Private client | Advising on retiring to Spain

It is not always the fulfillment of a lifelong dream to live in a sunny climate by the sea sipping piña coladas and eating seafood that leads people to move to the Spanish coast when they retire. In many cases Spain is considered to be the most affordable option, in terms of property prices, heating bills, grocery shopping and things to do in the great outdoors at absolutely no cost whatsoever.

In any event, the main issues to be considered by all of those who opt to emigrate to Spain tend to relate to the cost of property ownership, whether relating to purchase, maintenance, or ongoing

tax liability.

Perhaps the most expensive element of retiring to Spain is the purchase tax payable on real estate. The nature of the tax payable differs according to whether or not the property has ever been sold in the retail market. In the case of resale properties, the tax payable is called “impuesto sobre transmisiones patrimoniales” and is paid to the tax authority in the autonomous region in which the property is situated.

There are 17 autonomous regions in Spain. Those most likely to be relevant to UK nationals are Catalonia in the northeast, the Balearic Islands, the Canary Islands, the Valencia region in the east, the Murcia region in the southeast and Andalusia in the south. If the property is being sold for the first time, then the tax payable is a value added tax (now ten per cent), payable to central government. In addition, a stamp duty is payable to the respective autonomous community of between 1 per cent and 1.5 per cent. In the case of a resale, the purchase tax (payable to the respective autonomous community) will be between 6.5 per cent and ten per cent. Hence, depending on the part of the country, and whether or not the property is being sold for the first time, the total tax payable upon purchase can be between 6.5 per cent and 11.5 per cent of the purchase price.

Retirees tend to purchase mortgage free. Some will finance the purchase themselves but then release equity later on, as to which please see further below. In Spain there is a tax of between one per cent and 1.5 per cent payable on the total debt secured by a mortgage, so that the maximum level of secured debt must be set out in the loan document. This is the sum of the principal loan, interest, penalties and costs. All of the above percentages are subject to frequent change in the current economic climate.

In order to complete a property transaction, documentation must be signed before a notary. Many readers will be familiar with the term “escritura”, which means deed in this context. Each document signed before a notary is an “escritura”.
A notary has a public function and does not act for any one party to the transaction, but each notary’s office or “otaría” is a private business and is regulated. The notary will charge a fee, which will be determined by reference not to the amount of time spent, but the nature of the transaction and the number of pages that the “escritura” extends to.
For example, a notary’s fee for the purchase of an apartment in Barcelona can range between 500 and 1,000

e

uros approximately.?
Registration of property?Once purchase tax or stamp duty has been paid, the transaction must be registered on the corresponding property register. In Spain there are one or more property registries for each locality, so that in a small town there may be no more than one, whereas in Madrid there are 42. As a very rough guide the property registry will charge a fee equal to approximately 65 per cent of the notary’s fee. One of the issues that will need to be determined upon purchase is whether the property tax has been paid up to date in relation to the property in question. All Spanish residential and commercial property is subject to a tax equivalent to a council tax or business rate, which is calculated based on a rateable value set out by the local town hall, according to established rules. Liability to property tax arises on 1 January each year, although the tax demand is usually sent out between June and August each year.

The strict position, therefore, is that the seller of the property is liable to the tax, but in practice a purchaser completing a transaction in the first half of the year may agree to prorate the liability to property tax during that year. The year following the purchase the tax demand ought to arrive in the new owner’s name, as the notary will supply the tax authority with details of the sale and that information will be passed to the local town hall. Unpaid property tax is met by an automatic debt recovery procedure not requiring formal court proceedings, resulting in a charge being registered against the property and a forced sale of the asset to recover the debt.

As anywhere else in the developed world, income tax is payable annually by those resident in the jurisdiction. Many UK nationals arrange to have their pensions paid straight into their Spanish bank accounts, whether state or private pensions.
On many occasions new clients have informed me that they have been living in Spain for years not once having paid tax on their UK pension income, despite being registered as non-resident in the UK and tax not being deducted at source here.
Depending upon the amount of pension income being received it may not be necessary for a UK national resident in Spain to make an annual tax declaration. Currently, only those receiving less than 11,200 euros in pension income need not submit an annual tax declaration in Spain.

Many retirees choose apartments or small houses in a development, rather than detached family homes. The reasons are obvious and relate to a sense of community in a foreign country. The level of service charge one pays is determined by the costs of running the community being divided equally between all of the property owners. This is set out in the “escritura” when you purchase and is registered at the property registry. Failure to make payment of the service charge is usually met with a series of demands followed by court proceedings. Whereas owner-occupiers such as retirees are relatively likely to keep up payments, before one purchases it is important to be aware of the degree of indebtedness of other owners, as those who do pay will be subsidising the debtors.
Given that many owners in developments such as these will be foreign residents, it may be that the rate of recovery of the debt is low. This factor alone will contribute significantly to higher service charge payments. It is possible to demand previous years’ accounts and minutes of previous AGMs, to determine the level of cooperation between the owners. A poorly run development may well be the reason for lower prices.

In the event that one wishes to release equity from a Spanish property but does not have sufficient income to afford to pay either capital or interest on an ongoing basis, it is possible to release equity from the property in two ways. These are the “hipoteca inversa” and the “hipoteca de máximo”. In the case of the “hipoteca inversa” (literally a reverse mortgage), there is a requirement that the borrower be at least 65 years old. The mortgage guarantees a loan being a percentage (usually a maximum of approximately 25 per cent) of the value of the property as at the date of the loan agreement. Interest accrues and at the end of each year the total interest accrued is rolled up. The lender must be a Spanish bank or other financial institution regulated in Spain. The borrower may receive the loan in a lump sum, or by way of monthly payments (hence a reverse mortgage as notionally the lender pays the borrower). Upon the death of the borrower the beneficiaries of his or her estate are responsible for the repayment of the loan.

In the case of a “hipoteca de máximo” (literally a maximum mortgage), the mortgage guarantees the equivalent of a credit facility, whereby a maximum permitted credit is established. Typically the same percentage of the value of the property is made available at the outset, for example an amount equal to approximately 25 per cent of the value of the property. The maximum permitted credit is calculated to allow for rolled up interest over the course of the lifetime of the borrower. Clearly the beneficiaries of the estate of the borrower will also be responsible for repaying the loan in that case. The principal differences between the two mechanisms are that in the case of a “hipoteca de máximo” the borrower need not be 65 years old and the lender need not be regulated in Spain in any way. The result is that, for example, British lending institutions are able to use the “hipoteca de máximo” to lend to British nationals in Spain.

Retiring to Spain is not simply a matter of packing your bags and heading off into the sunset. It is prudent to be aware of the potential pitfalls before you embark on your journey, and to seek good quality independent legal advice in relation to your or your client’s specific circumstances.