Transfer Tax

Hi everyone, Can any one please advise. Have just had a bit of a shock, we purchased an uncompleted resale property on the Costa del Sol through an agent in March 2004.  We paid approximately half the purchase cost which included IVA and advised of the final payment which also included IVA. We have now been advised that we can now complete.  However the final cost has now increased to include an additional Transfer tax which our solicitor insists that we must also pay. This new tax came into force during December 2006, but this should only apply to resales, new builds only need to pay IVA at 7%.  As you can imagine a substantial incresed additional payment is now due.

Any one have any experience with this problem?

If this is correct I would imagine that this tax would kill any resales before completion stone dead!!

Virginian

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Yes, that is correct.  There is a transfer tax of 7% that needs to be paid on resales.

If you use our property calculator you will see this appear in the list of purchase costs.

Property cost calculator

Justin

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Hi, I am afraid Spanish taxmen are real sharks.

The rule says if you buy newly builder you pay 7% IVA as purchasing tax and if you buy a second hand you pay 7% IVA as transfer tax.

We have been caught in this situation as well. We just bought an apartment from a couple who bought it 2 years ago at off-plan stage and due to the reason only known to themselve they cannot go through completion, therefore, sold to us before the completion. In this case, it is a new builder since the complex is not completed yet, but since we bought from another seller and taxman treat the purchasing as resell as well even though there is not a property to transfer yet (what we bought is 'a right to buy') So in total 14% IVA is applied. In our case seller is in hurry to sell since completion date is very close, so they shared the transfer tax with us.

We offered to buy off from seller after completion to avoid transfer tax, but seller did not profer that option. I guess for them it will work out the same cost wise because if they went through the completion their mortgage cost probably will run up around 3.5% purchasing price any way. For us we paid 3.5% extra cost as tax. But the seller bought it at off-plan so the price is cheaper than builder's current selling price. So we just swollowed extra cost.

Hope that help.

 

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Yes and it is killing the offplan resales dead. It is being challenged as under spanish law the private purchase contract is merely a right to buy - the proeprty cannot be bought until it actually exists!

I guess there may be refunds in due course and it was bought in to stop people making massive profits by selling on with taxman getting nothing!

It can be got aropund but only if the builder cancells the original contract and reissues a new one in the new buyers name. Sometimes they do it and sometimes they wont.

In truth I only had this scenario when the sellers are actually making nothing, the developer cancells their contract and draws up a new one to accomodate the new buyer!

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In the (fairly recent) past, selling before completion, or contract-flipping as it became known, slipped by the tax man because, as the other replies here explain, no actual property had yet been registered, so assuming that the developer agreed to it, the original contract was simply cancelled and a new one made up in the name of the new "off-plan" purchaser. Some developers may have asked for some payment in return for the "favour". But since the tax man got wise to the fact that a lot of people were making a lot of unrecorded profits, they tightened things up, and now developers are far less likely to agree to contract flipping, or if they do, it must all be recorded and, subsequently taxed as if it was any other property sale. Hence the 7% IVA as with all new builds, plus the 7% transfer tax (not IVA) that applies to all resales.

Clearly, this has contributed to the decrease in take up of off-plan property, and has no doubt therefore also contributed to the general decline in the market. Just my opinion, but it seems to me that 7% IVA / transfer tax is a pretty effective way of stifling the market anyway, and I wonder why the Spanish government doesn't consider lowering it at least temporarily in order to stimulate sales a little and restore a bit of confidence. Surely the cost of all the lost jobs in the property sector is a good enough reason? I'm no economist or politician, but the way the market is at the moment, I don't see what they've got to lose by trying it. After all, 7% of nothing is, hmm, let me see........nothing!  Why not halve the tax for 6 months, and get 3.5% of anything, and at the same time kick start the market, help first time buyers get on the ladder, help distressed sellers shift their properties and save goodness knows how many more businesses and jobs being lost?

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Thanks everyone for your input, but it looks very much like I'm up the creek without a paddle!  It seems totally unjust to me as we purchased/placed our deposit 4 years ago, based on the cost and facts at that time. The very people the tax authorities are trying to catch go scot-free with their profit in their back pockets, we and others in the same situation are left to pay the consequences of potentially crooked solicitors and such like.  How else can someone take profits from property sales or investments without paying tax and the authorities not knowing??

The cost of our apartment seemed a reasonable deal at the time, but with the state of the market now,and this additional charge: negative equity here we come! However had the developer completed on time we would have been enjoying the Spanish weather in 2006 and we would also have completed before this new tax was introduced.

Oh well such is life.

 

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It's not a new tax as such, more a re-interpretation of how to apply the existing ones. Scant consolation, I know. The sellers, on the other hand, should be liable for Capital Gains Tax on their profit. Again, the way these deals were conducted previously, this was usually avoided - or should that be, evaded? Similarly, I think the seller should be liable for any PlusValia tax arising, but this may depend on what your contract states.

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I think that 7% on resales before completion are not legal.... but.....

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Well, we all depend on you, Maria, to tell us what is legal and what is not, so..........

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Maria, can this point be varified somehow? Even our lawyer is pushing us to pay this 7%. Actually our 7% is with our lawyer now. Completion is within next two weeks.

Our lawyer says she will pay the transfer tax 2-3 days prior the completion. Would Spanish taxman say 'no' to the money  if that is not legal?

We have insisted on a receipt, that is, at least, what we can do.

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Maria is the best person to advise on this, but just for the record, I don't believe you have to pay any taxes in advance. No doubt your lawyer has asked for money "on account", so that funds are in place to pay all relevant taxes and fees once completion has taken place. I don't know the exact circumstances of your deal, but I think I would be inclined to wait until the signing takes place, before commiting any funds. Maybe too late in your case, but be sure to ask for receipts not just from your lawyer, but for any taxes paid on your behalf to Hacienda, just to make sure the money is going where the lawyer says it is.

If you do have to pay transfer tax on the re-sale aspect of the deal, I wonder whether this would be 7% of the total price you are paying for the property, or only on the amount you are paying to the original purchaser (assuming they only paid a deposit, or a percentage of the original contract price, to the developer so far)

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Apologies for the lack of punctuation signals but my keyboard is not working correctly today


The Administration charges 7 per cent  on the total price in concept of transfer tax on resales before completion and my legal opinion is that this is not legal,:

The off plan buyer has been paying  VAT on the amounts he has been handing and VAT and Transfer Tax are two oppositional tax. If you are paying for one, you cannot be paying for the other one in real estate purchases.

As transfer tax operates on resales and VAT in first hand purchases, I would maintain the final purchaser, the one who is completing by Notary deeds, paying the whole VAT and yes, according to provision 17.1 of the Transfer Tax Act to have the seller.in.between paying transfer tax just on the price he is selling the buying rights for, not on the total purchase price as the Administration pretends. I would also ask the final buyer, the one for the Notary deeds, refunding the VAT the original buyer has been paying for to him.

I would follow that route and will wait to see what the TaxMan says about. The worst you can have is to be denied on your allegations against this and end up paying as the Administration wants.  But of course, this is not a route to follow by all of you but just for one who wants to take the chance.... I think it is just fair, and of course we have got our legal grounds to say that.

This message was last edited by mariadecastro on 1/25/2008.

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Quite a few lawyers are taking the same view as you Maria that it is not correct or legal.

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It is not, it is not according to Law.

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 does law mean anything? have passed this infomation to our lawyer. She said our local tax man has insisted whole 7% transfer tax levied on our purchasing. That is total 14%

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Law is above the practise of the Administration, you can challenge that practise before the Courts. 

Yes... that is the classical theory of "The Divission or Distribution of the Power": legislative, executive and judicial. Law above them all. Or as the latin phrase says: quid custos custodes? Who keep the keepers? Law ( democracy) keep the keepers.

Apologies for the digression !!

Maria

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The problem may arise when the taxman thinks that by "passing on the contract" to someone else you are running over 1 taxed step.

In other words, selling before completion avoids tax on the transfer... a tax that you wuold have to pay should you have completed. This can be the argument to charge a fine for an extra 7%...

What do you think? I do not know of any cases in practise, apart from the one mentioned by flyingcat. It would be interesting to know how the payment of the extra 7% was communicated, actioned, etc.

Thanks and regards,

Manuel.

This message was last edited by Lawyers on 2/1/2008.

This message was last edited by Lawyers on 2/1/2008.

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In our case it is fact now. The extra 7% transfer tax has been paid and our lawyer now has the M600 (I may remembered document name wrong) as the receipt from tax man. But she needs it for completion. After completion she will pass the receipt to us. That is 14% tax in total.  7% IVA paid on top of the purchasing price to the developer and 7% transfer tax paid to tax man  .................... wish we know in advance how expensive it can get to buy second hand off-plan before completion ........................... on the other hand our seller is lucky to find us (we just fall in love with the apartment), this heavy tax certainly will effect people who unable to complete, but also unable to find buyer.

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Below is an extract from our lawyers last communication to us, we did ask if it was possible to reassign the contract in our name, but the developer has rejected it.  We have also been informed that the developers in the Costa del Sol are now strictly enforcing this rule.

Effectively the law has changed since you signed the purchase contract in May 2004. Before this change in the case of contract assignment the contract between the developer and the first buyer was cancelled and a new contract was signed between the definite buyer and the developer. In consequence the buyer only had to pay 7% VAT and 1% Stamp Duties. But the actual legislation obliges that apart from these tax the definite buyer also pays 7% Transfer Tax on the assignment of the purchase contract. 

The information you give me is correct because normally in a purchase is paid either VAT or Transfer Tax. IVA is paid in the purchase of a new property and Transfer Tax is paid in a resale. The problem is that actually in the case of transferring a contract the VAT is payable to the developer and the Transfer Tax is payable for the assignment. I am very sorry but when you signed the contract in 2004 the law was different and we did not know that the law was going to change. 

The contents of the article on the website you sent me is quite discussable and the Tax Authorities will never accept it. Therefore the developer rejects to sign the title deed in your name except you pay the transfer tax for the assignment of the contract.

Looks like we have to pay!

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Very interesting, especially since it pretty much contradicts what Maria says. This lawyer is saying the law has actually changed, Maria says you can challenge this ruling in court.

Since a lot of "flipped" contracts are probably coming up for completion now, this will no doubt become a big topic of discussion. It certainly, as Flyingcat suggests, will only serve to add to the problems in the proprety market - the last thing anyone needs.

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