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Capital gains tax on properties in Mallorca

March 12, 2009 // Posted in Property finance in Mallorca (Tags: , , , , , , , ) |  1 Comment

Both residents and non-residents are required to pay capital gains tax when they sell a property in Mallorca. It used to be advantageous to buy properties through a company in order to avoid this, but this is not the case now as the advantages are less and it can complicate the sale of the property. So this is something we recommend strongly against unless there are very clear reasons as to why this is the preferable structure to adopt.

The good news is that the tax rate is now lower than it used to be. Non-residents used to have to pay a higher rate of 35%, but this has now been standardised to be in line with the residents’ rate at 18%.

The tax is calculated as the difference between the acquisition value and the sale value of the property. These figures are worked out as follows:

Acquisition Value

The value is based on the stated value in the Deed of Purchase plus those taxes and disbursements which are related to the purchase (primarily VAT, Transfer Tax, Inheritance tax (if applicable), Notary’s fees, Stamp Duty and Land Registry fees).

This value is then recalculated according to a formula that is reviewed every year by the Government. This basically reduces the taxable value by increasing amounts according to the length of ownership.

Sale value

The value of the sale is calculated as the purchase payment received less any disbursements – this includes taxes related to the purchase and which have been paid by the vendor (Plusvalia tax, Estate Agent’s fees and Notary’s fees). Disbursements can include some types of post completion works carried out on the property.

So, in essence, both the Acquisition value and the Sale Value are moderated in your favour. As with all tax matters we advise that you need to seek the advice of a tax expert during the initial purchase process and, ideally, prior to making the option payment on the property, ion order to be sure that you fully understand the ins-and-outs and that you plan your management of the property in the most tax-efficient way.

Obviously if you are paying this tax in Spain you do not have to pay it again in the UK. There is a double taxation treaty between the UK and Spain which means that tax cannot be levied in one country and then again in another. The gain on the property is being made in Spain so this is the correct place to apply the tax liability.

If you would like to speak to a tax expert regarding any of the above please email us and we will put you in touch with our partners in Palma. They will be happy to give initial advice free of any charge.

Mallorca property prices levelling out?

March 4, 2009 // Posted in Mallorca property market, Property finance in Mallorca (Tags: , , , , , ) |  1 Comment

According to official statistics reported in today’s Mallorca Daily Bulletin (the local English language newspaper), property prices in Mallorca rose by 0.8 percent in February compared to January. This is the figure for resale properties as opposed to new builds.

I agree with their comment that it is too soon to talk about positive signs of a recovery. In fact I think it is actually way too soon for that and we are unlikely to see any real signs of recovery before the middle of next year. However, this figure does illustrate that the property market in Mallorca is more resilient than most places, and is certainly not in free fall as some buyers seem to believe.

If you thinking about buying a property in Mallorca but area waiting for prices to drop substantially, it is worth considering the points made our latest Mallorca property Market Update and also having a look at this post – How to secure the best Mallorca property deals in the current market.

The key point is that the average price statistics do not take into account the considerable variance in prices that is currently being created due to the owners circumstance. Some owners are very eager to sell or have no option and they are likely to negotiate a significant amount off the pre-slow down price. Others who are in a more solid position are quite ambivalent about the situation and know that Mallorca is a good investment, so will not negotiate so much. This is a factor that is not apparent in property markets when times are good!

So, in my view, trying to identify a bottom in prices misses he point and could lead to some fantastic opportunities being missed. If you would like us at Mallorca Property Partners to keep you updated on the best opportunities please email me at kevin@mppsearch.com.

Clarification on abolition of Spanish wealth tax in Mallorca

February 18, 2009 // Posted in Property finance in Mallorca (Tags: , ) |  1 Comment

This is old news, but I still get asked whether the wealth tax is applicable, so here is confirmation that the tax was abolished at the beginning of 2008.

The Spanish wealth tax, known is known in Spain as ‘patrimonio’ (the Impuesto sobre el Patrimonio). The tax was introduced 30 years ago and required all property owners (both residents and non-residents) to pay an annual tax based on the net value of the asset after permitted deductions such as mortgages. The tax was collected by regional governments i.e. the Mallorca Government in this instance.

For most non-resident property owners the tax bill for the wealth tax was never very big, possibly €1,000 depending on the property. The wealth tax was abolished as of 01/01/2008. All non-resident property owners who have been paying the wealth tax to date should also have an appointed fiscal representative in Spain, as required by law i.e. a gestoria, in order to ensure that the correct services and fees are in place for 2009.

How to secure the best Mallorca property deals in the current market

February 5, 2009 // Posted in Mallorca property finders, Mallorca property market, Property finance in Mallorca (Tags: , , , , ) |  2 Comments

This is an addendum to our latest Mallorca Property Update which brings our October report up-to-date. Both reports discuss the direction of the Mallorca ( Majorca ) property market and detail the buying opportunity that is apparent at present.

This post talks more about the “tactics” or approach you should adopt if you are to secure a good deal on a property that is a solid and valuable long-term investment.

  • Don’t necessarily go for the most obvious “bargains”. This is a point I made in the October update. It is an important one so I am repeating it here. Don’t necessarily go for the “best  bargains” judged purely in terms of % off original asking price. If you really want to buy based solely on the biggest price reductions then Mallorca is the wrong place to look – you should be looking on mainland Spain! However the best long-term investments and the ones that will “bounce back” most quickly when the economic environment improves will be the good quality properties in the most sought-after areas. Mallorca as a whole is a good bet, but there is a lot of variety within Mallorca and the areas I recommend focusing on are those that have been the most sought-after for many years. You can read more about this in the October update linked above.
  • Be in a position to buy. Obviously the more serious the vendor thinks a buyer is the more seriously he will treat them and any offer they make. Buyers who have cash or have agreed finance in place are obviously in the best position. This does not mean however that you need to be rolling in cash to take advantage of the market at the current time. Whilst credit from banks is still tight, they are (believe it or not) eager to get things moving and will lend money to people who can show that they can meet interest repayments and that they are buying a property at a sensible price vs. the mortgage. This latter point should not be a problem at present as bank valuations are generally showing properties to be of a higher value than they can be bought for! There is one mortgage product in particular that allows you to purchase in Euros without exchanging the bulk of your Sterling until the exchange rate between the two currencies improves. You can see more about that on our web site here – Sterling / Euro mortgage product for properties in Mallorca – and also on this blog posting – Illustration of Sterling / Euro Mallorca property mortgage.
  • Be prepared to move quickly and be decisive. Whilst the market is slow and properties generally are not moving fast, the genuinely good deals do move quickly. You need to be prepared to come out to Mallorca at short notice if you are to stand the best chance of getting the most interesting properties. If you have MPP looking out for opportunities you will be tapping into years of experience and an extensive contact-base within the Mallorca property market. We are the longest established no-cost property finder in Mallorca and have an enviable network of estate agent partners covering all areas. So we have more comprehensive coverage of the good property opportunities than any conventional agent. Furthermore we can assess opportunities on your behalf in advance, so that if you do visit to view it will be for good reason and you are less likely to have a wasted trip.
  • Listen to the professionals. Of course estate agents are employed by the seller so buyers often take their advice with a pinch of salt, and in normal times this is sometimes the best approach. But these are not “normal times”. Estate agents are eager to make deals and will advise their clients (the owners) to negotiate to the maximum they think is realistic in order to get an agreement on price. So if the agent says the offer is “far too low” or that your assessment of the current value of the property is simply “not realistic”, this may well be the case. However, if you use the services of Mallorca Property Partners you can be assured of an experienced view on what offer should be made and what is likely to be accepted. We are completely independent, and our credentials and reputation are established on providing a valuable service to you as the buyer. We do this a) by finding you the best properties b) ensuring you get accurate information and genuine objective advice to help you in your decisions and c) providing direct access to all the supporting services and property professionals you might need at any point during the search and purchasing process.

If you are interested in buying property in Mallorca or if you have further questions on the market please, email me, or fill in the search form on our web site by clicking here – Mallorca property search. I hope this has been of interest and look forward to hearing.

Further information

≈ More about our Mallorca property finder services
≈ About property finders in Mallorca

Sterling deposit mortgage for Mallorca properties

February 1, 2009 // Posted in Property finance in Mallorca (Tags: , , , , , ) |  1 Comment

I sent out an email and posted information on our website of a new mortgage product that allows people to purchase a property in Mallorca in Euros without changing their money from Sterling into Euros. You can read the article here – Mallorca Property Mortgage details. The objective is to avoid losing out in the exchange while the pound is at its current low level.

A few people have asked for a better understanding of the way the mortgage product works so here is a copy of one of the illustrations I gave. This one is based on a property purchase price of Euro 150.000. (Sterling has moved up since I wrote this illustration, and it looks set to continue … I will be writing on this early next week).

The key terms to look out for here are the valuation price, and the actual purcahse price, and the difference between the two.

The product works on the basis that many properties are currently selling for less than the bank valuation. The difference can be as much as 30%. The bank will lend 70% of valuation amount and, depending on the exact amount the final purchase actually costs, this can cover the bulk of the actual Euro purchase payment required for the property – possibly even all of it. 

The purchaser is required to deposit an amount, in Sterling, that means the banks percentage lending on the total valuation amount is 70%. So this is not a product whereby the buyer can borrow 100% of the loan value without putting any deposit forward. But the deposit is held in Sterling avoiding the need to exchange these funds at the current time.

The only sum that the purchaser has to pay in Euros at the time of purchase is the purchase charges (taxes and legal fees – usually around 10%).

For example.

  • Purchase price: 150,000 Euros
  • Bank valuation: 214,000 Euros
  • Charges (tax / legal) @ 10%:  15,000 Euros – paid at time of purchase.
  • Euro finance available from bank: 70% of Euro 214,000 = Euro 150.000 – the amount required to purchase the property.
  • Deposit @ 30% of valuation price = Euro 50.000 but this is retained in GBP. At 1.06 Euros to the pound = 42,000 GBP (approx) – held on account by the bank.

The Sterling deposit held by the bank will get interest paid on it, so this negates any potential disadvantage of taking the money out of your UK bank and off-sets against the total monthly outgoing covering the Euro loan interest payments.

When the pound improves the purchaser can then exchange their deposited funds into Euros. The loan values are recalculated so that bank mortgage continues to cover up to 80% of the total loan value. Let’s say Sterling moves back up to a level of 1.30 and you decide to make the exchange at this point.

  • New loan amount = 150.000 x 80% = Euro 120.000.
  • Therefore you require 30.000 Euros to take the loan down to this level.  This equates to  23,076 GBP.
  • There is, therefore, a surplus of GBP 18,923 from the original deposit payment which is returned to you. (Or you can, if you wish, opt to pay off more of the loan at this stage.)

The end result is an 80% mortgage on a property for which you have paid Euro 150.000 (+ charges) and which has been valued at  Euro 214.000.

The product is most advantageous for properties that have sale prices 30% lower than the valuation. Where the percentage difference between the valuation amount and sale price is lower the buyer will need to compensate by changing some money into Euros.

The great advantage of this mortgage product is that you are buying a property at a time when prices are depressed. Mallorca ( Majorca ) continues to be a very good investment prospect and looks set to “bounce back” quickly when the economic environment improves – unlike much of the mainland and other locations in Europe. You can read more about the market environment in my last Mallorca Property Market Update. It was written in October last year but the observations made are proving accurate.

Hopefully that sheds some light on how this mortgage works. Drop me an email (kevin@mppsearch.com) if anything needs further clarification or you want a further illustration.