Question: I am buying a property in Spain and have been told it is normal to pay part of the price in cash. We don't do this in the UK and this seems rather strange. Is this normal?
Answer: It does seem rather strange from a UK perspective doesn't it? Having said that it has been common in Spain to under-declare the purchase price. The effect of this was to save some of the 10% of the costs and taxes associated with a purchase. This practice is illegal and short sighted as a capital gains tax of 35% (in the case of non-residents) is paid on the profit realised on a sale. By making an under declaration on purchase one automatically makes an artificial profit when one comes to sell, unless of course one can find a Buyer prepared to make a similar under declaration.
The scope for this form of tax evasion is now being very severely restricted and is likely to be restricted further in the future. Penalties can now be imposed on both the Buyer and the Seller in the case of a substantial under declaration. In extreme cases of under declaration the authorities have the power of compulsory purchase at the declared price.
Sometimes the seller will refuse to sell to you unless you under declare (because they will want to minimize their tax liabilities), we can only recommend that the full purchase price is declared — allowing, of course, for any deductions in respect of furnishings and other items that are not subject to the tax.
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