Archive for purchase process
It is clear that the healthcare crisis caused by the Coronavirus (COVID-19) has had a huge impact on all areas of our daily lives. The state of alarm decreed by the Spanish government, as well as many other governments in foreign countries, has caused movement restrictions and limitations, the closure of the airspace, the paralysis of the business fabric and government agencies, etc. People's everyday lives have been severely affected from a social and economic standpoint.
With this article, we would like to respond, as much as possible, to the doubts and uncertainties of foreign clients buying homes in Spain, as well as their sellers. We are referring to sales between individuals that were already underway with signed contracts but which were 'surprised' by the COVID-19 crisis and the measures adopted by the Spanish government decreeing the state of alarm.
At the end of the article, we will comment briefly on the legal situation of sales of new homes or off-plan sales from developers.
What does Spanish law say on the fulfilment of purchase contracts?
The first thing that must be said emphatically is that, under Spanish law, the clauses agreed in a contract have the force of law and, therefore, the parties are required to fulfil them. In other words, the impossibility of fulfilling what has been agreed in a contract is an exception and is interpreted very restrictively.
The Spanish Supreme Court, when dealing with potential breaches of contract and to avoid the loss of the money paid, has established that the party in breach has to evidence and argue the reasons behind said breach, as well as prove that it did everything possible to perform the contract.
However, even after establishing the impossibility of complying with the contract, if it is possible to amend or adapt it so it can be fulfilled, the parties must seek to modify the contract in that way, to solve the problem arising from the situation caused by the state of alarm and the COVID-19 Corona crisis. In other words, when faced with the potential avoidance of the contract by one of the parties, they must always attempt to reach an agreement to fulfil it.
Which property sales could be affected by the state of alarm?
In my opinion, the conveyance contracts that may be affected are those that required either of the parties to fulfil a requirement or condition agreed in the contract before the execution of the public deed of sale and that condition is affected by these months of paralysis.
Due to the paralysation of activities and movement limitations, it is very possible that some of the requirements established in a conveyance contract cannot be fulfilled, as the estimated time to process or manage these were calculated based on a normal situation, which has not existed since 13 March. As an example, we can mention the following:
Purchase contracts in the state of alarm:
- For the conveyance contract to establish the condition of being granted a building permit or the record for legalisation of a home, such as DAFO in rural homes in Andalusia. As city halls are paralysed or working at minimum levels, it is very possible for these applications not to be processed until the state of alarm is brought to an end.
- For the condition to be obtaining a Spanish mortgage. If the appraiser cannot travel to visit the property or the bank's risk department is not operating, this process will be paralysed, making the average resolution time much longer than initially expected.
- For the date of signing the conveyance contract and recording it as a public deed to coincide with the period of the state of alarm and/or the restrictions on commercial flights, making it impossible for either of the parties to attend the notary office.
- The impossibility to obtain an NIE (foreigner's identification number.), which is necessary to sign a conveyance contract before a notary and pay the corresponding taxes. The processing of these documents is currently suspended. The national police stations in Malaga that we asked don't know when they'll be able to open to accept new NIE applications.
- Either of the parties being admitted into hospital or in quarantine.
What should the seller and buyer do in this situation?
Well, the first thing is to see if the private contract contains any clause that governs these situations since, as I've mentioned, the sales or purchase contract has the force of law and binds the parties. However, in conveyance processes where the deed cannot be signed for reasons arising from the coronavirus crisis, what both parties should do would be to amend the contract and extend it, to give time to the party that needs it in order to complete the sale. In most situations, it is only a matter of time for that circumstance or condition that is currently impossible to fulfil to be fulfilled later on.
Likewise, in the event of inflexibility and the refusal of either of the parties to grant such an extension to the conveyance contract, in most cases there would be no legal grounds to terminate the contract and/or claim damages. As mentioned above, the parties must always attempt to reach an agreement to comply with the contract.
Is it possible for the buyer to terminate the contract due to the COVID-19 crisis?
Withdrawing from a conveyance contract due to a sudden drop in house prices and in the face of an economic crisis is a complex issue. In this case, we are referring to the buyer having to accredit meeting one of the requirements established in case law for terminating purchase contracts, this being that there has been an extraordinary change in the circumstances leading to the execution of said contract.
In other words, the buyer would have to evidence that the current economic crisis, resulting in a deep and prolonged economic recession, could be openly considered an economic phenomenon able to generate a severe disruption or change in the circumstances leading to the execution of said contract.
In Spain, the courts have been rejecting the possibility to terminate a sales or purchase contract based on this circumstance. However, this possibility should not be ruled out and individual factors should be analysed, such as whether the home will be a primary home or a holiday home, if the buyer was in need of mortgage financing, if the financial situation of the buyer has changed significantly, etc.
What is the buyer's situation in the sales process?
With this question, what we want to address is the situation of a buyer who made a decision to purchase a home at a specific price a few months ago, based on an economic situation that is in no way similar to the current one.
Let's imagine Dutch, Belgian, English, Swedish or other foreign people who wanted to invest in property in Malaga or the Costa del Sol, either to obtain a profit or to let it. Clearly, the sales price they agreed was based on the value of that property under the earlier economic situation. For instance, let's imagine a home in the historic centre of Málaga or Nerja, highly sought-after areas with tourist attractions before COVID-19, with great possibilities for letting in the tourist market, which is currently suspended.
Well, as a buyer, in the event that continuing with the purchase of the property would lead to incurring significant levels of debt, the first thing to do would be to analyse two things:
- The amount of money paid to the seller (usually 10% of the purchase price). Whether the buyer is willing to lose that money, essentially due to thinking that it is better to lose the money and not buy the property.
- The content of the purchase contract clauses agreed in terms of what happens when the buyer breaches the purchase contract. This is an important issue because a breach of contract could lead to different legal situations. The usual process is to execute an earnest money contract, which entails losing the money paid to the seller, leading to the termination of the contract, this being the clause that our firm usually agrees in conveyance contracts. However, if this is not properly drafted in the contract, it is possible for the seller to be entitled to require the buyer to comply with the purchase contract and sign the public deed, even if the buyer agreed to lose the earlier money paid. Obviously, this claim from the buyer would have to be addressed in judicial proceedings, which would take years before the parties get a resolution and usually sellers settle for keeping the money paid as a deposit.
What is the seller's situation in the selling process?
For sellers, they are most likely the most interested in completing the sale of the home as, certainly, the price set in the sales / purchase contract signed before COVID-19 will be higher than what they can obtain in the short or medium term. Without a doubt, the current situation will lead to a general drop in house prices, even though no one knows how long this will last.
That said, it is possible for sellers who already have a signed contract and who see that buyers are hesitating to complete the conveyance to be interested in making it easier for buyers to complete the purchase. In other words, in this context, negotiating a lower price so that the seller can sell doesn't seem far-fetched. In the end, the price drop would depend on whether it is very important for the seller to sell right now or they can wait, or whether the money already paid by the buyer is enough compensation for the seller to agree to keep that amount as a penalty instead of negotiating.
What is the situation when purchasing new builds or off-plan homes?
In sales of this type, in terms of the performance of the contract by the buyer, the situation is the same as explained above, in terms of both compliance with the contract and its termination clauses. In my opinion, the buyer's potential doubts would be determined by the progress of the works and the expected completion date of the development, also thinking about the financial solvency of the developer.
If the buyer signed the sales contract over one year ago, when the market was experiencing a good time and prices were rising, it is very likely for the price agreed at that time to be lower than what they could find at the beginning of this year, for instance. On the other hand, if the works are close to completion, there would be little doubt as to whether the developer will complete them, as they would be almost completely sold and few buyers would be thinking about terminating the purchase contract, since they would have already made significant payments on account for their homes. In this case, the scenario for the buyer is safe.
In the case of developments where construction has not yet started but which were already being marketed, with expected completion likely coming in a year or two, the scenario is different. In this case, buyers who are in doubt and recently signed the private contract must assess the price of the property and its completion date, as well as find out the number of homes with signed contracts sold by the developer, in order to make a decision. However, if the private contract has not yet been signed and only a reservation had been agreed with the developer, they can withdraw from it and recover the amount paid. They can also wait longer, as developers are likely to lower prices, depending on how long the crisis lasts.
In terms of the solvency of developers, due to the obligation to guarantee all the amounts paid during construction once the private contract has been signed, the buyer would have complete legal certainty in the event that the developer is unable to complete construction. This situation is in no way similar to the 2008 crisis, where many buyers lost their payments on account.
Individual review situation purchase contracts
However, these sales processes starting prior to the COVID-19 crisis can lead to complex situations that should be analysed individually and always with the advice of a lawyer. This is not the time to make decisions without the appropriate legal knowledge, taking into account that a private conveyance contract has already been singed. Rushing is never a good idea.
Author: Gustavo Calero Monereo, lawyer at C&D Solicitors, (Málaga, Andalusia)
On 9 April, the Andalusia Council approved, through a Decree Law, an amendment of the tax on inheritance and gifts, which, in particular, entails great tax savings in terms of the tax on gifts. This legislative amendment introduced a bonus of 99% of the tax liability due in inheritance and gift tax, that is to say only 1% of what was previously paid would be due.
Needless to say, the Tax on inheritance and gifts is devolved to the different Autonomous Communities that make up Spain so this bonus is the one in force in Andalusia. But, depending on the location of the property or residence of the recipient (for movable assets) –the person receiving the asset–, legislation will be different on the matter of inheritance and gifts.
Example: A father gifts his son 200,000 euros
With the previous legislation, the tax liability on this gift would have been 31,621.21 euros, which meant that the son would have had to pay 31,621.21 euros in taxes after receiving this money from this father. With the new regulation, this tax liability of 31,621.21 euros can benefit from a bonus of 99%, which means that, now, the son would pay a tax of 316.21 euros. Without a doubt, it represents huge tax savings. When money or other moveable property is donated, the applicable regulation for this purpose will be that of the residence of the recipient.
Who can benefit from this bonus on the gift tax?
Those people included in groups I and II established in the regulation governing this tax can benefit. This means that the recipient must be the spouse, child, grandchild or parent of the grantor; the person who gives away the asset.
What other requirements need to be met for gifts in Andalusia?
Besides being included in groups I and II mentioned above, it will be necessary for the donation to be made effective in a Public Deed before a Notary and, if money is gifted, its source must be justified. In case of donating a property, this Deed will be used to inscribe the property in the new name of the new owner in the Land Registry.
What happens with the Capital Gain Tax and Plusvalia?
From the perspective of the tax on gifts, there is no problem with a parent donating a property in Andalusia for the child to apply the 99% bonus and pay a very small amount for the tax on gifts. The problem in the case of properties affects the grantor because, even if the property is gifted, the Tax Agency equates that transfer to the sale of the property –for the Treasury, there is no difference between donating and selling–. For this reason, the grantor must pay Capital Gains Tax calculated on the difference between the original value paid in the purchase of the property and the value of the property when gifted.
It is important to note that if the grantor is a tax resident in Spain, over the age of 65 and gifting their habitual residence, no capital gains tax would be paid for gifting or selling the property.
Lastly, as the city where the property is located also interprets a gift as a sale, it will ask for its piece of the pie in the form of capital gains tax – Plusvalia in Spanish-. This local tax is calculated according to the number of years that the grantor has owned the property, with a maximum of 20 years, and is paid on the increase in value experienced by the plot/land of the property.
What if I value the property at a low price to pay less tax?
You may be tempted to set a very low value for the property gifted and thus pay less Capital Gains tax when it is gifted. This is perfectly understandable but it is very important for this value not to be below the minimum taxable value, which is the taxable value that the Treasury deems properties in Spain to have. That is to say, the value of the property being gifted should not fall below the minimum taxable value to prevent an inspection by the Tax Agency. The minimum tax value in urban properties is based on the cadastre value of the property multiplied by a factor that varies from town to town.
Does this bonus apply to everyone, regardless of whether they are resident in Spain?
As explained in several previous articles, the most recent from March, different judgments have ruled that both residents of the European Union and residents of third countries must be treated the same as residents in Spain for the purposes of the Tax on Inheritance and Gifts. Based on this, anyone who meets the requirements explained in this article can benefit from the 99% bonus in Inheritance and Gift Tax introduced in Andalusia or any other regulation of the relevant Autonomous Community.
Example of a property being gifted
Let's imagine a Swedish homeowner who bought a property in Almuñécar (Granada) for 200,000 euros and decides to gift it to his son who lives in China, with the current minimum taxable value being 300,000 euros. Since the home is in Andalusia, the son-recipient can benefit from the 99% bonus in the tax due and would only have to pay 554.68 euros for the tax on gifts, of the total tax amount of 55,466.81 euros.
Since the father-grantor obtained capital gains of 100,000 euros from the gift, he will have to pay capital gains tax on this 100,000-euro “profit”, which currently stands at 19% of net profit (after certain possible deductions). However, as the owner is 64 years old, resident in Spain and is gifting his habitual residence, we recommend that he waits until he turns 65 to avoid paying capital gains tax. The son will surely understand the reasons.
What happens to taxes where the recipient resides?
Before accepting a gift, it is important for the recipient to get information, from his or her country of residence, regarding which tax will have to be paid on this, if any. Lastly, it should be said that this amendment of the Tax on Gifts in Andalusia means that the construct of gifts may be attractive in situations where a couple wants one of the spouses to own 100% of the property –only for married couples under separation of assets– or if they want to leave the property to their children or grandchildren during their lifetimes. Previously, from the standpoint of tax savings in Andalusia, the only options were to terminate co-ownership or sell the property but now, with this new amendment, in many cases it will be better to gift it as more taxes will be saved on the transfer of the property.
Read more about the subject of selling your house in Andalusia in the video below:
Author: Gustavo Calero Monereo, lawyer at C&D Solicitors Torrox (Málaga, Andalusia)
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 is married 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 AJD tax
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 property and 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.
Author: Gustavo Calero Monereo, lawyer at C&D Solicitors Torrox (Málaga, Andalusia)