I was surprised to read that undeclared cash payments, known as B or en negro (Black Money), are still prevalent in Spain, according to an article in the Spanish daily El Mundo. I thought they disappeared with the boom.
In the past, including the boom years, under-the-table cash payments were a feature of many property purchases in Spain, at least in the resale market (far less so in the new home market). Many foreign buyers were horrified, but it was cash or no deal.
With a big black-economy (thanks to high taxes and bureaucracy) there was plenty of cash sloshing around, and property was a great way to hide it – one of the factors that helped inflate the bubble. But most of all, undeclared cash payments reduced taxes for both buyers and sellers – lower declared profits for vendors, so lower capital gains, and lower ITP purchase tax for buyers. The big loser was the Spanish treasury, which could have collected more tax by reducing tax rates.
How did it work, given that all property transactions in Spain have to be witnessed by a notary? With buyer and seller gathered in the notary’s office, once the declared payments had been made, and the deeds signed, the notary would leave the room, and the buyer would hand over wads of cash to the vendor. Tens of thousands of Euros often changed hands this way, and notaries knew very well what was going on.
But the property bust, and stricter controls on cash, put paid to the practise. Crashing prices wiped out capital gains and reduced ITP, making cash payments less attractive for both sides. Indeed, prices fell so far that many buyers were hit with what I call the ‘bargain-hunter tax’ – a type of fine for paying too low a price. How ironic that when buyers stopped paying in B-money, the tax authorities started fining them on the presumption of having done so.
Stricter controls on cash
Stricter cash controls against money-laundering and financing terrorism have also made it much harder to deal in cash. To change just one 500 Euro note in the bank today (commonly known as a ‘Bin Laden’, and the favorite denomination of property dealers back in the day), you have to provide your identity documentation. You can’t withdraw or deposit significant amounts without justification. So unless you want to keep lots of cash under the mattress, B-money is more hassle than it’s worth.
But now house prices are rising, and with transaction taxes are higher than ever, the incentive to return to cash payments is getting bigger. Even so, I was surprised to read in El Mundo that black money “continues to be very prevalent in the purchase of homes”. I looked into it a bit, and found no evidence of this. Undeclared cash-payments are “very, very residual” says Guirfé Homedes, International Director of Amat Immobiliaris, a real estate agency covering Barcelona and its surroundings. “They disappeared from new home purchases years ago, even before the boom, and in the resale market you now rarely, if at all, hear of them, at least in this area.”
So despite recent headlines in the Spanish press, I think you are unlikely to be asked to pay a percentage in cash under the table if you buy a home in Spain today, and certainly not if you are buying a new Spanish home from a developer. And if you are asked to pay in cash, refuse or walk away. It’s not worth the hassle.