Antonio Flores’ Blog

Unlike the developer, buyers at Casa Toro (Álora – Málaga) can now feel relieved. Zurich Investments has decided to refund down payments paid towards their properties through the firm Lawyers of Spain (now Lawbird Legal Services) to 22 clients (after having lost a few in this rather tortouos legal itinerary to marauding ambulance-chasing lawyers who lie in ambush on legal-gossip websites).

Although the properties were correctly completed, these were on an untimely fashion and so buyers decided to pull out on grounds of delayed completion. As the Romans quite rightly used to say, pacta sunt servanda, or “pacts are to be observed”, which Zurich has applied correctly, since they provided to a collateral security in the event of the default.

One is left wondering, and to me still remains a mystery, about the situation that now unfolds: will Zurich chase the developer for repayment, or is the risk covered non-refundable? Will the developer have himself some side collateral? Presumably Zurich cannot just walk away being out of pocket for around €900,000 and allow the developer to resell the properties to third parties but then again, the developer may well argue that that Zurich paid out in breach of their contract, on grounds of insufficient delay.

I dont want to come about as frivolous, but I just can’t be bothered about who picks up the debris : I just want to jump on the AVE high speed train to Madrid to collect 22 checks for our ever-patient clients!

Antonio Flores Litigation, Property ambulance chasers, Bank Guarantees in Spain, Casa Toro, property in alora

Following my previous post in which I briefly described the common pitfalls of non resident inheritance planning, in this post I will analyse a bit more in detail the first point: what involves selling your property to your children.

The sale of property by the parents to the children is called in Spanish law (presumably also that of other countries’) a “simulated” sale, which means that it is not real, normally for one (of all) of the following reasons:

1. Lack of proof of payment of the purchase price: this is an obvious conclusion and needs little explanation: if no money has changed hands then no sale has happened.
2. Lack of financial capacity to acquire property or assets (this is typical of children or people with no known occupation).
3. Low or unreal price: This indicative fact is normally assessed in conjunction with others, such as the one below.
4. Relationship between seller(s) and buyer(s): This is also an indicative fact to conclude that there was no intention to really sell a property.
5. The “seller” remains in control of the property, what is called in Latin legalese, retentio posesionis.
6. Reformations made by the “seller” on a property which no longer belongs to him. According to existing case-law (and logic), this openly defies the rules of normal human behaviour for nobody would spend substantial sums in someone else’s property, nor (according to these rules, and the judge) nobody would consent someone else to make reformations in his own property, without a contract of some type

Because a “simulated” sale is null and void, the transaction can be challenged by the Tax office, other inheritors or creditors. The consequence of this happening is that the transaction could be classed as gift (donation) and taxed accordingly, which implies that the gifter has to pay Capital Gains Tax in addition to Gift Tax paid by the beneficiary, which is the same as IHT but without applicable allowances, certainly not a nice situation to be in!

As an example, if a €240,000 property was sold “illegally”, that is, with no consideration, to a child or to a friend (higher tax scenario), and it was successfully proven that it was a simulated sale, then applicable taxes would be of €40,000 and €90,000 respectively!

A variation of this would be where the funds are given to the children who then buy the property. This, in itself, is a gift, but it does not necessarily have to take place in Spain (true for non residents). Residents, on the contrary, are subject to Spanish tax rules and regulations.

Antonio Flores Inheritance, Property inheritance tax spain, selling property to children in Spain, selling property to family in Spain, Spanish Inheritance Law, spanish inheritance tax

It comes as no surprise that 30% of the enquiries we receive during a month relate to inheritance tax (IHT): there is an almost absolute ignorance about how much it is, when and where is it payable and how does one go about not paying, if at all possible.

IHT tax in Spain can span from nothing, if you inherit under a certain sum and are a Spanish resident to a whopping 81,6% if you inherit loads of money, you are also very well-off and you have no family ties with the testator. This is why it is important to know more or less what would the tax liability be for our inheritors should we pop our clogs within say 12 months (it makes a difference if one dies tomorrow as opposed to dying in say 20 years, particulary if you have a 20 year mortgage which by then would have been repaid).

To calculate quickly how much tax would our inheritors have to pay we could do with an IHT calculator and hopefully this will soon be an application on our website but meanwhile see below some examples on the tax liability if we were to inherit different value net assets (after mortgages, debts etc.):

(We are assuming, for the purposes of the above calculations, that the net values have already been reduced with the average legal allowance, approximately 15.000 Euros)

The following list is by no means complete, but mentios a few of the most common mistakes made by non-resident testators with regards to their Spanish property. I always recommend that people:

1. If you have already bought, don’t just transfer the property to your children (or designated inheritors)!: This seems quite obvious but still today many property owners believe they can do it lawfully and don’t realize that logic and common sense are up against them: how can children buy when they don’t have money?
2. Don’t panic and jump into equity realease programmes, foreign company incorporation scheme or other miraculous option. The reason for this is very simple: the suppliers of these products/services do this for a living which means that they will not wish that you opt for another IHT avoidance scheme, but only theirs. In short, they are not able to give you impartial advice. If you are not sure, try asking them…
3. Over a certain value, don’t buy in your own name: How much will have to be paid will depend on the value, whether you have a mortgage, the number of designated inheritors and the relationship with them or if these are residents for tax purposes.
4. Don’t reciprocally will the property between the spouses, if the ultimate heirs will be the children. This can raise the tax bill dramatically.
5. Don’t pass away without a will or just a foreign will and think a Spanish will is not needed. Any asset proprietor in Spain should arrange his post-death affairs in a neat way, inasmuch as the heirs would otherwise be involved in consuming and expensive legal procedures which would attract different legal jurisdictions. An experience not recommended by those who have experienced it.
6. Don’t use the services of the so called tax experts to draft a will.
7. Don’t attempt tax-evading tricks, especially if you don’t know the risks!

In the following days I will elaborate more on each of these points.

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For those of you interested, on Tuesday September the 28th, I will be in the The Hannah Murray Show on Talk Radio Europe, discussing the inheritance issues that affect foreigners in Spain. You can tune in directly through their website (internet stream), or through the FM frequency assigned in your area.

Antonio Flores Inheritance, Taxes inheritance tax spain, Spain taxes, Spanish will, tax avoidance Spain

I had all but forgotten about the above Mr. Mottola and then, a couple of weeks ago, I received an email from an off-plan buyer who, back in 2003, thought he had secured an apartment at the development Jardin Tropical, built by Larios 2000, a company that subsequently filed for insolvency (funny enough, in the middle of the property boom!).

Sinister Mr. Mottola is the guy behind Compagnie des Guaranties, a fraudulent insurer operating off a flat at Alberto Aguilera Street, in Madrid, that boasted assets in Spain enough to guarantee hundreds of deposits on off-plan property developments. Several years later we find out that the most substantial assets they could boast was 1 premier-quality-multi-function-digital-colour Photocopier Printer Scanner and Fax.

As it happened, when this buyer tried to enforce his bank guarantee/insurance policy these guys had disappeared, the monies lost and the acting lawyers, let’s call them LF (Law Firm), who should have ensured that the guarantee/policy was fully valid end enforceable when the time arrived, began to pull funny faces.

Below is my response email to this enquiry:

Dear XX

I am writing regarding your previous email in respect of a proposal for legal action against LF and Caser Seguros which is, by default, the insurer currently covering all lawyers registered with the Malaga Law Society. As per our conversation, where I indicated the high probability that LF’s actions, or omissions in this case, caused you to lose the deposit, it would be, in this respect, possible to bring an action against them.

There is substantial case law in the matter, and, prior to me searching individually for court rulings from our electronic database, I have gone through a short cut and obtained an article written by a colleague pertaining to the matter. Most of these relate to careless or negligent actions when representing a client in Court, and a few others on non-contentious legal representation (non-litigation cases).

The basis of a claim against LF has to be based on the obligation that LF had, when representing you in purchasing a property, to ensure that the bank guarantee you had was legal and enforceable. This, in principle, could have easily been established by checking with the (Direccion General de Seguros). Our firm did pick up on this when we received our first fraudulent policy, and we published it in our website belegal.com and devwatch.com, forcing the developer Arenal 2000 to suspend the issuing of these.

Already others sites had picked up on this as early as September 2003, which is only a few months after LF represented you in the transaction, and which would objectively point to a grave professional negligence, with the result of monetary loss, for with a minimum due diligence carried out by LF it would have easily been detected that your money was at serious risk.

Aside from the above, LF should have, or could have, known full well that these documents were illegal because:

• Nobody had ever heard of them, particularly in the legal business.
• They were registered with the General Directorate of Insurance as being fraudulent.
• They looked, on the face of them, highly suspicious, and were printed off with cheap printers (we have several of these documents in our offices and the ink falls off them we ease).
• When calling the company, based in some small flat in Alberto Aguilera Street (Madrid), a Spanish-speaking Italian person would take the call, make a note and promise to call back (which he never did).
• Not once did they honour payments on a claimed bank guarantee.

All the above may have been known by LF only after representing you in the purchase, and hence they could resort to saying that it was not possible to have known then that this fraudulent entity was being used by certain not-so-solvent developers (and who presumably did not get proper guarantees for this reason). The reality, however, is that, with a minimum due diligence, any lawyer (and I even think than any layman with a cynical outlook) could have detected the fraud and prevented it. LF was processing contracts like a fast-food restaurant.

I would imagine that LF has not even reported this company to the police or the courts, nor has attempted to find remedy with their insurers to mitigate, if not totally, at least partially, the damage caused by their grave error.

The Spanish Supreme Court has established that a lawyer, not unlike doctors, architects or other professionals, have a obligation to carry out the task they have agreed to with an optimal execution, which presupposes an adequate professional preparation and entails a correct compliance with the entrusted job so that if it is not executed or it is improperly executed a full  or partial contractual default of the professional’s obligations will occur.

Similarly, the Supreme Court has established that the obligation of a lawyer is not one of “result” but of “means”, which means that LF did not have an obligation to ensure, by way of searches and due diligence, that the development would be finished on time or at all, but certainly did have an obligation to ensure that, should the development not be completed, your deposit would be safe, which would have happened had LF carried out the instruction correctly.

In relation to professional indemnity insurance, the Malaga Law Society has signed a policy with the insurer Caser to cover losses of up to €600K per case. I am part of this insurance and presumably LF will be so as well, irrespective of other policies they may have taken out.

Since then we have found out that Compagnie des Guaranties has an address and accountants in London (30 City Road EC1Y 2AB and Arram Berlyn Gardner, respectively), files proper accounts, but, as expected, Mr. Mottola is never available. This evasive behaviour, coupled with the closing of the Madrid branch and, not the least, his inability to ever provide insurance services in Spain, as per the DGS (General Directorate of Insurance) ban, could be construed as a punishable offense with jail, for it is clear, if nobody else remedies it, that some hundreds of off-plan purchasers could have lost their deposits forever, as a direct result of this fraud.

Antonio Flores Litigation, Property, Scams Caser Seguros, Compagnie des Guaranties, Jardin Tropical, Larios 2000