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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

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


    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:
    1. 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.
    2. 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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