Properties in Spain can be jointly owned for a number of reasons i.e. spouses, friends, family, investors. A practical problem may arise when one of the joint owners wishes to terminate the community by either buying out the remaining quota or else selling up their outgoing quota to a fellow joint owner. This is known as Dissolution of Joint Property Ownership. Solicitor Raymundo Larraín Nesbitt explains the procedure.
By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of May 2011
Some owners may be unaware there is a special legal procedure that can be followed in Spain to re-arrange holdings which saves buyers a considerable amount in taxes. On buying resale property in Spain, a buyer is normally subject to 7% Property Transfer Tax (ITP) on the proceeds. However, on following what is known as a “Dissolution of Joint Property Ownership” (DJPO, for short) a buyer will only attract 1% tax. EDIT 2015: it is now 1.5% Stamp Duty.
Read further to find out in what cases this applies and just how this can be achieved legally.
Deed of Dissolution of Joint Property Ownership
Signing a deed of Dissolution of Joint Ownership follows the same legal procedure as if you were buying or selling a property. Therefore a DJPO has associated identical expenses as a standard conveyance except with the added boon that the tax borne by the buyer is significantly less, as in 86% less. The reason being is because the buyer instead of being subject to Property Transfer Tax, on following a DJPO, is now subject to Stamp Duty which is significantly lower. This procedure may however not be applicable in all cases.
A deed of DJPO is signed before a Spanish Notary Public who witnesses it, allowing joint owners to re-arrange their share on any property in a tax-efficient manner as it enables the outgoing joint owner to transfer his share to an existing co-owner legally waving the extreme 7% Property Transfer Tax and paying in lieu 1% Stamp Duty on the full property value (EDIT: in 2015 it is 1.5%). Please note Stamp Duty is paid on the full value of the property, not only on the outgoing share that is actually being transferred.
If the property is mortgaged, consent from a lender is required to approve a deed of dissolution.
Foremost, both buyer and vendor need to be pre-existing owners of the property i.e. a married couple who owns a property in joint names. One of them wishes to terminate the situation and sell his share.
The buyer must also be an existing joint-owner i.e. in the above example the husband would buy out the outgoing 50% belonging to his spouse. He would now own 100% of the property.
If there is an outstanding mortgage on the property, a lender’s permission may be required to release the outgoing borrower/owner from his commitments.
A DJPO is most suitable in a number of cases involving joint property ownership:
1.- In a divorce or separation. Couples owning property jointly may decide to split up. Taking for granted they own a property in equal shares, one of them decides to sell their 50% to his ex-partner. The ex-partner will pay him/her his quota and this transaction will only attract 1% Stamp Duty on the full declared value instead of the usual 7% Transfer Tax on the 50% in addition to Land Registry, Notary and Lawyer’s fees.
2.- Re-arranging inheritances. Beneficiaries of an inheritance transferring their quota on a property to a fellow heir.
3.- Re-arranging property holdings between family and friends. Stakeholders such as family, friends or investors co-owning a property deciding to re-arrange their holdings.
Both buyer and vendor are subject to pay taxes on transferring ownership of the asset.
i) Buyer: will pay 1% Stamp Duty on the full property value. EDIT 2015: it is now 1.5% Stamp Duty.
E.g. following the above example, on a property worth €300,000, jointly owned by the couple, the husband would only pay 1% on the full property value or €3,000 in lieu of 7% Property Transfer Tax (that’s a tax reduction of 86%!).
ii) Vendor: pays Capital Gains Tax on the outgoing share. More on CGT in my article Taxes on Selling Spanish Property.
If the vendor is non-resident, 3% retention is practiced on the outgoing share. The CGT payable would amount to 19%.
E.g. continuing with the above example, if the wife is non-resident, 3% retention would be practiced on her 50% (€150,000). So the Notary Public would withhold in her case €4,500 which will be paid into the Tax Office on selling her share. The vendor, depending on whether she makes a profit or a loss, may be due a tax rebate on the withheld amount.
Other Expenses Incurred
As additional expenses, common to any sale or purchase, you will have to budget Notary’s fees (who witnesses the signing of the Public deed), Land Registry’s fees (to legally lodge the now re-arranged share in ownership of the property) and finally the Lawyer’s fee who negotiates with a lender if a mortgage is attached on the property, drafts the deed and organizes the signing of the deed at a Notary.
Forced Dissolution of Joint Property Ownership
What happens if one of the co-owners refuses to sell? This is when a contentious DJPO comes into play.
There may be cases in which one of the joint-owners may wish to terminate the joint ownership for good and sell the property. Fellow co-owners, for whatever reason, may turn down the proposal to sell the property as a whole and likewise may refuse to buy him out. This will result in a bitter gridlock that will erode personal relations. Refusal may be narrowed down to either lacking the necessary funds to buy the outgoing share outright or else due to the fact they reject altogether the idea of a sale.
To bypass the deadlock, any joint-owner is entitled to force a DJPO through a competent law court (Arts 406 and 1062 of the Spanish Civil Code). The court’s ruling will overrule any dissent and the asset will be disposed of regardless of opposition from fellow co-owners. The property will then be auctioned off publicly to the highest bidder. However, easy as it may sound, following a forced DJPO is far from it and there are three main downsides that ought to be pondered upon prior to taking this route.
The main drawback is that the asset will be sold in a Public auction which will fetch a value considerably below the current market value. It is unsurprising if the property is auctioned-off for 50% of its true market value. Another problem, given today’s grim financial environment, is actually finding a genuinely interested bidder; which in today’s market simply cannot be taken for granted. The reason being is that in a Public auction it is mandatory for a potential bidder to previously lodge before a law court 30% of the appraisal value (which is refundable if not won); not everyone has this kind of money nowadays. The credit-crunch has made a dent in Spanish lenders, who are no longer lenient with their lending criteria and have in fact raised the bar considerably for the average borrower requesting collateral. This has resulted in a shortage of bidders to the point that in 9 out of 10 auctions no one is bidding. And last but not least are the associated expenses to a contentious DJPO which are those of a litigation procedure which happen to be considerably higher than if it were just a standard conveyance procedure.
For the above three reasons, a forced dissolution through a law court is advisable only as last resort wherein the disagreement is serious resulting in a protracted stalemate; as all joint owners stand to lose significantly on following it. Sadly, at times, this may be the only legal solution to bring an end to an ongoing co-ownership problem.
A Dissolution of Joint Property Ownership is optimal to mitigate a buyer’s tax burden. However, it may not be applicable in all cases. Seek legal advice on the matter.
A non-contentious DJPO is very straightforward and can be arranged within a few days without any need for you to fly over to Spain by way of granting your appointed Spanish lawyer a specific Power of Attorney. The new re-arranged ownership will then be lodged at the Land Registry after the associated taxes are settled.
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