Second home focus: Spain

More than a decade ago, the Spanish property market underwent a wrenching dislocation that left buyers out of pocket, lenders struggling to survive and swathes of empty apartments across the country. For would-be purchasers, Spain continues to harbour pitfalls for the unwary, but it remains a popular destination for holiday residences with a combination of sea, sun and relaxed lifestyle that draws buyers from across Europe and beyond.

The Spanish property market had acquired a Wild West reputation by the time it crashed during the global financial crisis. House prices dropped as much as 30%, the extent of over-construction – especially in coastal areas – emerged, and many buyers were left with debt greater than the value of their property.

The crash left many of the country’s banks who had lent excessively to speculative property developers on their knees. However, prices have been rising steadily over the decade, which has seen an end to the worst excesses in the industry, although Covid-19 did cause price growth to slow in 2020.

Impact of Brexit

International buyers have historically influenced prices in Spain, particularly in areas such as the Balearic Islands and Mediterranean coastal resorts, accounting overall for just under 10% of property transactions. The restrictions on movement arising from the pandemic and, even more importantly, the impact of Brexit have deterred UK buyers who had always formed an important part of demand; British residents have dropped from 30% of foreign buyers in 2009 to just 10% in 2021. However, other European investors have stepped in to fill the gap.

BIL’s Head of WM Credit Structuring Catherine Bastien says that the bank’s financing activity is focused on the luxury markets: “We concentrate on the Balearic Islands and Marbella, where prices remained quite stable during the mentioned crisis. Prime areas are in the “Golden Triangle” (Marbella, Nieva Andalucia, Sierra Blanca, Ojèn, Benahavis). The Marbella property market showed resilience. Moreover, it is worth to mention that properties of a very high level did not exist before the last crisis and we might see a temporary shortage”. Nevertheless, she acknowledges that Spain can be a difficult market: “Illegal construction without planning permission has been a problem.” In general, buyers will struggle to raise finance to acquire property unless its legality is clear.

Ms Bastien says the fall in demand from British residents has had an impact on the market: “UK nationals who already had property in Spain, for instance, may be finding it more difficult to travel there, particularly now that Britain is out of the EU. There is also concern about their ability to pass on a second home as an inheritance now that the UK is no longer governed by EU rules. They may also face different taxation arrangements from EU citizens.”

Investment property rules*

Despite these factors, Spain has retained its appeal as a second home destination. For information, 2022 has been a busy year for the Costa del Sol’s property market. In fact, the busiest year since 2007. In general, it is considered relatively open for foreigners looking to buy property. For example, it offers a so-called golden visa scheme for foreign property owners; foreigners can obtain a residency visa if they invest more than €500,000 in Spanish real estate.

These visas appeal primarily to retirees and holiday home buyers, but are also popular with non-EU citizens looking to get a foothold in a European Union member state and access to the Schengen travel zone. However, with pressure growing from the European Commission on countries to scrap investment-based visa schemes, the Madrid government has acknowledged it is considering ending the scheme or doubling the minimum investment to €1 million.

For potential buyers looking for an investment property rather than a second home, the rules are somewhat more complicated. In some cases regional governments have introduced stricter regulations on holiday lets, and in particular short-term rental platforms such as Airbnb, in an attempt to curb rising prices in popular tourist areas.

Each of the country’s 17 regions has the power to set its own rules on foreign buy-to-let investment, with the most stringent requirements imposed in the Balearic Islands and Madrid; potential investors should check out the local requirements. Non-residents from the EU or EEA must pay 19% in income tax on rental income, those resident in other countries pay 24.75%. A 50% reduction is available for resident owners, who must include rental income alongside other income in their annual Spanish tax return.

All buyers need a financial number, which can be obtained by visiting a police station with your passport. For EU citizens, this is a speedy process, usually taking only a day or so. For non-EU citizens the process will take longer, so buyers should factor this requirement into their timescales.

Capital gains and wealth and property taxes*

If and when you come to sell the property, capital gains tax starts at 19% Spanish residents and non-residents from EU and EEA countries for the first €6,000 profit, rising to 21% for gains between €6,000 and €50,000, 23% between €50,000 and €200,000, 27% between €200,000 and €300,000, and 28% above €300,000; the tax starts at 24% for non-residents who are nationals of other countries.

Spain also levies a wealth tax that usually applies to property worth €700,000 or more, net of mortgage borrowing. Madrid and Andalusia don’t apply any wealth tax. Other regions apply rates between 0.25% and 3.75% for extremely valuable property (up to 10M€). Non-resident buyers should also be wary of what is known as imputed income tax, levied on unrented property in Spanish urban areas and set at 2% of the valor catastral – land registration value, as assessed by the local tax authority.

The land registration value is also used to calculate the annual municipal property ownership tax (impuesto sobre bienes inmuebles or IBI), which is usually between 0.4% and 1.1% of the valor catastral a year, depending on the region. Buyers should note that this value is usually significantly below the market price.

Property purchase costs*

The cost of buying a property in Spain can vary considerably from area to area and charges are often negotiable. Buyers pay the majority of fees and commission, but unlike in France, there is no fixed scale of fees for lawyers or real estate agents.

Notarial costs, which include the title deed tax and land registration fee, usually account for between 1% and 2.5% of the property’s value. Legal fees add another 1%-2%, while agents’ fees tend to be around 3% of the property price. Property transfer tax ranges from 6% to 10% for existing property and 10% for newly-built homes.

Buyers in Spain should still be wary of speculators; the financial crash may have thinned out the ranks of the cowboys, but one should still scrutinise developers’ credentials with great care. However, the reputation of the property sector is much improved, and the appeal of the country’s landscapes and lifestyle is as compelling as ever.

International buyers have historically influenced prices in Spain, particularly in areas such as the Balearic Islands and Mediterranean coastal resorts, and make up just under 10% of all property transactions.

* Disclaimer: The information contained in this article is provided purely for information purposes and is only valid at the time it is given. This information is no substitute for the knowledge and competencies of their user.