Ways to tackle Spanish property transfer tax

TRANSFER tax in Spain, and more specifically in Andalucia, has been upped consistently over the last few years.

Up until December 31 2011, transfer tax on resale property was capped at 7% (6% some years before) but, as if the worldwide housing slump had not reached this region, the Socialist government chose to increase it to 8%, 9% and then 10% – applied on property purchase price brackets of 0-400k, 400k-700k and 700k and above.

Madrid, on the contrary, thought that it was wiser to bring it down by 1%, from 7% to 6% (a little incentive to make up for lack of good weather it seems).

But going back to Andalucia, not all transactions are taxed at rates close to double digits. Property professionals that buy resale property and sell it within five years can benefit from a reduced 2% rate.

So what are the requirements that have to be met to get this deal?

That the property is for living accommodation purposes (commercial and land are excluded).
That the unit(s) remain(s) registered in the same form (i.e. buying a plot with a derelict property to rebuild and divide up into several units will not qualify).

That the property is sold within five years of purchase, and the sale is not subject to VAT.
When completing the purchase transaction at the notary, the buyer officially confirms that he is a property professional and the asset will be categorized as a ‘current asset’ (i.e. reasonably expected to be sold through the normal operations of business), that he wishes to use the tax reduction and that he intends to sell within five years.

Does this scheme make sense financially?

Three points to be considered when opting to go down this route:
1. The pretty stiff closing costs in Spain if you add buying and selling costs: these can reach 20% if one factors in transfer taxes, legal costs, agency fees and capital gains tax. By taking up this option, anything between 6% and 8% can be saved.

2. The ‘running costs’ of being a property professional: by registering with the tax office, and social security, one has fixed minimum costs of €280/month plus €50/month in legal/accountancy fees – the lowest the market has to offer- roughly €4,000 p.a. (if we multiply it by five years, that’s €20,000).

3. The ‘Five Year Rule for Buying a House’, which is the average time people expect to stay in a particular property, according to experts.