Buying a new-build home in the Canary Islands: IGIC, AJD and guarantees

New or resale: the taxes change

The first question I ask an undecided client isn't about the tiles: it's about who's selling. If the property is a resale and a private individual is selling it, buying it means paying ITP (Impuesto sobre Transmisiones Patrimoniales, the transfer tax), which in the Canary Islands has a general rate of 6.5% of the price. If it's the first transfer and the developer is selling it, the tax changes: buying a new build from the developer means paying IGIC, the Canary Islands' indirect tax, not ITP, with a general rate of 7%.

The difference doesn't stop at the percentage. IGIC is paid to the seller along with the price, like VAT, and the developer passes it on to the authorities; ITP is paid by the buyer, on their own return, after the signing at the notary. And on the deed for a new build, AJD (Actos Jurídicos Documentados, a duty on the notarial deed itself) is added too, which doesn't apply to a resale between private individuals. These are three separate items that I often see added up wrong in the sums people do before they start.

IGIC: 7%, 5% and 3%

The general rate is 7%, but Canary Islands law sets out two reduced rates for people buying their own home, with precise requirements on use, price and family situation.

• General rate: buying a new build from the developer means paying IGIC (the Canary Islands' indirect tax), not ITP, at a general rate of 7%.
• Reduced rate: IGIC drops to 5% if the new home will be the buyer's habitual residence, the price (garage and annexes included) doesn't exceed €150,000, and the buyer doesn't already own another home; the ceiling rises to €225,000 for large families in the general category and to €300,000 for those in the special category.
• Super-reduced rate: a 3% IGIC rate is available for the habitual residence of certain categories of buyer (including household incomes of up to €24,000), with the same price ceilings.

The most common misunderstanding I see is this: "habitual residence" doesn't mean "a house I'll use often". It's a status with requirements you have to prove, and anyone buying a second home for holidays falls under the general rate. Before budgeting for a 5% rate, it's worth checking your own position with a gestor or tax adviser: redoing the sums after signing the arras is awkward.

AJD on the notarial deed

On the notarial deed for a new build (subject to IGIC), you also pay AJD, Actos Jurídicos Documentados, at 1%. It's a line that's almost always missing from the budget of buyers from abroad: it applies to the notarial document, not to the sale itself.

For other notarial deeds on property not subject to IGIC, AJD is 0.75%: this is the case, for example, with the mortgage deed or other documents signed around the purchase. When I put together the cost estimate for a client, I keep these two lines separate, because they apply to different bases.

The developer's guarantees: ten years, three, one

This is the real advantage of buying new, and it's worth knowing before you choose. The Ley 38/1999 de Ordenación de la Edificación, the Spanish building act, sets out in Article 17 that anyone involved in the building process is liable to the owners and to later buyers for material damage, within periods that run "desde la fecha de recepción de la obra, sin reservas o desde la subsanación de éstas" (from the date the finished works are formally accepted without reservations, or from when any reservations are remedied).

1. Ten years, the structure Damage affecting foundations, columns, beams, floor slabs, load-bearing walls or other structural elements that directly compromises the building's mechanical strength and stability. This is the ten-year guarantee, the heavy one.
2. Three years, habitability Damage from defects in the construction elements or installations that cause the building to fall short of the legal habitability requirements: hygiene and health, protection from noise, energy saving and thermal insulation.
3. One year, the finishes The builder is also liable for material damage from execution defects affecting the finishing elements, within one year. This is the guarantee that covers cosmetic cracks and work rushed and done badly.
4. When it isn't clear whose fault it is Article 17.3 provides that, if the cause of the damage can't be pinned down, or if several parties are at fault without it being possible to measure the degree of each, liability is joint and several. For the buyer that's a real protection: it isn't down to you to work out who got it wrong.

These liabilities are backed by insurance guarantees. Article 19 lists the seguro de daños materiales (material damage insurance), the seguro de caución (surety insurance) or a financial guarantee for each of the three periods, and specifies that those insured are the developer itself and "los sucesivos adquirentes del edificio o de parte del mismo" (later buyers of the building or part of it): if you buy from someone who bought from the developer, the cover follows the property. The second additional provision makes the ten-year guarantee mandatory for buildings mainly intended as homes, with the exception of an individual self-developer building a single detached house for their own use.

Deposits on a property under construction

Buying off-plan means handing over money before the property exists. The law addresses this in the first additional provision: a developer who wants to take deposits has to "garantizar, desde la obtención de la licencia de edificación, la devolución de las cantidades entregadas más los intereses legales" (guarantee, from the building licence onward, the return of the sums paid plus statutory interest), with a seguro de caución or an aval solidario, a joint and several bank guarantee, from a credit institution, in case the building work doesn't start or doesn't reach completion within the agreed time. And those deposits have to be taken in through a bank, into a special account kept apart from any of the developer's other funds.

The contract has to say so in writing: the obligation to refund with interest, the details of the insurance or aval with the name of the provider, and the account to pay into. And at signing, the developer "hará entrega al adquirente del documento que acredite la garantía" (shall hand the buyer the document proving the guarantee). That document is the first thing I ask for, even before the specifications: if it doesn't turn up, the rest of the negotiation doesn't interest me.

If the building work then doesn't start, or the property isn't handed over, the buyer can choose between rescinding the contract with a refund of everything paid, including taxes, plus statutory interest, or granting the developer an extension, which has to go into an additional clause with the new date. The guarantees are cancelled once the cédula de habitabilidad (certificate of habitability) or the licencia de primera ocupación (first-occupation licence) arrives and the property is handed over: not before.

This is general guidance on taxes and guarantees, not tax or legal advice. The requirements for the reduced rates and each buyer's individual position need to be checked case by case with a qualified professional in Spain.