Buying a property in Spain
“Doing so requires numerous legal and tax questions to answer,” explained Sabine Plattner, Senior Estate Planner Southern Europe & International at Banque Degroof Petercam Luxembourg.
Real estate in Spain is attracting growing interest from people who live in Luxembourg. The climate, the Mediterranean pace of life, the local culinary delights and so much more are persuading many to buy a second home there, or even to consider moving residence. "Modern Spain offers a lot to expatriates: specially designed services, a high-quality health system and a diversified schooling offering,” explained Ms Plattner. “In addition, while property prices may seem high - especially near the major cities and popular coastal and island destinations - they are generally lower than those in Luxembourg.”
Considering your tax obligations
While there are many tempting upsides to investing in Spanish real estate, several aspects of the country's legal and tax structures need to be taken into account. “Whether investing on your own behalf or with the idea of renting the property to others, there are many subtleties to consider," said Ms Plattner. “We advise our Luxembourg-based clients to consult us before signing preliminary sales agreements or deeds of purchase. It is important to assess the impact of acquisitions on every individual’s situation, particularly the tax implications.”
An important first principle to understand is that, in general, the law applicable to real estate is that of the country in which the property is located. Indirect, direct and local taxes can accumulate on such investments. “A Luxembourg resident owning a second residence in Spain is therefore subject to tax in that country, which also requires certain reporting obligations to be met," Ms Plattner explained. “Some property taxes may also vary from one region to another, as regional authorities have a great deal of autonomy in this area,” she added.
These tax implications change at different moments: at the time of acquisition; throughout the ownership period; and when it comes to sell, inherit etc.
At the time of purchase, costs vary from one region to another
"While buying a new property, 10% VAT is applicable. For an old property, the buyer will have to pay an onerous transfer tax ("TPO"). This varies between 6% and 11.5% of the reference value published by the General Directorate of the Land Registry, or of the acquisition price if higher, depending on the region," explained Ms Plattner. “To this must be added notary, lawyer and registration fees.”
It is important to understand that the role performed by the notary is not as extensive as in Luxembourg. While notary fees are lower in Spain, the lawyer is required to carry out a series of checks and will draw up the contractual documents. This makes it essential to seek legal advice regarding transactions. “Finally, and before taking any steps towards a purchase, a tax identification number (“NIE”) must be acquired,” said Ms Plattner. “This can be obtained directly in Spain or from the Spanish embassy in Luxembourg.”
Cadastral value, wealth and income tax
During the period of ownership, the owner will also have to pay a tax on the cadastral value of the property ("IBI - Impuestos sobre bienes inmuebles"), which is levied at the local level. Wealth tax may also apply. "Wealth tax is calculated on the net value of assets in Spain on 31 December of the previous year. It is applied differently from one region to another, generally from the moment that the value of the total assets held in Spain exceeds 700,000 euros. This value may be lower in some regions, such as 500,000 euros in Catalonia," explained Ms Plattner. “Some regions (such as Madrid and more recently Andalusia) offer an exemption from this wealth tax. These exemptions for very high net worth individuals (3 million euros and above) were challenged at the end of 2022 by the Spanish government, leading to the creation of a new temporary progressive state wealth tax of up to 3.5%.”
A third tax (on non-resident income) is also levied. “If the owner receives rental income from the property, they have to pay a tax on the actual income, which amounts to 19% of it," she said. “If the owner uses the property for their personal needs, they will have to pay a tax of 2% of the cadastral value, or 1.1% if it is a revised cadastral value.”
Controlling the tax burden
There are several ways to reduce the wealth tax burden, such as using a loan to finance the acquisition or having the purchase made by several people, as the minimum exemption applies to individuals and not to a household. In the case of a Lombard loan, however, certain criteria must be observed. Finally, making the purchase via a Luxembourg SCI company also allows a Luxembourg resident to optimise this tax, in accordance with the advice of the Spanish tax authorities. However, recent reforms announced and approved also at the end of 2022 have reduced the attractiveness of this option.
Resale, donation and transfer
When the property is sold, the vendor is subject to a 19% capital gains tax (with a partial exception for property acquired in 2012 and before 1994) and a municipal capital gains tax. It is important to note that in the case of a property donation, the donor is still liable for these taxes, with the beneficiary paying a gift tax.
As for inheritance tax in Spain, this only applies to property located in that country.
"Here too, there are significant differences and exemptions from one region to another. It is therefore important to be well informed and accompanied to understand these various challenges," said Ms Plattner. “The Spanish legal and fiscal environment can be complex. To ensure that we provide clients with accurate, up-to-date information, Banque Degroof Petercam has a team that is familiar with both the Spanish and Luxembourg contexts. They guide clients to ensure that their real estate investments on the Iberian Peninsula are secure.”