Buying a property in Portugal or Spain? It's important to keep a cool head

IN THE first of series by solicitors and asset managers Murray Beith Murray WS explaining the issues around buying properties overseas, partner Graham Scott takes a look at Spain and Portugal.

MANY Scots buy second homes abroad unaware different laws on succession and inheritance tax (IHT) could have a big effect on their investment.

The number-one choice among British buyers of foreign property is still the Iberian peninsula and, like on the island of Great Britain, the countries that make up Iberia have two distinct legal systems. Therefore, legal issues could tip the balance in deciding on Spain or Portugal for a property purchase.

Spain is the more popular of the two countries among buyers in numeric terms. One big advantage for British buyers is that the vast majority of its property lawyers can speak English.

The process of buying a property in Spain usually begins with the buyer making a verbal offer. Then the two parties move on to a preliminary contract, which the buyer should sign only if he or she is sure that title is right.

The buyer must put down a deposit of at least 10 per cent of the selling price.

Buyers should expect to pay about 10 per cent of the purchase price in ancillary costs, mainly taxes. On a sale, any gain is taxable in Spain at 18 per cent and a UK resident selling a property will still be liable for Capital Gains Tax (CGT) in this country for a further 22 per cent if a higher rate taxpayer.

Property succession should be considered by all buyers. The Spanish authorities are quite happy for UK law to apply when British nationals with property in Spain die.

Ancillary costs in Portugal tend to be higher than in Spain, at about 15 per cent of the purchase price.

In Portugal, sales are subject to a transfer tax of up to 6.5 per cent and where there is a gain, CGT of 25 per cent is payable. Because the UK and Portugal have a double taxation agreement, higher-rate (40 per cent) British taxpayers will pay an additional 15 per cent in this country as well. Portugal does not levy IHT and although title is still subject to stamp duty, any transfer between spouses or to children is exempt.

For some years it has been common among British buyers to form a company to buy a Portuguese or Spanish villa or flat, which has certain advantages because, if the "owner" dies, the "company" does not, and taxation may be legally avoidable. There are, however, disadvantages: if circumstances change, it can be very difficult to disentangle oneself from such a company, and the property may also be more open to claims from relatives - such as children from a first marriage - than would have been the case had it remained in private ownership.

In Scotland virtually no-one would ever buy a home using a lawyer who was also acting for the seller, because of the conflict of interest that such a situation could involve - and the same principle should apply abroad.

Head for the sun - but don't let the sun go to your head.