Article by Raymundo Larraín Nesbitt
COVID-19 has brought in its wake a host of nasty effects, both direct and indirectly.
Directly, by infecting and killing hundreds of thousands of vulnerable people the world over, from all ages.
Indirectly, by drastically changing our lifestyles as we struggle to cope and adjust to our new reality. Governments, in order to protect the most vulnerable elements of our society, are forced to curtail our fundamental rights and limit our ability to move freely, even forcing non-essential businesses to shut down. But more fundamentally, it has forced people into a seemingly never-ending lockdown, trapped within the walls of their own homes. As a result of these necessary draconian government-imposed measures, it has led to Depression-era levels of unemployment and having developed economies in free fall.
We have gone from Greta’s ‘save the planet’ to save ourselves in the span of only two months.
And we thought Australia’s wildfires, from early on this year, which ravaged the land and devastated wildlife, destroying in its wake thousands of homes and taking the lives of hundreds was going to be the major highlight of 2020. How little did we know. Does anyone remember when this was a thing?
Amid this dire financial context of millions of workers being laid off, myriad companies filing for bankruptcy, property price drops of 40%, or more, stock markets plunging into the red wiping whole family’s life savings, couples are forced to live 24/7 under the same roof – with kids. Understandably, this sparks great tensions or even drives a rift, putting relationships under severe strain.
Not everyone has what it takes to come out on top. Escaping from this ordeal unscathed is proving quite the challenge for most couples and as a result we are sadly witnessing more and more couples filing for divorce.
In this article, we explain a special legal procedure that can be followed in Spain to re-arrange property holdings which saves buyers a considerable amount in taxes. On buying resale property in Spain, a buyer is normally subject to 8% Property Transfer Tax (ITP), or even more, on the sales proceeds. However, on following what is known as a ‘Dissolution of Joint Property Ownership’ (or DJPO, for short) a buyer attracts only 1.5% Stamp Duty.
In plain English, this procedure saves you 86% in tax, or more.
Interested? Read on…
A Dissolution of Joint Property Ownership allows joint owners to re-arrange their share on a property in a tax-efficient manner as it enables the outgoing joint owner to transfer his share to an existing co-owner legally waiving the extreme Property Transfer Tax and paying in lieu 1.5% Stamp Duty (or less).
Both buyer and seller must be pre-existing owners of a property i.e. a married couple who own a property under joint names.
One of them wishes to terminate the situation and sell his/her share to the other joint owner.
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 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.
2. Re-arranging inheritances. Beneficiaries of an inheritance transferring their quota on a property to a fellow heir. E.g. Sisters who inherit property transfer a share between them.
3. Re-arranging property holdings between family and friends. Stakeholders such as family, friends or investors co-owning a property may decide to re-arrange their holdings.
Associated taxes & expenses
Both buyer and seller are subject to pay taxes on transferring ownership of the asset.
– Pays 1.5% Stamp Duty on the outgoing share.*
– Lawyer’s fees
– Notary fees
– Land Registry fees
*In some regions of Spain, due to devolved competencies, it is in fact well-below this quoted tax rate.
– Pays Capital Gains Tax on the outgoing share.
– If the seller is non-resident, a 3% retention may be practiced on the outgoing share.
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. It involves litigation.
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.
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, a forced dissolution through a law court is only advisable as last resort wherein the disagreement is serious resulting in a protracted stalemate. The reason is that 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 quarrel.
A Dissolution of Joint Property Ownership is optimal to mitigate a buyer’s tax burden. In fact, you save 86% in taxes, or more, in a legal manner.
However, a DJPO may not apply in all cases. Seek legal advice on the matter.
A non-contentious DJPO works almost like a conveyance and can be arranged within a few days providing both parties agree to it. It can be arranged without any need 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.
A DJPO neatly puts to rest the financial side of couples’ ongoing marital disputes, legally saving them a great deal in taxes. It’s a win-win.
At LNA we can represent you following a DJPO for a very competitive fee, regardless of the property’s location in Spain. We act nationwide. Ask us free of compromise.