If you jointly own property in both the UK and Spain you may need to transfer your share of the family home in the UK and your second property in Spain under the terms of a UK Court Order.
The process
The transfer needs to be formalised through a Spanish termination of co-ownership deed (Escritura de extincion de condominio) signed by you and your ex-spouse/civil partner in person, or by someone representing you under a Power of Attorney in Spanish form. In preparation for signature of the Escritura, a copy of the final divorce order (previously known as Decree Absolute) and the consent order or equivalent should be officially translated and legalised.
Whilst the transfer of the property should not, in principle be a complex matter, you must bear in mind that distribution of property in Spain as a result of a divorce, is different to that in the UK. In Spain judges have less discretion than in the UK as we have Matrimonial Property Regimes that will deal with the distribution of property upon divorce.
For the transfer of the Spanish property to take place, the consent of bot owners is necessary. If there is no agreement, a party will have to resort to exequatur proceedings in Spain to have the UK court order recognised in Spain and subsequently apply for enforcement. This can be a lengthy process with an uncertain outcome.
It is therefore essential before obtaining a financial remedy order that the UK advisors seek the input of a Spanish lawyer to advise in relation to the potential difficulties in implementing the order in Spain. It is also important to confirm the tax and costs involved in the transfer so it can be agreed who will be responsible for payment and assist with the wording of the order in relation to the Spanish property. If this is not the case, complications can arise, here are a few examples:
- Weak definitions of the Spanish property on the Court Order issued by your local UK Court can be a real problem. Too often, an English Court Order fails to identify the Spanish property clearly enough for the Spanish Land Registrar to allow the transfer of ownership to be registered. This may imply a further application to the UK Court for the Order to be amended.
- Complex wording of the order or including provisions that are uncommon in Spain such as appointing estate agents for the sale; timescales for completion or undertakings given. Generally speaking, these will not be enforceable in Spain and can create uncertainty for all parties. Therefore, simplicity will be key.
- Often it is most problematic when the property is solely held by one party and full ownership is to be transferred to the other party.
Taxes and Costs
Depending on the timing, the transfer of shares relating to the English former matrimonial home to a previous spouse or civil partner tend to be tax free. In contrast, the taxes triggered by a transfer upon divorce of a share in Spanish property can be substantial:
Transfers of property as a result of a Spanish divorce are generally tax free as long as the other party has been financially compensated. However, it is often the case that a UK order provides for the transfer of a property as part of the overall financial provision but does not necessarily include a financial compensation in favour of the other party.
Taxes
The Spanish tax authorities may claim a transfer tax called Actos Juridicos Documentados (AJD) which varies regionally between 0.5% to 1.75% of the value of the share to be transferred. This tax would usually apply if the tax authorities accepted that the other party has been compensated with other assets or a lump sum payment in accordance with the court order. However, the tax authorities in Spain have been inconsistent with this as they have argued that they have no means to ascertain the value of the other assets or whether such compensation has taken place overseas. Consequently they have applied Impuesto de Trasnmisiones Patrimoniales (ITP) or transfer tax at a higher rate, which varies amongst the regions. In extreme cases, the tax authorities have applied gift tax rather than the two types of stamp duty as mentioned. Therefore, it is essential to involve your Spanish advisor even before a settlement is reached.
Non-resident’s withholding tax
A similar anomaly applies to a 3% withholding tax. An individual purchasing Spanish property from a non-resident seller is liable to withhold 3% of the value being transferred and pay it to the Spanish tax authorities to cover the Seller’s Capital Gains tax liabilities. With a divorce transfer, although no cash typically changes hands for the share of the Spanish property, according to a recent decision of the Spanish Supreme Court, the 3% tax is still likely to be payable.
The good news is that, if the withholding tax exceeds the Capital Gains Tax liability, an established process exists to claim a refund of the withholding tax.
Capital Gains Tax
Contrary to the UK position, transfers of property between spouses/civil partners are not necessarily exempt in Spain. It’s important to determine what the transferor gains, if any. Since January 2022, the tax authorities in Spain introduced a new method of valuation called valor de referencia, this value is based on statistics and not necessarily represent the market value. The tax authorities may not accept a higher value therefore this can be a potential issue from a Capital Gains Tax perspective, as the tax authorities may consider that the transferor is increasing the value to reduce his Capital Gains Tax liability. This method of valuation is controversial, and the tax authorities have been inconsistent in its application. It is advisable to carry out an official survey to ascertain the market value of the property. At present, the Capital Gains Tax rate for non-residents remains frozen at 19% on the net gain. Capital Gains Taxes will be calculated taking into account the value declared at the time of the transfer and the acquisition value. It will be possible to offset a series of costs such as legal fees, notary and land registry, taxes paid in the purchase amongst other.
Plusvalia Tax
Plusvalia is a local tax charged by the Town Hall on a property transfer. It is calculated on the rateable value of the land on which the property is built and the number of years that have passed since you purchased the property. This tax is not levied when there is a dissolution of co ownership. However, the transferee will have to bear in mind that when they disposes of the property in the future, the acquisition date for the purposes of this tax would not be the date of the dissolution of the co ownership, but the date in which both spouses acquired the property.
Notary and Land Registry fees
These are charged in accordance with an official tariff and will depend on various factor such as value of the property, number of pages of the notarial deed, etc.
Spanish mortgages
A pre-existing mortgage taken out in joint names when a couple is married can create another barrier to a timely transfer. The English judge may have ordered that whoever receives the half share of the Spanish property assumes full responsibility for any mortgage repayments. The Spanish lender will only allow this if the party taking full title of the property has the financial capacity to service the mortgage in their sole name. The process involved with a review of the mortgage product can add further complication and expense. Our advice is that both parties discuss with the bank the possibility of the potential new owner solely taking the mortgage before any agreement is made to avoid uncertainty and disappointment.
Whilst informal arrangements can be made where both parties remain part of the mortgage deed and the new legal owner continues paying the Spanish mortgage in full every month, both parties will remain jointly liable for the re payment of the mortgage to prevent a default. From a Spanish legal point of view, the former legal owner is left in a vulnerable position as they will remain a party to the mortgage without having an interest in the property. Therefore, it is important that provisions are made in England to cover this eventuality. Under Spanish law, any public deed will prevail over any private agreement. In order to mitigate the risk, it would be advisable that the parties enter into a private agreement, recording that the new sole owner shall indemnify the other of any default in the re mortgage payments. Whilst this is a private agreement, it would help the former owner bringing a claim against the new owner.
Protecting your interests through a difficult time
Our specialist team can work alongside your English advisers to ensure that any agreements and orders involving a Spanish property are properly dealt with before a settlement is reached or an order is made, allowing an adequate estimate of costs and taxes to be provided before any agreement is reached.
You can also appoint us to deal with the Spanish property transfer itself. Or, if your ex-spouse/ ex civil partner has already appointed their own Spanish professionals to deal with the transfer, we can advise you on any concerns you might have about documentation you are being asked to sign.
Whatever your circumstances, please do not hesitate to contact us to arrange a confidential consultation.
