Bank valuations vs. market value

Raymundo Larraín Nesbitt, April, 10. 2018

Lawyer Raymundo Larraín explains the difference between both concepts as they are often confused by non-residents. He also ventures the start of a new expansionist super cycle in some areas of Spain.

Article copyrighted © 2018. Plagiarism will be criminally prosecuted

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
8th of April 2018

 

 

Introduction

The Spanish property market has been a roller coaster over the last decade. From the dizzying heights of 2007 to the gut-wrenching lows of 2011. Over the last 15 years bank valuations have compounded this erratic behaviour exacerbating it. When property values were high, lenders overvalued properties by a long shot; when property values fell, lenders undercut property values even well-below their current market value.

I have been prompted to write this article on the back of low bank valuations which have nearly botched a series of conveyances I have been recently involved with as demand for Spanish property remains unabated. If you are an industry insider, you may want to skip this article altogether because it would be like teaching granny to suck eggs. This article is aimed to be read by neophytes who are largely unaware of how things work in Spain. I thought it would be a good idea to shed light on two points as I keep having to explain them to clients.

Firstly, to dispel a common blunder between non-residents that Spanish bank valuations are a true reflection of a property’s market value at any given time, which is simply untrue.

Secondly, why bank valuations seem to be always so out of touch with reality never seeming to match the real market value.

  1. Bank valuations are NOT a reflection of a property’s market value

One of the first things I was taught in Economics 101 at university, is that the price of a good is always determined by the intersection of demand and supply at any given moment. In other words, prices of goods and services fluctuate over time in line with demand and supply.

A property that was worth one and a half million euros at the peak of the market, can now go for €900,000. But it may have fallen as low as €700,000. So, what is its real price? Is it 1.5m, 900k or 700k? The ‘real’ price is what someone else is willing to pay a vendor at any given moment. If you can find someone willing to pay 1.5m, that is its current market value.

Bank valuations however do not reflect real market values. They are devised for a mortgage loan application and often are calculated for the purposes of an auction value (in the event of a bank repossession).

A common occurrence is for a foreigner to agree to buy a property for say €500,000, apply for a mortgage loan and then be upset to find out his lender values the property at ‘only’ €400,000. The buyer feels cheated at the €100,000 shortfall and becomes angry with the vendor, estate agent and even with the lawyer!

Bottom line, Spanish bank valuations are NOT a reliable assessment of a property’s current market value. 

  1. Why are bank valuations so out-of-sync with the market value?

Lenders, believe it or not, have their own vested interests which at times (read frequently) are misaligned with a borrower’s interests. Lender’s valuations serve a purpose: the bank’s purpose, not yours.

  • Why were properties overvalued during the property bubble haze? In the early two thousands the then Chairman of the US Fed, Mr Alan Greenspan, flooded the financial market with cheap credit on slashing interest rates. He inundated the financial market with cheap credit. This prompted a credit bubble of gargantuan proportions which led to a house of falling cards with which we are all too familiar. Back in the day, it was in the best interests of lenders to overvalue properties well-above the accepted market price so that borrowers borrowed as much money as possible (read up to their eyeballs) to over-indebt themselves. This (reckless) credit policy led banks to profit from huge gains in the short-term (at the expense of the mid to long-term growth). Basically, anyone with a pulse qualified for a mortgage loan. In my opinion self-certified mortgages exemplified like no other this ‘irrational exuberance’ (credit furore) at the start of the new millennia.
  • Why are properties so undervalued now in 2018? Lenders suffered great losses post 2008 leading to hundreds going under. Many were forced to request state-backed loans to prop up zombie balance sheets. The Spanish government bailed out several banks but imposed harsh repayment terms in exchange. The slow and painful readjustment of the banking sector - which still endures a decade on - led to merges and acquisitions, tighter credit regulations and also to laying off dozens of thousands of bank employees and forced early retirements. As a result of this state-imposed downsizing, lenders are now ultra-conservative on their lending criteria and value properties prudently (read undervalue them significantly). The interest of lenders now, a decade on, is the opposite; to only lend money restrictively to creditworthy customers which actually have the ability to fully repay mortgage-backed loans. This goes on to explain why lenders nowadays purposely (under) value properties well-below the current market value, because they wish to spread the loan risk and force would-be borrowers to pay a larger percentage of the property’s value out of their own pocket. In the event of a default, a bank wouldn’t lose as much.

 

Conclusion

Buyers should not be shocked if their chosen lender values the property they are buying 25 - 35% below the agreed asking price. Bank valuations are simply a reflection of a lender’s credit policy, nothing more; which currently is ultra-conservative in the aftermath of the banking collapse of 2008 (The Great Recession).

What really matters on buying is that the property you are purchasing can be resold later on for a higher price. That is what should concern you foremost. Asking rental prices and capital appreciation underpin any sound financial investment. Spain's real estate market seems to be staging a comeback in full swing on both accounts according to the latest macroeconomic figures.

Asking rental prices are soaring by two digits year-on-year as reported by experts. The exact figure remains contentious, as some prestigious media, like El Pais daily, quote a 21% annual increase whilst others, such as El Mundo daily, estimate the national average rental increase to be at 10.2%. In any case, minutiae aside, the consensus is clear and unanimous that we are witnessing a whopping two-digit rental growth in asking rental prices year-on-year. Nothing short of a new rental bubble. I analyse this new lease frenzy in my article Holiday Home Taxation in Spain. Nothing short of a new rental bubble.

Capital appreciation is quickly catching up with the above figures. After having reached all-time lows in 2011, properties in Spain are gradually picking up the pace seven years on (abetted by historic ultra-low interest rates which translate into cheap mortgages). Although Spain’s real estate market remains largely fragmented in a two-speed recovery, with some areas steaming ahead whilst others sluggishly trail behind, there is a reported one-digit year-on-year gain across the board. And even stunning two-digit capital appreciation year-on-year in selected areas with prime beachfront locations as well as in large Spanish cities such as Madrid (17%), Palma de Mallorca (14.7%) and Barcelona (11%); source TINSA. Some bold economists and rating agencies (Fitch) are even predicting the start of a new property bubble

The average rental yield in Spain can be expected at 5% pa (dependent on location). If to that you also add the potential of capital appreciation, Spanish real estate is poised for combined two-digit gains over the next years easily trumping alternative investments and paltry fixed returns in a context of historic ultra-low interest rates.

If one thing remains constant in Spain’s ever-changing property market is that it is cyclical (roller coaster metaphor). Hard data suggests we are geared towards a new expansionist super cycle.

Can you afford to miss out?

Buying property in Spain? Our law firm has over 15 years' experience dealing in conveyance transactions nationwide. Deal only with native English-speaking lawyers and economists, we will be very pleased to discuss your matter with you.

The thrust of my whole article can be neatly summed up in the wise words of a great American writer.

“A banker is a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain.” – Mark Twain.

American writer, humourist, entrepreneur, publisher, and lecturer. Among his novels are The Adventures of Tom Sawyer (1876) and its sequel, the Adventures of Huckleberry Finn (1885).

 

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in conveyance, taxation, inheritance and litigation.  You can contact us by e-mail at info@larrainnesbitt.com, by telephone on 951 894 675 or by completing our contact form.

Article originally published at Spanish Property Insight: Bank valuations vs. market value

 

Legal services Larraín Nesbitt Lawyers can offer you

 

Conveyancing-related articles

House Hunting in Spain – Interview with The New York Times. June 2015
Buying Property in Spain from a Private Seller (Resale Property) – 21st of February 2017
Buying Property in Spain from a Developer (Off-Plan Property) – 8th March 2017
How to inspect an off-plan property overseas – Q&A with The Sunday Times. July 2017
Buying Property in Spain – 10 Reasons to Hire a Lawyer – 8th November 2016
Non-Resident Taxes in Spain – 8th December 2015
Non-Resident Income Tax – 8th December 2017

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2.018 © Raymundo Larraín Nesbitt. All rights reserved.

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Tax advantages on becoming resident in Spain

Raymundo Larraín Nesbitt, February, 26. 2018

Contrary to popular belief, it is not all bad news on becoming resident in Spain. Lawyer Raymundo Larraín sheds some light on the matter, casting away some widely held prejudices.

The following article has been summarised to avoid unnecessary tax technicalities. The quoted tax rates are subject to change from one year to the next. The advice given is of a general nature and should not be construed as tailored tax advice. Seek professional legal advice on your matter – see disclaimer below.

Article copyrighted © 2018. Plagiarism will be criminally prosecuted.

 

 

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
8th of March 2018

Introduction

2018 will go down as a year of changes. The advent of the Common Reporting Standard (CRS, for short) coupled with the dreaded Brexit will significantly dent the taxation of non-residents in Spain.

‘Fake’ non-residents in Spain will have already started to feel the heat from their lenders as from early January in the shape of letters, emails and phone calls requesting clients confirm their tax details that will be relayed over to the Spanish Tax Office. Moreover, some Spanish banks have even contacted some of my clients threatening them with freezing their bank accounts in Spain unless they could prove their alleged 'non-resident' status. This is quite the change from what we were used to in Spain in previous years where it was ‘no pasa nada’.

The Spanish Tax Office receives information from 47 different sources (!). So, going forward, ‘fake’ non-residents are playing a cat and mouse game with the tax office that will likely end (very) badly for them. Not to mention they could also get into trouble with their home country’s tax office as well. I already made it clear in previous taxation articles that you have to come out clean in 2018; or you are resident, or you are non-resident in Spain for tax purposes. You can no longer sit on the fence gaming the system to your advantage.

The purpose of this article is to give some pointers on why becoming (tax) resident in Spain is not as bad as some people would have us believe. Mind you, if you do become tax resident in Spain, you will be taxed on your worldwide income unless you are lucky enough to attain from Spain’s Tax Office a coveted Non-Domiciled tax status (only affluent taxpayers need apply, thank you very much) which basically legally exempts you from paying tax on your worldwide assets/income. So much for equality.

 

Advantages on becoming resident in Spain

 

The below list is open-ended, there are many more I do not mention (regional variations).

Income tax

  • Holiday home rentals: Landlords can benefit from lenient tax relief which on average reduces your tax bill by 40% or more. Ideal for those with tourist rentals.
  • Residents and EU-residents pay a much lower percentage as opposed to non-residents (approximately 25% less tax).
  • Residents in Spain do not have to pay every year Non-Resident Income Tax.
  • You do not need to file an income tax return for earnings below €22,000 from one employer (not as self-employed)*.

 

Inheritance tax:

  • Take advantage of lenient tax allowances (at a three-tier level: national, regional and local) which make a vast majority of foreign inheritors not having to pay ANY inheritance tax whatsoever in Spain. For example, in Andalusia inheritances under one million euros are untaxed (per beneficiary). Post-Brexit inheritance taxes in Spain will be punitive for most British residents. If you are concerned on this, you can commission from us a Spanish Inheritance Tax Assessment Report (SITAR) which lays out clearly how much inheritance tax your heirs stand to pay in Spain. You can of course apply for unilateral tax relief from the HRMC (on the inheritance tax bill paid in Spain) despite their being no double-taxation treaty on inheritance matters.
  • 95% of tax reduction on a heir’s taxable base on his main home (up to 99.99% in some regions in Spain i.e. Andalusia). **

 

Gift tax

  • Multiple regions in Spain offer generous tax allowances between next-of-kin i.e. Valencia offers €156,000 tax-free for cash gifts to under 21-year-olds. €100,000 euros tax-free for over 21-year-olds.

 

Capital gains tax (on selling your property in Spain)

  • No 3% of the sales proceeds withheld by the Spanish Tax Office on selling your property in Spain.
  • Rollover relief: investing the sales proceeds in a new main home in Spain (or in the European Union) will negate completely your cgt liability.
  • Absolute relief:  pay no capital gains tax on selling your property in Spain. Over 65-year-olds are not liable for cgt on selling their main home. ***

 

Plusvalia tax (on selling, on inheriting)

  • Town halls offer significant discounts to residents. Up to 95% in some cases.

 

IBI tax (Spain’s council tax)

  • Significant discounts available to residents.

 

Wealth tax

  • Wealth tax: huge reductions available for residents (€300,000 on main home, per partner) besides a personal tax-free allowance of €700,000. A resident couple may apply for a combined €600,000 tax reduction on their main home (in addition to their own personal tax-free allowance of €700,000 each).
  • Spain’s Non-Dom Tax Scheme (for affluent expats)

 

Other advantages

  • Access to free state healthcare: more information in my article How to apply for healthcare in Spain.
  • Voting rights in local elections: enrolling on your local town hall census (Padron) allows your town hall to receive more funds which in turn are used to improve public services (more ambulances, increased medical attention, discounts on public services etc.). This also allows you the right to vote in local elections.
  • Mortgage loan applications: Non-residents are limited to 60 - 70% LTV. Whereas Spanish residents are handed out more lenient terms, generally being able to borrow 80% LTV, or even more. When you are starting out your own business in Spain, this can make a key difference on the money you can raise.
  • Lease agreements: Non-residents, perceived as a greater financial risk because they have no ties to Spain, are required additional financial assurances from their landlords (read increased deposits i.e. 6-months in advance). Whereas Spanish residents are left off the hook and only need to comply with the bare minimum.

 

* Subject to terms.
** Subject to a cap.
*** Subject to terms.

Conclusion

Do you still think that becoming tax resident in Spain offers no real advantages? Think again.

Our team of native English-speaking lawyers and economists have a long track record (over 15 years' experience) successfully assisting expats on their tax matters in Spain. If you pay more taxes than you should, it is only because you want to.

Come and speak to qualified professionals, we will mitigate your tax exposure with efficient tax-planning and avoid non-optimal taxation scenarios.

Larraín Nesbitt Lawyers, small on fees, big on service.

 

Está el hoy abierto al mañana.

Mañana al infinito.

Hombres de España: ni el pasado ha muerto,

ni está el mañana ni el ayer escrito" – Antonio Machado.

 

Brilliant Spanish poet and one of the leading figures of the Spanish literary movement known as the Generation of ’98. Died in exile during the Spanish Civil War. He is credited as being one of Spain’s most popular poets. Amongst his timeless classics, Campos de Castilla stands head and shoulders above the rest.

 

Larraín Nesbitt Lawyers is a law firm specialized in taxation, inheritance, conveyancing, and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on 951 894 675 or by completing our contact form.

 

Article also published at Spanish Property Insight: Tax advantages on becoming resident in Spain.

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

Buying Property in Spain from a Private Seller (Resale Property) – 21st of February 2017
Buying Property in Spain from a Developer (Off-Plan Property) – 8th March 2017
How to inspect an off-plan property overseas – Q&A with The Sunday Times. July 2017
Buying Property in Spain – 10 Reasons to Hire a Lawyer – 8th November 2016
Selling Property in Spain – 10 Reasons to Hire a Lawyer – 8th December 2016
Non-Resident Taxes in Spain – 8th December 2015
Non-Resident Income Tax – 8th December 2017

 

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2.018 © Raymundo Larraín Nesbitt. All rights reserved.

 

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Distinction between long-term and seasonal contracts

Raymundo Larraín Nesbitt, February, 10. 2018

Lawyer Raymond Nesbitt goes on to explain the key differences between long-term and seasonal contracts. He also points out the great advantages offered to landlords by seasonal contracts.

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
21st of February 2018

Article copyrighted © 2018.Plagiarism will be criminally prosecuted

 

 

Introduction

Picking up from last October’s article, where I wrote on the differences between seasonal and holiday home contracts (Seasonal lets: an alternative to holiday home rentals), in this month’s article I’m going to focus on the key differences between long-term and seasonal contracts. I will also make a case on why seasonal contracts are by far the superior option for most landlords.

Frequently, both types of lease agreements are befuddled leading to a mishmash of poorly-drafted lease agreements. Unbeknownst to the parties, this may have serious legal repercussions when such cobbled-up contracts are challenged at court.

I should clarify that the article’s title can be somewhat misleading, as seasonal contracts in truth can also be long-term. For clarity’s sake, when I mention long-term contracts, I will be referring to those which are used as a permanent place of abode and create lenient tenant entitlements as opposed to seasonal ones, which do not. I’ll define both types below, bear with me.

Definitions, definitions

  • Long-term contract: for this article’s purpose, it is understood as a long-term lease agreement which constitutes the permanent abode of a tenant (and his family). These contracts are subject to Spain’s Tenancy Act or Ley de Arrendamientos Urbanos. This law is the backbone of rental agreements and creates a raft of tenant entitlements which landlords ought to be acutely aware of before entering into any such contract. More details on this in my article: Urban Rental Law in Spain – Spain’s Tenancy Act – 8th May 2016.
  • Seasonal let: is a type of contract whereby a landlord rents a property not as a permanent abode. It can be either short-term (days, weeks) or long-term (months, years). Seasonal long-term lets are NOT subject to the batch of tenant entitlements set out by Spain’s Tenancy Act (which only apply to rentals that constitute a permanent abode, see above).

 

Landlord: the importance of getting it right

Normally when a landlord hires our law firm to draft a lease agreement, he is blissfully unaware of the (legal) implications he is getting into on signing a standard long-term lease agreement. Chiefly, that a tenant (and his family) can stay in the property legally for three years plus one at his own choice. A landlord has no saying over this, nada, only the tenant!

If a landlord wishes to avoid having his property tied up for the next three years, or more, he should be signing instead a 12-month seasonal contract. When the 12 months are up, the tenant needs to leave the property unless a new seasonal contract is signed.

The significance of this is better understood with an example. The following is a real case.

An expat landlord has been struggling to sell his property in Spain for several years due to the Great Recession. In the meantime, to make ends meet, he rents it out to a family. This landlord - without taking any legal advice - downloads some random rental contract from internet and uses it. Once signed, sometime later, the landlord manages to find a buyer. The deal has a positive outlook. Regrettably, his buyer finds out the property has long-term tenants living in it (can stay in the property for up to 5 years or more) and at the advice of his lawyer pulls out of the deal. The landlord/seller has lost a great opportunity to sell on his house.

My client, out of ignorance, and because he wanted to save himself lawyer’s fees, used an old contract from internet which gave his tenants cast-iron rights to remain in the property for the following 5 years (plus one). The sales deal, which was a given, fell through because the buyer did not want to commit waiting for 5 years until the end of the lease agreement.

A common mistake in landlords is to think they can end a lease agreement (whenever they want) and ask their tenants to leave the property when they are selling – which is false. A landlord cannot end a lease agreement only because he is selling his house and must respect the whole duration of the signed lease agreement until it elapses (five years in this case).

More details on common mistakes on long-term tenancy agreements in my article: 7 illegal clauses in Spanish rental contracts – 8th January 2018.

Had this person hired me earlier on, before signing any document, I would have drafted him a 12-month seasonal contract and he would have sold on his property without any problems. Bottom line, speak to a lawyer before you do something rash like signing away lease agreements in a foreign language which give your tenant all sort of rights which you do not fully understand. Sounds easy enough, but few landlords actually follow through and end up in all sort of problems.

 

Comparison: Long-term leases vs. seasonal lets

 

 

Long-term lease 

 

Seasonal lease

 

Applicable law

Spain’s Tenancy Act

Spain’s Tenancy Act

Place of permanent abode

yes

no

Urban property

yes

yes

Rural property

no

yes

Accommodation time

More than 2 months, varies between regions

no time limit (days, years)

Contract renewal

Automatic 12-month renewals (leading up to 3 years plus)

no

Can you rent out individual rooms?

yes

yes

Tenant entitlements

yes, significant

no

Creates right to stay and live in the property

yes, 3 years plus one

no

Rental deposit

one-month

two-months (minimum)

VAT

exempt

exempt

Enforced

nationwide

nationwide

Licence of First Occupation required?

yes

yes

Landlord tax relief available? *

yes

yes

Tax on rental income to be declared and paid in Spain?

yes

yes

 

*lenient landlord tax relief is only available to EEA/EU-residents.

Advantages of a seasonal let

  • No tenant entitlements.
  • No automatic contract renewals.
  • Your tenant cannot (over)stay in the property for 3 years plus one.
  • Smoother eviction procedures.

 

 Disadvantages of a seasonal let

  • A (minimum) of a 2-month rental is required.
  • Seasonal lets need to be drafted by lawyers to ensure they comply with all legal requisites to be upheld (successfully) before a law court if challenged.

 

The myth of the 11-month lease agreements

You may have heard, or been offered by layman, a 10-month contract as a universal panacea to all that is wrong in Spain with tenancy agreements. In theory, the idea behind these ‘magical’ contracts are to circumvent the automatic 12-month renewal periods Spain’s Tenancy Act sets forth.

In practice, you should know these contracts are not worth the paper they are written on. Should your tenant seek advice from a lawyer, or take you to court, they will be informed they can stay in your property for the next three years plus (providing they pay the rent, of course).

The only – legal – way to waive a tenant having the right to remain in your property for three years plus is to sign a seasonal contract. Seasonal contracts have a number of requirements to enforce them. Only because you label a contract as seasonal, it will not make it seasonal and can be easily challenged at court. Only lawyers are aware of the requirements, so they can be successfully upheld at court.

Do I need to declare and pay tax on my rental income in Spain in both cases?

Yes.

We have a competitive taxation service for non-residents that deals with holiday home accounting service (HRAS).

On average, we can reduce a non-resident landlord’s rental income tax by 40% using tax relief (available to all EU-residents, UK nationals included). Ask us.

Conclusion

Most landlords wrongly assume they must rent out their Spanish property using a standard long-term agreement – which is simply untrue.

For decades, landlords all over Spain have been letting their properties out using seasonal lets without a problem. Seasonal lets are by far the superior option for most landlords.

Don't be goaded into using lease agreements that only exist for the benefit of tenants. Be smart and make it easy on yourself – speak to professionals!

If you want to avoid stressful situations for you and your family, it is strongly advised you hire a law firm before you commit signing on the dotted line. Taking legal counsel ahead pre-empts most legal problems saving you money (and grievances) on the long run. This advice applies both to landlords and tenants. You can hire our contract drafting service from €165 plus VAT: Rentals (contract drafting). Rental contracts in English also available.

Be proactive, talk to a lawyer. We can make it happen.

"La acción es la clave fundamental de todo éxito." – Pablo Picasso.

Loosely translated as: "Action is the key to all success".

Pablo Picasso was a Spanish painter, sculptor, printmaker, ceramicist, stage designer, poet and playwright who spent most of his adult life in France. Regarded as one of the most influential artists of the 20th century, he is credited for co-founding the Cubist movement. Child prodigy, Malaga-born Picasso achieved universal renown and immense fortune for his revolutionary artistic accomplishments, becoming one of the best-known figures in 20th century art. He is one-of-a-kind towering figure that casts a long shadow over every other artist that has followed in his wake.

 

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in taxation, inheritance, conveyancing, and litigation. We will be very pleased to discuss your matter with you. Please contact us for a free initial consultation. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on 951 894 675 or by completing our contact form.

 

Article originally published at Spanish Property Insight: Distinction between long-term and seasonal contracts.

Legal services Larraín Nesbitt Lawyers can offer you

 

Rental-related articles

 

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2.018 © Raymundo Larraín Nesbitt. All rights reserved.

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7 illegal clauses in Spanish rental contracts

Raymundo Larraín Nesbitt, January, 5. 2018

Lawyer Raymond Nesbitt explains the seven most common illicit clauses in Spanish lease agreements.

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Abogados
8th of January 2018

Article copyrighted © 2018.Plagiarism will be criminally prosecuted

 

 

Introduction

Following Spain’s ongoing two-digit rental property bubble, I thought it would be a good idea to write a brief recap of the seven most common blunders in long-term rental agreements.

If you want to avoid stressful situations for you and your family, it is strongly advised you hire a law firm before you commit signing on the dotted line. Taking legal counsel ahead pre-empts most legal problems saving you money (and grievances) on the long run. This advice applies both to landlords and tenants. You can hire our legal service from €165 plus VAT: Rentals (contract drafting). Rental contracts in English also available.

Seven most common illegal clauses in Spanish lease agreements

 

  1. 11-month rental contracts are watertight. Eleven-month contracts is a popular urban myth that somehow manages to perpetuate itself from one year to the next. Such contracts were designed to circumvent Spain’s Urban Tenancy Act (which deals with 12 months renewable contracts) and thus waive generous long-term tenant entitlements. 11-month contracts are void and when challenged at court, a judge will rule they are in fact a long-term contract subject to the LAU, meaning tenants can stay in a property for three years. If landlords wish to avoid the lenient tenant entitlements set by the LAU, they should be signing seasonal contracts instead which legally waive them. More details in my articles: Distinction between long-term and seasonal contracts – 21st February 2018, Urban Rental Law in Spain – Spain's Tenancy Act – 8th May 2016 and Seasonal lets: an alternative to holiday home rentals – 8th of October 2017.
  2. Non-renewable 12-month rental contracts. A similar trick to point one above, is to word a long-term rental contract, which constitutes a permanent abode, as a non-renewable 12-month contract. Forbidding the extension avoids a tenant staying in a property for a number of years. Such a clause is null and void on being legally challenged. A tenant is allowed to stay in a property for up to three years at his sole choice (he can move out ahead if he pleases, providing six months have elapsed, see point three below). Only a tenant may choose whether to renew or not his rental agreement for a further 12 months. Spain’s tenancy laws are biased towards tenants for historical reasons outlined in my article Urban Rental Law in Spain – Spain's Tenancy Act.
  3. Cast-iron 12-month rental contract. Following on the above, another frequent clause is to word a contract as a 12-month contract, meaning a tenant cannot pull out of the rental contract ahead of the 12 months for whatever reason. This clause is also null and void following the amendment to Spain’s Urban Tenancy Act in June 2013. As explained above, a tenant may move out of a property ahead of the 12 months so long as 6 months have gone by. He must notify in advance his landlord of his intention of moving out but there is no need to justify a reason for it. The tenant however will have to pay a compensation to the landlord on breaking away for the outstanding duration of the long-term contract. So, there is a price to pay on bailing out ahead of time.
  4. Two months' rental deposit. By law, a landlord can only request a one-month rental deposit from a tenant on rental agreements subject to the LAU (Spain’s Tenancy Act). Notwithstanding, additional guarantees may be requested but they are not labelled as a ‘deposit’ from a legal point of view. On the other hand, by law, landlords of seasonal contracts must request a minimum of a two-month rental deposit. Often both type of contracts are confused leading to mistakes. More details in my article: Urban Rental Law in Spain – Spain's Tenancy Act – 8th May 2016.
  5. Right of entry. Frequently, concerned landlords word into a tenancy agreement the right to visit the rented property giving only a short notice. This is in fact null and void. This error stems from a misconception, when a landlord rents a property, he loses possession of it until such a time the keys are returned. What this means is that a landlord is forbidden to enter (his own) property without the express written permission of his tenant. Should a landlord disregard this, he can be criminally prosecuted for illegal trespassing being remanded into custody. More details in my article: Renting in Spain: Top Ten Mistakes – 8th of June 2011.
  6. The tenant is responsible for any damage to the (rented) property. Frequently, landlords word rental contracts in such a way that they make tenants responsible for any and all damages to the property. Such a clause is - you guessed it - null and void. Tenants are responsible of paying for the normal wear and tear. Landlords must pay for repairs and maintenance that allow the property to be apt for dwelling purposes as per art. 21 LAU.
  7. In the event of a sale, the tenant must leave. Another common mistake is to word a rental contract in such a way that if the property is sold whilst it is being rented out as a permanent abode, the tenant must leave the property (with his family). This again is null and void. Although following the amendments to Spain’s Lease Act in 2013 there are legal reasons which allow a landlord to bypass the three-year rule and kick out his tenant ahead of time, a sale is not one of them. The new buyer will be forced to respect the outstanding tenancy agreement until it ends (the full three years). This may lead to complicated legal situations with multiple ramifications which exceed the purpose of this article. Legal advice should be taken.

 

Conclusion

Hiring a seasoned lawyer, in my experience, pays for itself on all the money you stand to save on avoiding the most common pitfalls on signing a rental agreement in Spain.

You should hire a lawyer from the onset, particularly if you are a foreigner in Spain, before you commit yourself signing on the dotted line of a tenancy agreement. All agreements should be put in writing and worded into the rental contract. Quite often these contracts are flawed or have clauses which are null and void as templates are frequently used which tend to perpetuate errors.

Unfortunately, practice tells me that most clients only come to us after they have signed and landed themselves in hot water. The legal fees they wanted to save themselves will now be threefold at least.

Bottom line, for your own good, hire a competent lawyer from the outstart before you commit and sign a tenancy agreement or any other legal document for that matter. Trust me, you will save yourself money and aggravation on the long run.

 

“If you haven’t found it yet, keep looking. Don’t settle. As with all matters of the heart, you’ll know when you find it.” — Steve Jobs.

 

Steven Paul Jobs was an American entrepreneur, business magnate, inventor, and industrial designer. He was the chairman, chief executive officer (CEO), and co-founder of Apple Inc.

 

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in conveyancing, litigation, taxation, and inheritance. We will be very pleased to discuss your matter with you. Please contact us for a free initial consultation. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 951 894 675 or by completing our contact form.

Article also published at Spanish Property Insight: 7 illegal clauses in Spanish rental contracts

 

Legal services Larraín Nesbitt Lawyers can offer you

 

Rental-related articles

 

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2.018 © Raymundo Larraín Nesbitt. All rights reserved.

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Non-Resident Income Tax

Raymundo Larraín Nesbitt, December, 8. 2017

Solicitor Raymond Nesbitt gives us a year-end recap of the taxes non-resident landlords are liable for on owning and renting out property in Spain. Additionally, he walks us through the impact of the Common Reporting Standard.

The following article has been summarised to avoid unnecessary tax technicalities. The quoted tax rates are subject to change from one year to the next. Seek professional legal advice on your matter – see disclaimer below.

 

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Abogados
8th of December 2017

 

Introduction

I’m going to split this month’s contribution in two sections:

  1. I will kick off my article with the novelties introduced by the Common Reporting Standard as it marks an inflection point on non-resident taxation in Spain. This landmark agreement will force scores of non-resident taxpayers to think carefully on whether they come clean and become tax resident (in Spain) as this may have associated great fiscal advantages (listed below). The driving point I want to make clear in this article is that after this tax milestone becomes effective next 2018 nothing will ever be the same.
  2. The second part of the article acts as a gentle year-end reminder of the taxes non-residents have to pay on owning property in Spain. In my experience, the vast majority of non-residents are blissfully unaware of their tax liabilities on owning and renting property. This apathy has serious negative consequences as I care to explain below (i.e. losing substantial money on selling property in Spain; explained below).

 

I. The Common Reporting Standard and you

 

Whilst it is true the Spanish Tax Office (AEAT) traditionally adopted a blind eye towards non-resident non-tax compliance in the not so distant past, this is no longer the case by a long shot. The AEAT has dropped its paternalistic leniency and has been busy honing its claws and fangs on the wake of the Great Recession devising new methods to extort exact taxes. The widening public deficit in Western countries, led eagerly by care-free politicians obsessed with short-term opinion polls, has spurred taxmen to collect taxes in a more resolute manner leading to ‘creative’ solutions and burgeoning cross-border co-operation.

As an example of this budding trend, over 109 countries around the world, including all those belonging to the Organisation for Economic Co-operation and Development (OECD), signed three years ago a pilot initiative to automatically exchange fiscal information to combat tax evasion. As from 2018 Spanish Tax Authorities will automatically receive a great deal of fiscal information from non-resident owners, including UK and Irish nationals. This initiative is known as the Common Reporting Standard (CRS) and is a shameless mimic of the US’s wildly successful 2010 FATCA agreement which has proven adept at catching legions of non-compliant U.S. taxpayers.

In a nutshell, what the CRS does is to pull away the warm mantle of fiscal anonymity and make everyone lose their financial privacy. Its wide-reaching ripples have spilled over to multiple tax havens as well, namely UK overseas territories and the Channel Islands. Graphically, it is like the tideline receding all of a sudden, leaving ill-advised swimmers stranded and stark naked before the taxman.

All those expats who purposely – and sneakily – like gaming the system from a cosy hedge without declaring income (or paying taxes) in one country or another will have a problem going forward. You can no longer dwell and thrive in a grey area, in-between countries, to avoid paying taxes. If you own assets and receive rental income in one country but live in a second country, chances are both countries are going to know and act upon it, soon.

Leading up to this moment, the Spanish Tax Office slyly pre-empted this by requesting from resident taxpayers to comply with what is known as tax model 720 which discloses any assets tax residents in Spain hold abroad over €50,000. The Spanish Tax Office, after casting its own net and sniffing around, will now be able – for the first time ever – to cross-check tax declarations of hundreds of thousands of resident expats in Spain against the tax information supplied by fellow OECD tax offices in search of ‘discrepancies’. God forbid.

Fines for tax model 720 follow a sliding scale, but any ‘incongruity’ is fined starting at €10,000 and any data ‘omitted’ is fined starting at €5,000. Fines can lead up to a staggering 120% of the undeclared amounts you hold abroad on being resident in Spain. The afore does not preclude the fines for Income Tax which additionally can be up to 150%. In a classically fashioned pincer movement – coincidentally, no doubt – Spain’s Criminal Code was recently amended during the infamous Tax Amnesty to double the statute of limitations from 5 to 10 years in cases of tax evasion (defrauded amounts over and above €120,000). The cynic in me clearly sees a two-pronged strategy to nudge unwilling taxplayers (sic) to cross the line and become fully tax-compliant disclosing assets abroad or else face the risk of harsh penalties. Carrot or stick; it never ceases to amaze me how such a simple strategy is yet so very effective. In the spirit of full disclosure, Brussels has challenged the eye-watering fines of tax model 720, but for the time being they are very much enforceable by Spain.

The Spanish Tax Office hasn’t been dithering over the last two years and has been busy leading a pro-active hounding of non-taxpayers clawing back taxes. With particular emphasis on those living opulently in lavish villas locked up in a string of shadowy holding structures which nominally belong to third parties without paying a monthly rental. They have also been actively targeting property owners who fail to declare their annual Non-Resident Imputed Income Tax. And recently, over the last year or two, regional Tax Authorities have also jumped into the fray actively chasing non-compliant holiday home landlords on the back of the new raft of holiday home regulations as has been widely reported by Spanish Property Insight and other high-profile media. As an example, in my blog post from last October, I explained how the region of Andalusia have begun to fine non-compliant holiday home landlords with fines which range from €2,000 up to €150,000: Andalusia starts fining holiday home landlords.

Bottom line, for your own sake, if you own assets in Spain, get your taxes sorted out pronto because it is a ticking time bomb and time is running against you.

Now that I have caught your attention, and perchance given more than one reader a stomach ache, I list the tax obligations of expat landlords in Spain.

 

II. Non-Resident Income Tax

 

Unbeknownst to most non-resident Spanish property owners, irrespective of whether you let your property out or not, you are liable for tax every day of the year.

  1. Non-Resident Imputed Income Tax (NRIIT) – You do NOT let property

 

On owning property in Spain, even if you do NOT rent it out you must nonetheless file and pay once a year NRIIT. It is a legal fiction whereby it is surmised that you derive some form of financial benefit from your Spanish home; that is why it is called non-resident imputed income tax as it is deemed. Spanish Tax Authorities take the view an owner derives a benefit in kind from owning property irrespective of whether it is true or not and is taxed accordingly.

On selling your property, the Spanish Tax Office will verify you are up do date paying NRIIT; otherwise they will simply pocket all or part of the 3% retention a property buyer is forced to withhold on buying your property and pay it into the Tax Office. Losing 3% of the sales proceeds is a large amount of money for most people. You can pre-empt this on being up to date with this tax. This tax is ultra-low, and its true purpose is to serve as 'control'.

This tax is collected once a year. To be paid before the 31st of December of the following year.

You can contact us until the 21st of December 2017 to file and pay your Non-Resident Income Tax (scroll below for our law firm's contact details).

Our law firm offers the following legal service to file this annual tax at a very competitive fee: Non-Resident Income Tax (Fiscal Representation).

Stragglers are welcome!

 

  1. Non-Resident Income Tax (NRIT) – You let property (long or short-term)

 

In addition to filing the above annual tax, when you rent out Spanish property, whether as a long or short-term rental (i.e. holiday home or seasonal let), you also need to file and pay quarterly NRIT in Spain. On the days a property is effectively not rented out (think short-term lettings) a landlord is still liable for Non-Resident Imputed Income Tax on a pro rata basis (see section one above). Put simply, one way or another, you pay tax on the property every day of the year.

Following the double taxation treaty between Spain and the United Kingdom (updated in 2014), non-resident landlords need to file and pay tax on their rental income in the country where the real estate asset is located. So, for example, if a British national owns property in Catalonia (Spain) and rents it out as a holiday home during the summer season, they must declare and pay tax on their rental income into the Spanish Tax Office. If this British landlord is declaring and paying his Spanish derived rental income only in the UK, where he is tax domiciled, he would in fact be breaching Spanish tax laws. Thousands of British make this glaring mistake and are going to get into trouble with the Spanish Hacienda. UK tax domiciled owners need to declare and pay tax on their rental income in both countries. Following the double taxation treaty, the HRMC gives tax breaks on any rental income tax paid in Spain, so you don’t have to pay tax twice.

This tax is collected quarterly, on the first 20 days of every January, April, July and October.

Generous landlord tax relief is available even if a landlord is non-resident in Spain (albeit EU/EEA-resident). This tax relief can greatly reduce a landlord’s taxable base. More details on this taxation and landlord tax relief, in my articles:

 

 

Our law firm offers the following bespoke accounting service to file this quarterly tax for a nominal fee: Holiday Rentals Accounting Service (HRAS).

 

Resident: to be or not to be – that is the question

 

To ascertain whether you qualify as resident or non-resident the Spanish Tax Office applies the following criteria:

  • You spend more than 183 days in a calendar year in Spanish territory.
  • Your centre of financial interests is located in Spain.
  • Your spouse and/or underage children live in Spain.

 

If any, or all three, above apply you will be regarded as resident for tax purposes.

 

Resident in Spain: tax advantages

Now that we have gotten out of the way that you can no longer game the system pretending not to be resident in Spain following the introduction of the CSR, you may be surprised to learn there are a great number of tax advantages on becoming tax resident in Spain.

Post-Brexit, many of the tax advantages that British could benefit from as members of the European Union will cease to exist. As an example, in a recent Spanish Inheritance Tax Assessment Report (SITAR) we completed on behalf of a UK-domiciled client, it resulted in him having to pay 2,300% more (two thousand three hundred pc) in IHT post-Brexit than if he were Spanish (or EU) tax resident. Food for thought.

I have collated a few tax advantages on becoming tax resident in Spain, but there are many more. Speak to us for more details.

  • Income tax: landlords can benefit from lenient tax allowances which on average can reduce your tax bill by as much as 40%. Ideal for those with tourist rentals.
  • Income tax: residents and EU-residents pay a much lower percentage as opposed to non-residents (approximately 25% less tax).
  • Income tax: residents in Spain do not have to pay Non-Resident Income Tax.
  • Income tax: earnings below 22,000 euros from one employer are not obliged to make a tax return in Spain (does not apply to self-employed)*.
  • Inheritance tax: take advantage of generous tax allowances (national, regional and local) in place which make a majority of inheritors not having to pay ANY inheritance tax whatsoever in Spain.
  • Inheritance tax: 95% of tax reduction on a heir’s taxable base on main home (up to 99.99% in some regions in Spain i.e. Andalusia). **
  • Selling your property in Spain: pay no capital gains tax. ***
  • Selling your property in Spain: no 3% of the sales proceeds withheld by the Spanish Tax Office.
  • Wealth tax: huge reductions available for residents (€300,000 on main home, per partner). A couple can apply for a combined €600,000 reduction.
  • Spain’s Non-Dom Tax Scheme (for affluent expats)

 

* Subject to terms.
** Subject to a cap.
*** Subject to terms.

Conclusion

Following the CRS, Spain’s Tax Office will now have unprecedented access to fiscal information from your home country as from 2018. This will allow it to boldly cross-check fiscal information of thousands of expats, resident or not in Spain. And what’s better, they won’t even have to ask for it as it is automatically exchanged between OECD members.

The always divisive red line that separates tax avoidance (legally acceptable tax planning) from tax evasion (criminally pursuable) has grown ever thinner. Make no mistake, as from 2018 the net is closing in. There will no longer be a warm cosy grey area to shelter in. The question is if you will fall in line or remain out of line

If you choose the former, we can help you sort out your tax affairs regularising them for a nominal fee for your peace of mind. We only charge for our legal services; a pain-free stomach is gratis

Act now, before it is too late. Contact us free of compromise on your tax matters, we are here to help.

 

You never know who's swimming naked until the tide goes out.”Warren Buffet.

 

Legendary American business magnate, investor, and philanthropist. Wharton School graduate nicknamed the ‘Oracle of Omaha’. CEO and Chairman of Berkshire Hathaway. Despite a reported net worth of $80bn as of 2017, true to himself, he still lives in the same house he bought in 1958.

 

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in taxation, litigation, conveyancing, and inheritance. We will be very pleased to discuss your matter with you. Please contact us for a free initial consultation. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 951 894 675 or by completing our contact form.

Article originally published at Spanish Property Insight: Non-Resident Income Tax

 

Legal services Larraín Nesbitt Lawyers can offer you

 

 

Taxation-related articles

 

 

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2.017 © Raymundo Larraín Nesbitt. All rights reserved.

 

 

 

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Have you sold property at a loss in Spain? You can now apply for a full tax refund!

Raymundo Larraín Nesbitt, November, 8. 2017

Lawyer Raymond Nesbitt goes on to explain how vendors (both resident and non-resident) can now benefit from a time-limited opportunity to claim back their tax on selling property at a loss in Spain.  

 

 

 

 

 

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
8th of November 2017

 

Introduction

Following a recent Constitutional Supreme Court ruling from 2017, if you have sold (or are planning to sell) property in Spain at a loss you can now benefit (for a limited time only) from a full tax refund (plus interests).

The new ruling argues that taxes need to respect the constitutional principle of economic capacity. Taxing someone when no profit was made (on selling) would therefore be unconstitutional and would qualify for a full tax refund.

On selling, a vendor needs to pay a tax known as ‘plusvalia’ tax. It is this tax that can be fully refunded.

Practical effects of this new ruling

  • Vendors who sold property at a loss as from 2013 can now request a full refund of plusvalía tax plus legal interests on top.
  • It is estimated over 550,000 vendors qualify for this refund since 2013.
  • Refunds on average stand to be in excess of €3,000.
  • Claims are time-limited. You cannot claim back your money after the statute of limitations kicks in.

 

How can we help you recover your money­?

One of the core specialties of our law firm is litigation. We offer a no win no fee* on these cases.

We will examine your matter free of charge and report back to you if you have a strong case.

You only pay our legal fees, if we win your case. That simple.

What we need from you

  • Copy of Title Deed (buying).
  • Copy of Title Deed (selling).
  • Copy of last IBI/SUMA invoice.
  • Copy of plusvalia tax invoice.

 

Frequently Asked Questions

 

  1. Does this new ruling mean I no longer have to pay plusvalia tax on selling at a loss?

No. You will be expected to pay this tax to your town hall on selling a property whether you have made a profit or not. Once you have paid it can we then claim back the tax on your behalf plus interests.

  1. Hearsay has it that I only need to fill in a form before a town hall to get my money back. Why should I need to hire a lawyer?

This information is incorrect, hugely misleading and can make you lose ALL your money. There is nothing worse and more dangerous than a half-baked truth.

The first step for a law firm to recover your funds is to apply for a refund petition. Wording and arguing the petition properly, in a legal manner, is critical for reasons I explain further below. In 99% of cases town halls turn down this form or simply ignore the claim.

Once the claim is spurned by a town hall, the following step is to instigate a legal proceeding which hinges on said petition, hence its importance. If the petition was incorrectly worded, say by a layman, the case is lost beforehand, and you will NOT receive back your money, period. Litigation is necessary almost in every case to recover your money.

If you want your funds back, you simply need to hire a law firm such as ours to act on your behalf from start to finish; you cannot cut corners doing it yourself.

  1. Can I claim my money back without a lawyer?

You can try albeit most likely fail. You simply need to appoint a lawyer to litigate on your behalf.

Conclusion

There is a limited time frame to claw back your tax refund (which varies depending on your own personal circumstances). After your claim becomes time-barred, your case is precluded and you lose all your money.

Act now, you will not get a second chance! Contact us before it is too late.

 

"La acción es la clave fundamental de todo éxito." – Pablo Picasso.

Loosely translated as: "Action is the key to success".

Pablo Picasso was a Spanish painter, sculptor, printmaker, ceramicist, stage designer, poet and playwright who spent most of his adult life in France. Regarded as one of the most influential artists of the 20th century, he is credited for co-founding the Cubist movement. Child prodigy, Malaga-born Picasso achieved universal renown and immense fortune for his revolutionary artistic accomplishments, becoming one of the best-known figures in 20th-century art. One of a kind towering artistic figure that casts a long shadow over every other artist that has followed in his wake.

 

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in litigation, conveyancing, taxation, and inheritance. We will be very pleased to discuss your matter with you. Please contact us for a free initial consultation. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 951 894 675 or by completing our contact form.

Article also published at Spanish Property Insight: Have you sold property at a loss in Spain? You can now apply for a full tax refund!

*Court runner’s fees & property assessment report not inclusive.

 

Legal services Larraín Nesbitt Lawyers can offer you

 

Litigation related articles

 

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2.017 © Raymundo Larraín Nesbitt. All rights reserved.

 

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Seasonal lets: an alternative to holiday rentals

Raymundo Larraín Nesbitt, October, 8. 2017

Lawyer Raymond Nesbitt goes on to explain how seasonal lets can be a viable alternative to holiday home rentals in some instances.

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
8th of October 2017

 

 

 

Photo: Cala Llombards, Majorca, Spain.

 

Introduction

Are you fed up with the intrusive and obnoxious new regulations on private holiday home rentals in Spain? *cough* Balearics *cough*

Did you know that, at times, landlords can circumvent these restrictive regional regulations offering their properties as seasonal lets instead? I.e. no rental licence is required. Were you aware that thousands of properties all over Spain are rented out legally every year as seasonal lets to tourists without much of a hindrance?

Interested? Read on.

Definitions, definitions

  • Holiday-home rental: short-term contract that spans between a day and a month (varies between regions in Spain). Accommodations are offered through touristic channels (see further below) such as online property portals with an online booking system.
  • Seasonal let: is a type of contract whereby a landlord rents a property not as a permanent abode. It can be either short-term (days, weeks) or long-term (months, years). Seasonal long-term lets are NOT subject to the raft of tenant entitlements set out by Spain’s Tenancy Act (which only apply to rentals that constitute a permanent abode) and most certainly do NOT require a rental licence.

 

Comparison: Holiday Home Rentals vs. Seasonal Lets

 

 

Private holiday home rentals

 

Seasonal let

 

Applicable law

regional holiday home regulation

Spain’s Tenancy Act (LAU)

Rental registration required

yes

no

Rental licence required?

yes, in some regions i.e. Balearic Islands

no

Urban property

yes

yes

Rural property

no

yes

Commercialization (offer)

touristic channels

forbidden to use touristic channels

Online booking system

yes

no

Accommodation time

less than 2 months (varies between regions)

no time limit (days, years)

Can you rent out individual rooms?

yes

yes

Guest number limitation

yes

no

Accommodation mandatory requirements

yes i.e. bed cleaning, A/C

no

Place of permanent abode

no

no

Tenant entitlements

no

no

Rental deposit

varies

two-month rental

VAT

usually exempt*

exempt

Subject to regional property inspections

yes

no

Fines (non-compliance)

humongous. Varies significantly between regions.

no

Civil liability insurance required?

yes, in some regions

no

Forbidden to rent out

 yes, in some regions

no restrictions

Enforced

locally (with regional variations)

nationwide

Licence of First Occupation required?

yes

yes

Rental tax relief available?

yes

yes

Tax on rental income to be declared and paid in Spain?

yes

yes

 

 

Advantages of a seasonal let

  • No registration necessary: registration of the property for rental purposes is not required.
  • No rental licence required: you do not need to attain a rental licence from the Authorities.
  • No expensive improvements: you don’t need to install in your property WIFI, A/C, hire insurance to comply with the law.
  • No property inspections: your property will not be subject of inspections by the regional Authorities.
  • No fines: unlike holiday homes, seasonal lets are not liable to be fined by inspectors.
  • No time restriction: unlike holiday homes, you can rent out for more than 2 months. You have the flexibility to rent out either short or long term.
  • No intermediaries necessary: you will not be paying any commissions.

 

Disadvantages of a seasonal let

  • You need to build up your own client base: if you are reliant on third parties to provide you with clients (as most landlords are), you cannot benefit from a seasonal let.

 

* With or without VAT?

In principle, as a general rule, VAT is not applied to holiday rental homes. However, if you offer any of the following below your rental may be regarded as assimilated to offering hotel accommodation in which case you need to invoice everything with VAT which impacts the profit margin of the business increasing its costs:

  • Concierge service.
  • Daily changing of bed linen.
  • Daily changing of bath towels.
  • Daily cleaning of property/room.
  • Room service (food and beverage), catering.
  • Bed & Breakfast.
  • Other ancillary hotel services such as: daily press, laundry cleaning, luggage storage service, accommodation booking (holiday reservation).
  • Other.

 

What is understood by ‘Touristic Channels’?

It is a bit of a grey area to be honest and may vary from one region to the next. Almost every region in Spain has approved specific regulation on what is understood by private holiday rental homes. Regulations vary from one region to another; you are strongly advised to seek legal expertise on your particular region. More details in my article  Holiday Rental Laws in Spain for a full region-by-region list of approved holiday home rentals. Offering a property through a touristic channel automatically tags it as a holiday home subject to strict regional laws.

As a generalization, if a property is offered with any or all the following points it is regarded as being advertised through a touristic channel:

  • It is marketed and offered by intermediaries. It is understood as companies or professionals who mediate between landlord and tenant in exchange of a commission such as: travel agencies, real estate agencies, online property portals (i.e. Airbnb, HomeAway, Tripping, Tripadvisor, Flipkey, VRBO etc.).
  • Online reservation system enabled. Bookings can be viewed and made over internet.

 

Does this article mean that landlords have carte blanche to simply sidestep stern regional holiday regulation at their whim using seasonal lets instead?

No. It takes a case-by-case approach. Not everyone will qualify for a seasonal let e.g. landlords who market their properties through touristic channels.

Talk to a lawyer, we can confirm if you can benefit from it and draft a contract for you.

Do I need to declare and pay tax on my rental income in Spain in both cases?

Yes.

We have a competitive taxation service that deals with Holiday Home Accounting Service (HRAS).

On average, we are able to reduce a landlord’s rental income tax by 40% using tax relief (also available to non-residents). Ask us.

 

Conclusion

Most landlords wrongly assume they must rent out their Spanish property to tourists in compliance with all the new batch of regional rental laws featured in the press - which is simply untrue.

For decades, landlords all over Spain have been letting their properties out to tourists using seasonal lets without a problem. Seasonal lets at times are by far a superior option than renting out as a holiday home. In some regions in Spain the requirements of the new rental laws are so overzealous (read daft) that you are expected to offer a private home on par with the services offered by a four-star hotel. Seasonal lets cut through the red tape and may save landlords thousands of euros on the long run.  

Not all landlords are required to offer their properties as holiday home rentals and comply with the cumbersome (and often expensive) new regional rental regulation. In some instances, landlords would be far better off to simply offer their properties as seasonal lets which do not have associated restrictive requirements i.e. you don't need to install A/C in every room (Andalusia), you don't need to attain a rental licence (Balearic Islands), you do not need to hire an insurance cover etc.

Seasonal lets exist since 1994 and you never hear landlords complaining over them - that should tell you something.

On the other hand, regional holiday home laws are fairly new (post 2013) and you hear most landlords moaning bitterly on them; or worse, not being allowed to rent out because they do not meet the stringent requirements set out in these laws!

You may be surprised to learn you can opt for a seasonal let instead saving yourself considerable time, money and hassle. You could avoid home inspections and steep fines altogether!

In some cases, even landlords who are forbidden to rent out their properties under the current regional holiday home regulation may be stunned to find out they can in fact rent them out as a seasonal let without much of a problem!

Don't be goaded into using new rental contract types that only exist for the benefit of powerful hotel lobby groups. Be smart and make it easy on yourself – speak to professionals!

Be proactive, talk to a lawyer. We can make it happen.

 

Hecha la ley, hecha la trampa.” – Spanish saying.

 

Loosely translated as “for every law, there is a loophole.”

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in conveyancing, taxation, litigation and inheritance. We will be very pleased to discuss your matter with you. Please contact us for a free initial consultation. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on 951 894 675 or by completing our contact form.

 

Article originally published at Spanish property Insight: Seasonal lets: an alternative to holiday home rentals.

 

Legal services Larraín Nesbitt Lawyers can offer you

 

Holiday-home letting related articles

 

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

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New Balearic Islands Holiday Rental Law

Raymundo Larraín Nesbitt, September, 8. 2017

Lawyer Raymond Nesbitt briefly explains the new landmark amendments made to Balearic Islands' Holiday Rental Law (Law 8/2012).

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of September 2017

 

 

 

 

Introduction

The Balearic Islands Administration has recently approved Law 6/2017, of 31st July 2017 which introduces a batch of significant changes to its 2012 Tourism law. These changes came into force on the 1st of August 2017, on the day after they were published in the Balearic Islands Official Law Gazette (BOIB).

Because of how significant I think they are, and their wider impact on the short-term Balearics rental market, I am compelled to devote September’s article to shed some light on them. To clarify, this is not a new law that has been passed, they have simply amended 2012 holiday rental law. As this law was passed five years ago, I will not be analysing it as everyone should already be familiar with it and I already mentioned it in my recap article of 2015 Holiday Rental Laws in Spain.

I will briefly highlight the major changes to my mind without going into the minutiae.

 

EDIT 12th September: As reportedly there seems to be some confusion over my text, for which I profusely apologise, I will try to clarify the situation.

The confusion stems from readers not being familiar with the Balearics Tourism law of 2012, which I already mentioned I would not be analysing in this article. My article may seem baffling if you are unfamiliar with said law because I took for granted readers already knew it as it is a five-year-old law (which clearly was my mistake).

The matter of holiday homes is highly controversial amid Balearic politicians. This bill has been consensuated by political parties with opposing views and some of them even abstained from voting it in open disagreement with its thrust. Whereas some political parties welcome the idea of private holiday home rentals, others want to outright ban them. As a reflection of these polarising views, the bill is cobbled together with inherent contradictions which lead to some grey areas and confusion.

All existing rental or tourism licences are valid, regardless of whether you are resident or non-resident. So, if you have attained already a tourism licence you can continue business as usual. Going forward, this bill sets a one-year moratorium on issuing ALL new rental licences (Declaraciones Responsables de Inicio de Actividad Turística or DRIATS for short) for both detached properties and tenements within a community. Consells Insulars and town halls will now need to determine in their planning zones which areas are apt for private holiday home rental.

A new rental modality has been introduced for main homes where the landlord has his habitual residency. In other words, you must be resident in the Balearics to rent out your property as a holiday home under this new modality (the exact terms are unknown and will be developed by further regulation). To attain this new type of rental licence you must comply with the requirements I set out in my text below. Does this imply that non-residents can no longer apply for rental licences? No, it doesn’t mean that.

After the one-year moratorium has elapsed, hopefully the local Administrations will have defined clearly the boundaries of the new touristic areas where new rental licences may be issued (for both residents and non-residents alike). Any property outwith the specially earmarked ‘tourism zonings’ will not be able to attain a coveted rental licence (with the only exception if they already had one issued before this regulation was passed last August).

The logic behind this new rental modality, exclusive to residents, is to allow locals, who apparently are struggling to meet their mortgage repayments (sic), to make a supplementary income renting out their properties to tourists for a maximum of 60 days within a calendar year. Additionally, locals allegedly struggle to find affordable accommodation, particularly in Palma and Ibiza, which has sparked a social backlash on holiday homes this summer and Tourism in general. This public outcry has led local politicians to seek a sustainable tourism growth model which apparently has already hit a glass ceiling in the Balearic Islands.

The pervading idea behind the bill is to restrict furthermore rental licences and even go as far as to reduce them gradually over the next years. By the same token, new draft laws will restrict the number of properties a single individual can rent out to avoid speculation and concentration of properties in few hands which drives rental prices upwards (tut mir leid, Bettina). Year-on-year holiday home rental prices have increased by a whopping 40% in Palma city alone.

Batch of changes

 

Holiday-home

  • A new rental modality has been introduced which requires the landlord to be resident to rent out. Only properties that constitute the permanent residence of a landlord can be rented out under this new rental type! Let us examine the significance of this with an example for ease of comprehension: a British national resident in the UK, who owns a second holiday home in Port Andratx, may NOT rent it out as, by definition, he is a non-resident and it is not his main residence.

 

       These properties can only be rented out for a maximum of 60 days within a calendar year. The landlord must have applied and attained a most sought-after rental licence issued by its consell or local town hall which is entirely at the discretion of the local Administration and is contingent on the zoning of your property (PIAT) and if it is earmarked as suitable for holiday rental.

       This new law introduces an overall capped number of beds (currently set at 623k) with each island being assigned a quota. This figure is planned to be reduced gradually over the next years by as much as 100k. No new rental licences will be issued over the next year until the touristic planning zones are determined by the town halls.

    Oh, and I forgot to add that even if you manage the herculean feat to attain a coveted rental licence, the rental permission is renewable every 5 years providing you fulfil all the requisites – again. Meaning after five years they may not renew it, in which case you can’t rent it out after all.

  • When the property is marketed, in all publicity it should clearly state the rental code of the property.
  • A novelty of this bill is to allow for the first time ever for properties within a Community of Owners to be offered and marketed as private holiday homes. This can only be done if the majority of the property owners have approved it in a General Assembly and this agreement has been lodged at the Land Registry. In other words, if a Community of Owners forbids the use of properties as holiday homes a landlord cannot (lawfully) rent out his property (in the Balearics).
  • The person who markets the property must inform the Police of every lodger of age 16 and over in compliance with Spain’s Security law.
  • Short-term lets are restricted to 30 days (one month) to the same tenant and may not surpass this limit.
  • Only properties with a minimum of 5 years antiquity can be marketed as holiday homes (unless specific regulation states otherwise) and must have been used as a private residence.

 

Fines

  • Unlicenced holiday rentals (clandestine lettings): Landlords who offer rental holiday homes without having a rental licence issued by the Administration can now be fined between €20,000 to €40,000 (per property!).
  • Failure to communicate to the Administration change of property ownership on holding a rental licence (selling property). May result in fines of up to €4,000.
  • Serious offences: are now fined between €4,001 to 40,000.
  • Very serious offences: are now fined between €40,001 to 400,000.

 

Registering your holiday home to pre-empt fines – You can still be fined for non-compliance!

It should be noted that the fact you apply for a rental licence while you wait for it to be issued by the consell does not exclude you in any way of being fined in the interim.

Moreover, as I care to explain in my blog post regarding the region of Andalusia, if you apply for registration but you lack some of the prerequisites (i.e. your property does not have a mandatory Licence of First Occupation issued, article 50) you are breaking the law and you will be (heavily) fined by the Administration. Which is why I advise all landlords not to register their holiday homes unless they are fully compliant. Ignorance on the law’s finer terms will not be accepted as an excuse not to be fined.

Conclusion

If you are looking to buy property as an investment in the Balearic Islands (Mallorca, Ibiza, Menorca and Formentera) and plan to rent it out short-term, you may want to look elsewhere in Spain.

Pushed by a lack of affordable accommodation for natives, local politicians seek to limit the ability of property owners to rent out their properties as holiday homes; specifically targeting non-resident landlords. Clearly this matter is a serious local problem, but I question the right approach is to limit the ownership rights of property owners. I venture that limitation on planning permits and adopting a sustainable development growth model would perhaps be a more advisable alternative (read investor-friendly) as opposed to curtailing owner’s rights.

The changes brought about will also have unforeseen market consequences, possibly drumming up speculation, as properties within areas apt for holiday home rentals will likely be more valuable than identical properties in excluded areas from private short-term rentals.

This new regulation is so restrictive and has associated such stiff fines that it is honestly not worth all the hassle and risk of getting caught red handed without a rental licence. Many other regions in Spain (i.e. Andalusia) have more landlord-friendly regulations with laxer terms and lenient fines in comparison. Not to mention how they have enabled a system of online whistle-blowers with a whiff reminiscent of the best the U.S.S.R. had to offer the world, not. These measures have Kim Jong-un’s seal of approval.

This new regulation unabashedly wants to paint into a corner private holiday rentals, demonising them, making them a most unattractive proposition. It will likely be the death knell of the burgeoning private holiday rental industry in the Balearics on the heels of dubious local political interests. This new regional law in my opinion is borderline unconstitutional as it is a frontal attack to private property which is a legal right enshrined in art. 33 of the Spanish Constitution. Furthermore, it induces pernicious asymmetrical inequalities in regional holiday home regulation which may have a broader impact on foreign investment diverting funds to other more investor-friendly regions in Spain to the detriment of the Balearics.  

I will self-restrain myself and resist the urge to comment on the attack to a free market economy and how these measures (artificially) stifle competition. I had already ranted at length on these counterproductive consequences and who they (really) benefitted in my articles of 2013 New Measures to Bolster Spain’s Ailing Rental Market and in 2015 Holiday Rental Laws in Spain. Unfortunately, time has proved me right in all my comments.

Ultimately, it may be needed for the State itself to step in decisively and curb the law-making enthusiasm of regional politicians; centralising regulation of holiday home rentals under common standards to iron out provincial lopsided regulation. This would be truly ironic, given how the Government itself in 2013 opened the legislative floodgates, leaving the door ajar for all regions in Spain to pass new laws on private holiday rentals. The Government should backtrack on its (derailed) policy and rein in legislative power on a matter of national importance to the Spanish economy.

Regardless, if you still remain unconvinced by my remarks and decide to fearlessly plough ahead and rent your property out, I strongly advise you to take legal advice on your Balearics holiday home rental as the new laws in place are so complex and the fines on non-compliance are humongous.

I should clarify this new law should not affect your decision-making if you are simply buying property in the Balearics with a view to enjoy the property yourself (in lieu of renting it out as a holiday-home). Balearics is a beautiful place to live in, despite its delusional politicians.

 

Politics: the art of creating new problems where none existed.”

 

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in taxation, inheritance, conveyancing, and litigation. We will be very pleased to discuss your matter with you. Please contact us for a free initial consultation. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on 951 894 675 or by completing our contact form.

Article also published at Spanish Property Insight: New Balearics Holiday Rental Law

 

Legal services Larraín Nesbitt Lawyers can offer you

 

Holiday-home letting related articles

 

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. No delusional politician was harmed on writing this article. VOV.

2.017 © Raymundo Larraín Nesbitt. All rights reserved.

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Legalising Unregistered Property Extensions

Raymundo Larraín Nesbitt, August, 8. 2017

Lawyer Raymond Nesbitt briefly explains how to go about legalising unregistered property extensions and the consequences of not doing so.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of August 2017

 

                                                                                                                                     

 

Photo courtesy: Kingspan Insulation Ltd

Introduction

Often, with a view to sell, property owners decide to make improvements or extensions to their Spanish properties to make them more attractive to prospective buyers. Adding an outbuilding in the garden next to the pool, adding a few additional guestrooms, adding a toilet, building a cellar with home cinema or an in-door heated swimming pool all sound harmless and like a great idea on paper. Surely these improvements add value to the property, making the prospect of selling them far easier, yes?

The fact of life is that if these improvements are not carried out following the correct legal procedure they may become a perfectly good waste of money or even be counter-productive to selling your home.

In this article, I explain what are the legal consequences of unregistered extensions and how to go about legalising them.

 

Legal consequences of unregistered property improvements

There are several risks associated, with varying degrees of importance, of not following the statutory legal procedure; I will list them as bullet points.

  • You can be fined. Should your town hall catch you undertaking non-sanctioned improvements on your home you can be heavily fined and even be required to pull down the improvements at your own expense.
  • You may be criminally prosecuted. You may even face the daunting prospect of a State prosecutor instigating criminal proceedings against you dependent on the illegality committed. This is particularly true of rural property. Please read my article on the matter: How to Buy Rural Property in Spain.
  • You may be forced to pull down the improvements at your own expense.
  • Unregistered extensions are uninsured. Should they collapse, you have no legal recourse against them. Legal extensions will be covered by insurance.
  • You can´t borrow money against the improvements on the property (or not enough money). Should you require to raise capital to face medical treatment, for example, a lender is going to offer you significantly less money if you have not registered the extensions or improvements made to your property.
  • Unregistered extensions at the Land Registry do not exist legally. This has very important practical consequences, particularly on selling a property. In other words, only accurate property descriptions matching reality at a Land Registry are deemed legal. This translates in practice into significantly reducing the pool of buyers for your property, something nobody wants; more so on a challenging sales environment. Most buyers require finance to acquire a property (i.e. mortgage loan). Lenders will offer borrowers considerably less money to acquire a property with non-registered extensions as these are non-existent for all intents and purposes.

 

Making it easier on us, let us examine it with a practical example. If a rural property is being sold with a modern two-storey villa of 450 m² in a plot of 10,000 square metres (€1.5mn) albeit on paper (Land Registry description) it is actually a vintage cortijo of 80 m² (€120k), a lender will only be able to finance a fraction of the asking price. Meaning a buyer will be facing a huge shortfall in the money required to close the gap. Consequently, the deal will likely fall through because of lack of finance. What we can glean from this example, is that what is not lodged at the Land Registry simply does not exist legally to lenders and no money can be borrowed against it.

  • Some extensions require a Licence of First Occupancy (LFO, for short) without which a property cannot be lived in or rented out. So, for example you cannot receive income letting it out as a holiday home.
  • You may not be able to apply for utilities. As a result of not having attained a LFO, the property may not qualify to apply for utilities.

 

Profile on the legal procedure to register extensions and improvements

  • Contact an architect to draft a building plan.
  • Hire a lawyer.
  • File and pay for a town hall’s building licence (major or minor works).
  • Attain a certificate of end of works.
  • Register the extension/improvement in a deed at a Notary Public.
  • Register the updated deed at the Land Registry.

 

Conclusion

Registering extensions and improvements is in a property’s owners’ best interests as these will be made legal and will allow him to fetch a more attractive sales price for his property.

Bottom line, for your own good, your Title Deed must reflect and match exactly your property’s description. If this is not the case, you must hire a lawyer to amend your Title Deed and adapt it to reality to legally sell your property or to apply for a loan against it.    

 

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in taxation, inheritance, conveyancing, and litigation. We will be very pleased to discuss your matter with you. Please contact us for a free initial consultation. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on 951 894 675 or by completing our contact form.

Article originally published at Spanish Property Insight: Legalising Unregistered Property Extensions

 

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

 

 

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

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Holiday Home Taxation in Spain

Raymundo Larraín Nesbitt, July, 8. 2017

Lawyer Raymond Nesbitt gives us an outline of Spain´s taxation on holiday home rentals.

The following article has been greatly simplified to avoid unnecessary tax technicalities. The quoted tax rates are subject to change from one year to the next. Seek professional legal advice on your matter – see disclaimer below.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of July 2017

 

Introduction

After a decade in the doldrums, Spain’s real estate market is once again picking up the pace showing indelible signs of warming up, spearheaded by Madrid and Barcelona. The market seems to be staging a comeback in full swing which is a welcome respite.

  1. Asking rental prices are soaring by two digits year-on-year as reported by experts. The exact figure is contentious, as some prestigious media, like El Pais daily, quote a 21% annual increase whilst others, such as El Mundo daily, estimate the national average rental increase to be at 10.2%. In any case, minutiae aside, the consensus is clear and unanimous that we are witnessing a whopping two-digit rental growth in asking rental prices year-on-year:

 

  1. Capital appreciation of well-located real estate is also rising fast (in some coastal areas by two digits).

 

The average rental yield in Spain can be expected at 5% pa (dependent on location). If to that you also add the potential of capital appreciation, Spanish real estate is poised for combined two-digit gains over the next years easily winning alternative investments and paltry fixed returns in a context of historic ultra-low interest rates.

Bottom line, go bricks for the win.

Limelight on Spain - why is it such an attractive place to live (and invest) in?

Spain is the world´s third country to attract more tourism (trailing closely behind the US and France) with over 68 million tourists as compiled by the United Nations World Tourism Organization annual barometer. An all-year-round mild weather, beautiful unspoilt scenery, great food, friendly natives, modern health and transport facilities, amenities and a rich cultural background make Spain a touristic hotspot to be reckoned with.

And last, let us not forget Spain´s renowned beaches. For almost 30 consecutive years Spain has led the world-ranking of Blue Flags awarded by the independent Foundation for Environmental Education with over 561 in 2015 trumping its closest competitor. Blue Flags are only awarded after meeting stringent requirements and are an indication of their high environmental and quality standards.

It is in this financial context that investors are showing increasing interest in the potential of buy-to-let properties in Spain. A burgeoning real estate market coupled with a consolidated tourism industry is luring investors to foray into the market in droves with a renewed sense of self-confidence.

Holiday Rental Homes Definition

What exactly qualifies as a holiday rental home or vivienda vacacional in Spanish? Spain is made up of 17 autonomous regions with devolved competencies on this matter. Many of these regions have passed on their own laws on what is classified as a holiday rental home. You can read further on the matter in my article Holiday Rental Laws in Spain – Explaining the Latest Changes. As an example, Andalusia approved last year its own regulation: Andalusia's Holiday Rental Laws (Decree 28/2016).

Basically, and take good note I am generalising, holiday rental homes are let for short periods of time which vary between one day up to several weeks. The main point is that they are not regarded as the permanent abode of a tenant which is referred to as ‘guest’ or ‘lodger’ rather than tenant (as opposed to long term lets). Take note that in this article I am expressly ruling out dealing with what are known as apartamentos turísticos or touristic lets which have their own regulation and set of rules.

Landlords would do well to acquaint themselves with the regulation of the autonomous region where their property is located in Spain as some of them have stringent rules in place which require the property to be registered in an official registry and other regions even go as far as demanding a touristic rental licence from landlords without which you simply cannot rent out. Fines for non-compliance vary, but we warned you could be landed with a steep six-figure fine or even having a charge placed against your property. Some regions, such as Barcelona, have taken the matter to heart with the town hall employing over forty inspectors trawling websites and doing the legwork to flag unlicenced holiday rentals and fine them. It is estimated there are 17,000 holiday rentals in Barcelona alone of which 7,000 are deemed illegal.

Holiday Rental Homes Registration

In Spain, it is mandatory most regional authorities require landlords to register their properties in a Tourism Registry. Requirements vary from one region to the next but in general a Licence of First Occupation is a chief requirement to let. Breach of these rules may attract humongous fines such as those levied on AirBnb in the hundreds of thousands.

Our law firm offers a Registration of Holiday Rental Homes service.

Holiday Rental Homes Taxation

Holiday rental homes are, by definition, short-term lets. Tenancies exceeding two months fall under Spain´s Tenancy Act and are regarded as long-term lets which give way to a great number of tenant entitlements landlords should be keenly aware of.

In Spain, all joint owners of a property are treated as individualised taxpayers. Landlords need to file a quarterly tax model in the first 20 days of every January, April, July and October.

In other words, one tax model needs to be submitted for each (joint) owner and also one for each guest. By guest it is understood as the leader of the group, he who pays the rental (not for every person lodging in a group).

Short-term landlords will additionally also be required to file an annual tax model (Non-Resident Imputed Income Tax).

As a recap, on renting out in Spain (whether long or short term) you have to pay two taxes:

 

I) Resident in E.U. or E.E.A.

Tax rate: 19% on rental income.
Tax relief: Yes, physical persons may deduct, for example, home insurance, mortgage loan interest payments, property maintenance expenses etc. Legal persons may also deduct rental-related expenses.
Dates: collected annually or quarterly.
Tax form:

II) Resident outside the E.U. or E.E.A.

Tax rate: 24% on rental income.
Tax relief: no.
Dates: collected annually or quarterly.
Tax form:

As can be gleaned, this can become tedious and very admin intensive for the average landlord. Which is where lawyers step in offering our legal and accounting services to cut through the red tape for a very competitive fee.

More information in my article Non-Resident Taxes in Spain.

With or without VAT?

In principle, as a general rule, VAT is not applied to holiday rental homes. However, if you offer any of the following below your rental may be regarded as assimilated to offering hotel accommodation in which case you need to invoice everything with VAT which impacts the profit margin of the business increasing its costs:

  • Concierge service.
  • Daily changing of bed linen.
  • Daily changing of bath towels.
  • Daily cleaning of property/room.
  • Room service (food and beverage), catering.
  • Bed & Breakfast.
  • Other ancillary hotel services such as: daily press, laundry cleaning, luggage storage service, accommodation booking (holiday reservation).
  • Other.

 

Holiday Rental Homes Non-Resident Landlord Rental Tax Relief

Recent ECJ rulings have created in their wake new opportunities for (physical) non-resident landlords to take advantage of tax relief in equal footing to Spanish nationals which were previously barred to them.

Please read my two articles on the matter which clearly explain how landlords*, with the support of our law firm, can take advantage of tax rules greatly mitigating their tax bill:

Renting in Spain: Non-Resident Landlord's Rental Tax Relief – 14th of January 2017

Renting in Spain – Landlord's Taxation Guide – 21st of December 2016

*Non-EU landlord nationals are barred from benefitting from lenient tax relief.

 

Through our dedicated service Holiday Rental Accounting Service (HRAS) we are able to reduce - on average - 30 to 40% of a landlord's taxable base on renting out property in Spain. Ask us.

Conclusion

As can be clearly surmised from the above, the taxation on private rentals may be somewhat convoluted given the fact that 17 different Autonomous Regions in Spain hold competence over them and rule accordingly. This requires the input of seasoned professionals to wade through the labyrinthian pitfalls and come out successfully.

Which is where we lawyers step in; hand-holding landlords and guiding them through the taxation ordeal to come up on top, working the system.

 

90% of all millionaires become so through owning real estate.– Andrew Carnegie.

 

Born in Dunfermline, Scotland, this 19th century Scottish self-made multimillionaire emigrated to the US at a young age. Carnegie led the expansion of the American steel industry in the late 19th century and through a string of savvy investments is often identified as one of the richest people and Americans ever. He will always be remembered for becoming a leading philanthropist for the United States and the British Empire giving generously to foundations, charities and university endowments.

 

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in taxation, inheritance, conveyancing, and litigation. We will be very pleased to discuss your matter with you. Please contact us for a free initial consultation. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on 951 894 675 or by completing our contact form.

Article also published at Spanish Property Insight: Spain Holiday Home Taxation

 

Legal services Larraín Nesbitt Lawyers can offer you

 

Holiday rental related articles

 

 

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2.017 © Raymundo Larraín Nesbitt. All rights reserved.

 

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