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- Which is the most tax efficient manner to purchase a piece of land to build a house?
Property Law
Antonio Flores Vila
22nd of September 2007
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Q. I am coming to Spain soon with a view to buying a piece of land with the intention of constructing a house. I want to do this in the most tax efficient manner from the acquistion point of view ( paying transfer tax on the land purchase but reducing that to 7% by constructing a house within a certain time frame ). I also want to sort out the Inheritance tax situation before I purchase as , being involved in forming offshore corporations myself, know it is easier to get things arranged beforehand rather than after the event. My wife and I would be joint owners she 47 and me 58. The property will be in an area some 50 to 80 kms east of Malaga.
Thanking you in anticipation
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A. There are two ways of approaching the matter you propose:
- The first one is to be buy a plot of land (at 7% Transfer Tax or 16% VAT + 1% Stamp Duty, depending on the seller's activity) and then contract a builder, in which case you would be paying 7% on the cost of works, plus 1% of Stamp duty to register the building.
- The second one is to buy a finished property, at a straight 7% VAT plus 1% Stamp Duty.
There are two main issues to take into account when opting for one or another:
- Tax: VAT is recoverable if you set up yourself as a trader, but the tax authorities now request that you prove that you have one person working full time and office space rented. This option is therefore not applicable unless you qualify.
- Purchase price: If we discard the above, the 16% VAT on the plot may be stiff if applicable (it may well not be the case and only a 7% transfer tax is applicable), the whole value of the operation is lower than if you buy straight from the developer. As an example, a villa which you buy for say 600k Euros from a developer could cost you to build 250k Euros plus another 150k Euros for the plot.
If as you say you wish to buy a plot and then construct your best bet is to avoid a plot with a 16%VAT + 1%Stamp Duty and find one at a straight 7% Transfer Tax.
With respect to Inheritance Tax, it is now very uncommon for buyers to acquire property via an offshore company unless a Spanish limited company is set in between both. This certainly avoids 100% IHT, subject to the dispositions of the jurisdiction of the offshore.
Another two ways to avoid IHT is to have a high mortgage in place, at all times (capping it up every two years or so), and/or split ownership into bare ownership and life interest where you retain the latter and your inheritors the former.
I would be pleased we met up on your next trip and discuss these matters thoroughly and therefore I will leave it to you as to when is it more convenient.
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