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The safe way to avoid the sharks

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Should you buy in your own name or through a company?

Sunday Times Home Section, 14 May 2006

When Gudula Freytag bought a plot in Estepona on the Costa del Sol on which to build her dream property, she was unable to do so in her own name: for tax reasons, the land was held in the name of a Gibraltar-registered company, and the vendors insisted she bought the company rather than the land itself. When she came to build her home, however, Freytag, 47, discovered she did not own the plot, leaving her embroiled in a four-year legal battle to get back what is hers.

“The owners of the hotel next door forged documents that enabled them to transfer ownership and register my land without my knowledge or consent,” she said. “My beachfront property has been stolen from under my nose.”

If Freytag ever buys again, she insists she will do so in her own name — or not at all. “You never know what can happen, and complicated ownership structures can expose you to risks you never imagined existed,” she says.

Unlike Freytag, most people buying in Spain will do so in their own name. But as her example shows, it is not the only way. So does it ever make sense to buy through a company? Well, occasionally, but it’s rare, and you need to know what you’re doing.

Buying in your own name

This makes sense for all Brits either relocating or buying a holiday home in Spain. They are buying mainly for personal use, though they may rent them out a little if they can.

It is the most straightforward and cost-efficient way. Given the size of the average British property budget, which is less than €200,000 (£137,000), Spanish companies are comparatively expensive to set up and run. There are tax rates of 30%-35% on their earnings, and a tax on dividends. This is almost certain to be much more than the capital-gains taxes individual owners face: at the moment, CGT is 35% for non-residents, although as of January 2007 this is predicted to fall to 18%; residents pay 15%. Furthermore, Spanish residents selling their main home can reinvest all their gains tax-free into another principal home, whether it’s in in Spain or the UK. This is not an option for people who own via companies.

Another important reason to buy privately — one that is often overlooked — is the “benefit in kind” tax you are obliged to pay to the British taxman if you own property through a company abroad. If your vehicle owns a property, and you have the benefit of staying there, you could be hit with a tax bill running into thousands of pounds. Many Brits, who have bought second homes through companies to avoid local taxes and Spanish inheritance laws do not realise this, and do not declare it in their self-assessments.

Buying through a Spanish company

The Brit who should consider using a Spanish company structure is the serious investor. Mark Banister, 54, a semi-retired banker from Milton Keynes, and his wife, Denise, are a classic example.

They spent £268,000 on a 5,000sq m plot of land in the upmarket Marbella Club Golf Resort, and are building a villa that they plan to sell for about £1.7m.

“With all the costs involved in buying a plot, which attracts Spanish Vat at 16%, and building a villa, it made sense for us to do this through a company,” says Banister, who now lives in New York. “Some of the Vat can be reclaimed, some of the build costs deducted, and we believe the overall tax burden will be lower.”

Sarah Dodgson, who runs Hermosa Homes, an estate agency that offers turnkey solutions to people such as the Banisters, agrees: “These clients are sophisticated investors who buy plots and then build villas that they plan to sell, or perhaps rent out. They are, in fact, small developers, and for them it is tax efficient to do this via a Spanish company.”

If Brits are buying through a Spanish vehicle to avoid local inheritance laws, they are misguided — UK inheritance laws usually apply to the property of British nationals, so there’s no advantage.

David Franks of Blevins Franks, specialists in expatriate financial advice, is clear: “For the most part, all of the clever reasons for using companies to buy property in Spain, such as tax efficiency and greater flexibility, are complicated and highly impractical.

“Owning through a company can also make it difficult to sell, as the vast majority of buyers want a property, not shares of a company. Spanish companies cost money to set up and administer, so for most buyers it is just simpler, and cheaper, in every respect, to buy in their own names.”

Buying via an offshore company

Once, it was worthwhile to buy through an offshore company, say, in Gibraltar — it enables you to avoid Spanish CGT and transfer tax when eventually selling, as the transaction only involves shares in an offshore structure.

But the Spanish tax authorities hate it when buyers use offshore vehicles and try to make it uneconomic. “If you own a property through an offshore company, you have to pay a special tax of 3% of the market value of the property every year,” explains Franks.

This is a lot to pay each year just for owning this way, particularly when, as Franks says, it is not an option with anything to recommend it for the normal investor. And as Freytag’s sorry tale shows, it can expose buyers to a greater risk of fraud. Most Brits will be better off, and will keep headaches to a minimum, if they buy in the simplest and cheapest way of all — in their own names.

© Mark Stucklin (Spanish Property Insight)

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