FAO David Searl - Property Transfer Tax - Please Help!

[livinginalhaurin]

My partner and I purchased a property in Alhaurin el Grande in April 2008 and we have received a notification from our Lawyer informing us that the Junta de Andalucia are asking for a further tax payment with regards to a private transfer contract (contrato de cesion privado) that was part of our purchase.

As you can imagine this has made us very upset as we made it very clear to our lawyer that we would only proceed with the purchase as long as there would be no surprises or further payments to make against the property after signing the escritura.

We put a deposit down on a new build six months prior to completion. The property had already been sold off-plan to a third party. At completion and on the escritura we purchased this property as a new build directly from the developer, however as a third party had bought the property off plan there was also a private transfer contract involved.

After waiting 6 months since we put down the deposit, the first occupancy licence was finally granted and it was at this point that the transfer tax payment was literally first mentioned and brought to our attention which turned out to be just 2 days before the initial signing date. This as you can imagine came as a complete shock as we had already had many meetings with our lawyer to ensure everything we needed to know was covered and so that we fully understood where all the relevant cheques were going etc.

After a couple of weeks of back and forth with our lawyer and the vendor, an agreement was made for the vendor to pay the private transfer tax otherwise we were not prepared to proceed with the purchase so eventually the vendor (or in this case the third party who held the transfer contract) agreed to swallow the tax payment.

After this was settled, my lawyer confirmed the total to be paid for the property and this was the same as previously stated before any mention of this transfer tax so I did not question this further. However, what has now come to my attention is that we actually paid for the transfer tax and instead they reduced the amount of money that the vendor was receiving for the sale.

I understand now that by law the private transfer tax (contrato de cesion) is something the buyer has to pay but this was not made clear to us at the time. More importantly, what was not made clear to us is that the private transfer tax amount to be paid was calculated from the remaining balance that the vendors (third party) had with the developer which was around 82,500 euros and not from the total cost that the vendors purchased the property for from the developer off plan originally.

The Junta de Andalucia has confirmed that the property has a minimum value of 133,000 so of course now they are asking for a further 4,500 euros or so (including interest and charges to date), on top of the 5700 euros that has already been paid on this particular transfer contract.

The purchase value was put down in the escritura as 159,000 euros on which we paid over 11,000 euros in tax. After talking with our lawyer concerning the purchase amount they advised that a purchase price of 159,000 would be sufficient for the Junta de Andalucia and that anything less than 130,000 would be risky and that the Junta may ask for more money regarding the tax at a later date.

My argument with the lawyer is why did they not apply the same calculation with the private transfer contract amount as they clearly know the approximate minimum value of properties in Alhaurin el Grande and they must have known that the payment of tax on the private transfer contract would not be sufficient if investigated by the Junta. For me, the whole reason for appointing a lawyer when buying a property is so that issues such as these are made perfectly clear.

This issue of the contrato de cesion was never fully explained to us and we were never informed that there could be a chance that the Junta would investigate the amount of tax paid on the transfer contract. We were actually under the impression that if any problems were ever to arise from the transfer contract that the vendors would be responsible and not us but unfortunately we now know this is not the case and it is us who the Junta are chasing for the tax payment.

We visited the Notario who was present at the signing of the title deed and he told us that our lawyer should have clearly explained to us that there could be a chance that this transfer contract could be investigated by the Junta de Andalucia and that they could request more money on the tax payment. After speaking with the Notario about what our options are, he explained to us that if we can prove that our lawyer did not inform us of this possibility of the tax paid on the transfer contract not being sufficient or the fact that all responsibility of this particular transfer contract would pass to us (the buyer) , that they could be held responsible for not informing us correctly and for negligence on their part.

We can honestly say that the lawyer at Manzanares never explained to us the issue of the contrato de cesion and we feel that it was their responsibility to inform us of this and from what the Notario has said, they are obligated to do so by law. If we had known that there was even a slight risk of the tax paid on the transfer contract not being sufficient for the Junta then we would not have gone through with the purchase. The fact that this tax payment was brought to our attention just before the signing date and 6 months after putting down the deposit is not acceptable.

I just dont understand how we can be responsible for paying transfer tax of this kind on the property twice.! We are only buying the property once and have completed on it directly with the developer so how can this be right.

We would like some professional and honest advice on our particular situation and we would like to know what our chances are of taking the lawyers to court and proving that we were not informed accordingly with the issue of this particular transfer tax.

The recaudacion office in Malaga have recently informed me that the debt has to be paid within 12 months and that they will begin to take an amount of just over 1,100 euros every 3 months with the first payment being taken out this May! they also placed an embargo on our account last month and again this month.

If David or anyone else in the know could let us know what our options might be it would be very much appreciated. As anyone who has taken the time to read this can imagine, it is causing us a huge amount of stress and we feel that we have been treated unfairly.

[julian]

I don´t think that going to court to admit you underdeclared the price in escritura would be a very good idea.

[livinginalhaurin]

Hi Julian,

I know what you mean but the fact still remains that the amount declared on the escritura is sufficient with regards to what the Junta have valued the property at, so it is not underdeclared so to speak.

[katy]

I doubt if you would find a Lawyer to take the case against another Lawyer. Best to pay-up like others have done. A lot of things are unfair here but fighting the authorities and lawyers is useless.

[julian]

it was either underdeclared or it wasn´t,...and from what you say it clearly was.... and underdeclaring is cheating the system, so if the system is now unfair on you then I think you´d be best to call it a draw and pay whatever is due before it gets messier

[Beachcomber]

Apparently this is a recognised legal procedure.

When the original prospective purchaser passes on his rights to a property it is normal for him to sign to say he is doing so. This often takes the form of a private contract and there is no obligation to make it into an escritura signed before a notary. However, the seller/promoter may insist on this before agreeing to sell to a subsequent purchaser in order to avoid the possibility of the original purchaser claiming that he still has a right to the property.

Once it is made into an escritura signed before a notary it attracts a 7% tax which is payable by the subsequent purchaser and subject, in the normal way, to a challenge by AEAT of the valuation upon which the tax is paid. There may be some dispute over whether the tax should be levied on the price the original purchaser paid to the developer or the amount for which he is selling on his rights to the property although in the present climate it is likely that there will not be much difference between the two figures.

In any event the subsequent purchaser is, in effect, paying two lots of 7% tax on the purchase making an over tax payment of 14%, something which most people would not entertain if they were properly made aware of the full facts which is obviously why the lawyer, who is probably in on the deal, tries to skim over the intricate details of the transaction in order no to prejudice its completion and, as a result, his fees and commission.

I think it would be very difficult for you to prove that you had been misinformed and, as the others have said, the chances of finding a lawyer willing to pursue a case in the courts is very remote. Be wary of any lawyer who offers to take on the case on payment of a provision of funds because it is likely that he will just procrastinate for months or even years then eventually tell you that there is insufficient evidence for the case to proceed.

It is a pity that you cannot name and shame the lawyers who 'acted' for you but there is nothing to stop you making it known in general conversation whilst you are out and about. Word will soon get around.

One other point, did you sign in your own name or did the lawyer have power of attorney?

[livinginalhaurin]

Hi Beachcomber,

Thanks for your informed reply. I signed in my own name although the lawyer did have power of attorney to sign in my parents names as guarantors.

I just find it unbelievable that by law I have to pay transfer tax on the property twice.

As you can imagine I am not on the best of terms with the lawyer who represented me but I do remember him mentioning something about the possibility to begin a different process to claim back some of the tax paid on the 159.000 euros that has been declared on the escritura although I am not quite sure what this involves. As the value of the property has been confirmed by the junta at 133.000 I think he was referring to claiming back tax on the amount we have over paid in the first place.

Any ideas if this is possible?

[Beachcomber]

The fiscal value placed on the property by AEAT is derived from applying a multiplier to the valor catastral of the property. However, by law the total purchase value must be reflected in the escritura of purchase/sale and the 7% transfer tax/VAT must be paid on this amount so there is no way that you would be able to claim back any tax you paid on the purchase even if the official fiscal value is lower.

There is a procedure to appeal against any revised value and resultant extra taxes imposed by AEAT and if you subsequently sell as a non-resident you may be able to claim back some or all of the 3% retention which would be made. Maybe it is this to which the person who is supposed to be looking after your interests is referring.

[DavidSearl]

FROM DAVID SEARL

FOR LIVINGINALHAURIN

And also, good work, beachcomber.

Sorry to be so long getting back but I wanted to find some good news for you but I can't.

Your question is: What are my options? Then you have two points.

1. Paying the tax and charges put onto the underdeclared private cesion contract, quite correctly by the Junta tax agency.

Here you have no option but to pay it. You are the buyer. In fact you bought the property twice, so you have two sets of transfer tax to pay. Properly, that off-plan purchaser should have declared the full amount on the sale and paid the tax himself as he was then the buyer, who later became a seller.

You could attempt to proceed against him for the "extra" tax, on the grounds that his attempt to dodge taxes by underdeclaring caused you financial loss. Several lawyers have suggested that this might or might not work and even if it does, the amount recovered would leave little after expenses.


2. Your lawyer failed to advise you fully of the tax liabilities.

He can reply that he himself supposed until just before the signing that the first off-plan buyer had paid the transfer tax in full as he should have. And how was he to know that the first off-plan buyer had underdeclared the price?

Nevertheless, if you are unhappy with your lawyer's services, you can complain about him directly to the "Colegio de Abogados", the professional society that licences lawyers in Malaga. And, you should not really have a problem with getting another lawyer to help you prepare your letter. The letter will probably result only in slap on the wrist for the lawyer, but a formal complaint has been filed. If enough of them pile up for one lawyer, the College starts to keep an eye on him.

I am sorry not to have a silver bullet for you, as you have been shabbily treated.

History Note

In the "boom" times, thousands of newly-rich Irish and UK "investors" came to the Costa del Sol with pockets of money. Instead of buying a flat, they were advised to put down payments on six flats instead. They used contrato privado de cesion with the developers and later sold on the flats for a fat profit. Actually, they did not sell the flats. They settled their private contracts with the developer in cash, so part of the profit went to the developer and another part to the off-plan "buyer". They dealt in cash and said nothing to no one about any taxes. The developer then sold the flat to an end-user at the new high price with no strings attached. The developer had his original financing from the early off-plan "buyer" and his share of the profit. The off-plan buyer had a tax-free profit.

Even though this is illegal, there are otherwise perfectly honest lawyers today who recommend doing such a deal in the same way. They look embarrassed and justify this by saying it is "cleaner". Your own case illustrates why they do this. It avoids many possible complications for their clients, who are end-user purchasers such as yourself. These end-user clients are then in fact perfectly clean as they buy from the developer with no strings attached. It is that off-plan speculator who has done the dirty, so to speak.

As a note to Beachcomber, the transfer tax of 7 per cent becomes chargeable when a property changes hands, even by private contract. It is not the registration of the "escritura" that attracts it.

Good luck with it, David Searl

[livinginalhaurin]

Hi David,

Thank you very much for your reply.

It really does upset me that there seems to be nothing I can do about this other than report the lawyer to the colegio de abogados.

I am of course not too sure how the whole process works with buying a property in Spain which was my reason for paying for the services of a lawyer. You mention how my lawyer was supposed to know about the fact that the off plan buyer had underdeclared the purchase price but if he doesn't know then how the hell am I (the buyer) supposed to know.?

The first point you mention about attempting to proceed against the off plan buyer on the grounds of his attempt to dodge tax and you say that the amount recovered would leave little after expenses. could the amount recovered cover the tax payment I am having to now make to the Junta. I am not looking for any financial gain other than covering the cost of the tax which what now seems (as initially suspected) that the off plan buyer has passed on to me.

The person who sold me the apartment still owns another apartment in the same community which i believe he had to complete on as it seems he didn't find anyone else to con. I have actually spoken to him about this and he just denies knowing anything about such things and cant speak Spanish so says he left it all up to his lawyer to sort out.!

By the way my lawyer and the sellers lawyers are the only main lawyers based in Alhaurin el grande which as I have been told, do not see eye to eye with each other at all.! The off plan buyers lawyer firm is the same firm who represent the developer as well so no doubt they were all in on it.

[Beachcomber]

...As a note to Beachcomber, the transfer tax of 7 per cent becomes chargeable when a property changes hands, even by private contract. It is not the registration of the "escritura" that attracts it...

According to my notary, if the promoter had not insisted on first prospective purchaser (in whose name the property had never been registered) appearing before the notary to abandon his rights to the property by way of an escritura there would have been no tax to pay as it would be ostensibly be passing directly from the promoter to the actual purchaser never having been registered in the name of the first prospective purchaser.

I didn't say the 7% was payable on the registration of the escritura I said:

...Once it is made into an escritura signed before a notary it attracts a 7% tax which is payable by the subsequent purchaser and subject, in the normal way, to a challenge by AEAT of the valuation upon which the tax is paid...

[julian]

the ITP should be paid on private contracts as well as escritura publicas, so whether the seller chooses to appear before notary or not does not free the buyer from paying the ITP at the time of signing the private contract.
(I imagine that the first sale from the promotor to the first purchaser has IVA instead if ITP? )

[Beachcomber]

I say again, not according to my notary. Perhaps the operative word is 'should' but if it is a private contract who knows that it exists and if it has not been signed before a notary it is not valid anyway? This is obviously why the promoter concerned insisted on it being signed before the notary in the form of an escritura.

The first purchaser didn't actually purchase the property so he won't have paid either. If he had gone through with the purchase paying IVA the OP, livinginalhaurin, would have only paid one lot of transfer taxes on the purchase which would have been from him not the developer.

[julian]

your notary, as a notary should tell you what should be done, not what is usually done.
a private contract is perfectly "valid"
not paying the tax because "who knows it exists" is illegal.the tax should be paid.

because others don´t do things properly doesn´t mean that one shouldn´t do so either.
many people don´t declare their income on rented property, but nutters like you and me do !

[Beachcomber]

A private contract is only valid if it is notarised otherwise it is just a worthless piece of paper.

When you sign a private contract of purchase/sale you don't pay tax on it until it becomes an escritura of purchase/sale.

[julian]

sorry, I don´t agree with you on either of those two points
let´s agree to disagree, it´s friday evening , start of a long bank holiday weekend,and time for a beer or two !!

[Beachcomber]

Yes, I think we will have to because I have never heard of anyone paying tax on a private contract of purchase/sale. I was just wondering if anyone else has.

[julian]

are we talking about what should be done or what is usually done?

if you look at the modelo 600 used for paying the ITP you will see that you have to tick either box 45 if the tax is payable for a documento publico or box 46 for a documento privado

[Beachcomber]

Are you saying that your clients pay tax on a private contract of purchase/sale?

[julian]

I don´t have clients !!!