties acting in good faith to enjoy greater legal certainty.
Yesterday Thursday 26 March, the Lower House of the Spanish Parliament ratified the amendment to article 319 of the Spanish Penal Code, approved by the Senate last 12 March. A paragraph has been added to section 3, which reads: “In any event, the Judges or Courts of Law may issue a reasoned order to demolish the works and restore the physical reality altered at the expense of the principal thereof, without prejudice to the compensations due to third parties in good faith, and, assessing the circumstances and after hearing the competent government body, shall temporarily subject the demolition to the constitution of guarantees that ensure their payment. In any case, the seizure of the earnings from the offence shall be available, regardless of the transformations that these may have undergone”.
This new regulation will be into force next 1st July.
Until now, in proceedings regarding an Offence against Town and Country Planning, the judgment ordered the demolition of what had been built illegally and compensation was set by way of civil liability for the developer, in favour of buyers acting in good faith. The problem is that, in most of these cases, collecting said compensation was very complicated since the developer was either insolvent or had disappeared. However, enforcement of the demolition was not stopped, for which reason we could find ourselves before an unfortunate scenario where a buyer acting in good faith and recognised in a judgment could have his home demolished without being effectively compensated.
From now on, in criminal proceedings for Offences against Town and Country Planning, the judge may stop the demolition of the home until due compensation to the third-party acting in good faith is guaranteed.
From the literal wording of the amendment introduced, it seems that the judge will be the one who, after assessing the specific situation in each case, will stop said demolition, for which reason I understand that it will be an essential requirement to prove that the buyer is really a third party acting in good faith.
Likewise, it seems interesting that, in assessing whether to stop the demolition, it is required for the competent Government Body, which I take to be the City Hall, to be heard in the proceedings. I suppose that, in these cases, the City Hall can provide relevant details leading to stopping the demolition. Also, since the City Hall is the one responsible for executing the demolition, it may argue on the suitability of stopping it until it can ensure compensation for the third party acting in good faith.
Lastly, this amendment refers to stopping the demolition temporarily, i.e., a specific period of time is not established but, in any case, it should not perpetuate over time. However, the concept of “temporarily” is very wide and it may be interpreted as sufficient time to guarantee compensation to buyers acting in good faith.
I can say, with full knowledge, that this amendment of the Penal Code has been possible mainly thanks to the work of two associations in Andalusia that have been working on protecting buyers acting in good faith for several years: SOHA and AUAN, especially noting the great work done by Gerardo Vázquez, a colleague of mine, attorney and legal adviser at AUAN. The efforts of these organisations and their mobilisation have made this amendment possible.
The aforementioned organisations, along with many others that have been created, are justified by the great problem faced in Andalusia, which has 300,000 homes built in non-developable land (NDL). On the Andalusian coast, due to foreign residential tourism, many buyers are foreigners and this has led these owners, facing the legal problems with these homes, to move to defend their interests, to strengthen and to tell authorities about the existing situation.
The main problem, at least in Andalusia, has been the complete inactivity and inefficiency of Urban Planning in Andalusia, which has led to a failure in regulating non-developable land in Andalusia and to the existence of many homes built on non-developable land.
Regulations with very fixed and strict criteria governing construction on non-developable land were approved. However, Autonomic and Local Governments have completely neglected to provide the necessary oversight to enforce these regulations.
From the beginning of the years of the housing bubble, the competent government bodies have shown no predisposition to initiate and solve disciplinary procedures against offenders, with all the legal consequences that this entails, such as demolishing what has been illegally built. The governing party in City Hall should have assumed the “feared” political price that these unpopular measures may have entailed.
Most of these buildings have everything: registered deed, pay IBI (Property Tax), are registered in the Property Register, have electricity and water, and have paid autonomic taxes such as ITP (Tax on Asset Transfer) and AJD (Stamp Duty).
Many of the properties have changed owners, meaning that the person responsible for construction is no longer the owner of the home. When these properties enter legal proceedings, third parties acting in good faith appear, affected by this situation that the Local and Autonomic Governments, with full knowledge, have allowed due to their complete inaction in the field of Urban Planning.
The regulations provided in the Urban Planning Law of Andalusia (LOUA) to govern the very strict use of non-developable land were based on environmental protection and on maintaining the rural value of a large portion of the Andalusian territory so as to preserve this environment and its values.
However, its lack of application due to a lack of real and effective control of what was being done on non-developable land has given rise to the failure of regulations on the use of non-developable land provided in the LOUA.
In reality, this has resulted in large rural areas becoming full of unregulated buildings, achieving the opposite effect, as the lack of protection of the rural environment is clear in these cases.
In practice, a total lack of protection of rural land has occurred in some areas under greater urban pressure, where, without controls or any type of criteria regarding what was being built at the architectural level, construction has been allowed, of palaces, warehouses, terraced houses, one-storey homes, towers and everything in between. There has also been no control of the necessary infrastructure or facilities for these homes to be used: discharge of sewage, illegal wells to obtain water, etc. Furthermore, many of these homes did not pay local building taxes, as the majority were not eligible to obtain a licence under the LOUA.
However, as we explained in a previous post, it should be noted that, in some cases, the licenses for segregation, building and initial occupancy were indeed granted for some of these homes. The fact that the Government is responsible in these cases is more than obvious and the damages suffered by owners, who purchased the homes in good faith, are completely reprehensible.
This situation of deregulation of non-developable land has an undesirable effect on citizens, as there is a feeling that there are citizens who ignore the law and go unpunished and that there are others who are required to comply with it.
If the urban planning disciplinary proceedings had been started quickly and efficiently at the beginning of that frenzied period of real estate development on non-developable land, the message that citizens would have received would have been very clear and many buildings would not have been built. There would still be homes on non-developable land but the magnitude of the problem would be quite different.
Faced with this situation, the legal response to solve this problem should be consistent with the reality that exists and that has been tolerated by the Government itself for so many years. This is why the necessary legislative reforms in this area must be tackled rigorously and without propaganda messages, avoiding a focus on the debate on “amnesty for everyone” or “offenders must pay” because the situation is much more complex.
In the administrative field, the majority of these homes should be regularised as, in many cases, penalties for using land illegally would have expired and many of the developers-builders are not the current owners.
In the future, there should be a debate regarding the effectiveness and efficiency of Urban Planning under current regulations, as well as regarding whether the regulation of non-developable land in the LOUA is adequate for the purpose it intends to fulfil.