Buying a property in Portugal
Buying a property in Portugal is something that deserves full care and attention. Sound professional advice is essential, and common sense helps.
This booklet contains the most FAQ´s that arise. Needless to say that the information contained herein is for guidance purposes only and that it is essential to get professional legal advice from a qualified Portuguese Lawyer when doing a purchase of property in Portugal.
Part I: Before you speak with your lawyer
Q: What types of property exist in Portugal and which is the right one for me?
A: There are several types of property all to be owned freehold:
Plot of land: You can buy a plot on a resort, or out in the country (although this is getting harder in some areas). Resorts or developments will have their own rules about the size and style of villa that can be built: some may offer a choice of their own designs which can be varied to an extent.
Your real estate agent and your legal adviser MUST check exactly what is legally allowed to be built on the plot of your choice, and can advise you accordingly.
For some people, the dream is to find an old house in the middle of the countryside and to create a cottage that retains the character, but contains all the “mod cons”. Recent changes in legislation are tightening up on granting permission to build in rural areas. If you do manage to find an old house that does have the necessary (and current) permissions to build, bear in mind that there are limits to the size that can be built.
Apartment or Townhouse: Almost all developments or resorts offer some apartments or townhouses as part of the mix: indeed, some comprise only apartments and townhouses. One of the benefits of this type of property is the ease of maintenance. There are no large gardens to be cared for; they are usually quite compact, and so relatively easy to keep clean. They are ideal investment properties as they are easily rented out, either by the resort´s own management-company or one of the independent specialist companies.
There are also blocks of apartments being built in almost every town. These are usually aimed at the domestic market: since mortgages have become more widely available, more young couples are entering the property market.
Individual villa: If you are considering buying a plot and constructing a villa, check the plot size, and where the next villa will be in relation to you. If you are buying an existing villa, then things should be much easier. You can see exactly where it is, what is close to it, how many rooms it has and so on. If the villa is on a development, this is the easiest scenario, because usually all the records are in order. If the villa is out in the country, your legal adviser will check the necessary paperwork to make sure that it has the proper licences, particularly if extensions or a swimming pool have been added.
The benefit of a villa is, of course, space and privacy; the disadvantage is the cost of maintenance. With a villa of your own, you usually have far more space than with an apartment or a townhouse, and you have your own garden and swimming pool – larger or smaller, as you choose. This gives you far more privacy than sharing the communal facilities of a development. If the villa is large, you will probably need a team of maintenance people to look after it. They will keep the villa clean, maintain the garden, clean and treat the pool, handle day-to-day repairs, and generally keep and eye on the property, which is important if you are away from it for long periods.
Individual villas are very much in demand for rentals, particularly during the extended summer period, and there are always advertisements in the local paper asking for property owners to make contact. Your property management company may also handle rentals on your behalf. If the property is to be rented out, to “earn its keep”, furnish it accordingly – save the interior of your dreams for the time when you live in it full time!
Q: How much will it cost me to buy the property?
A: Property prices are rising again throughout the country. This makes property an excellent investment, and one that you may enjoy more than putting your money on deposit or buying stocks and shares! When you are looking for a property, you should be realistic about the costs involved. Do not over-extend yourself if there is the slightest chance that you may have difficulties in paying back a mortgage.
When you are buying a property, beware of the hidden costs. If you are considering a villa with a large garden and a swimming pool, there are costs for water and electricity. The garden will have to be irrigated (most properties will have an automatic irrigation system) and the pool will need to be filled frequently, particularly in summer. Some local authorities and developments charge a lot for water supply. Similarly, a lot of electricity will be used powering the irrigation system and the pool pump, which will have to work very hard in summer. Air conditioning and heating are also significant costs that should be taken into account.
Q: Should I use a real estate agent?
A: Yes. Some offer a far better service than others, and have far more experience. You can only choose by asking pertinent questions, and by assessing who you personally get along with. A good real estate agent will do more than just show you a series of properties. He or she will take the time to find out what you really want and what you don’t want, the things that are important to you. He or she will explain anything that may be relevant with each property that you are shown – the possibility of a new road, for instance, or the construction of a shopping centre nearby.
They should have sufficient experience of the area to understand if there is likely to be flooding or subsidence. If you are buying an older property outside of a resort, it is always advisable to have a survey done. There are a number of independent surveyors, but not all real estate agents will advise their clients to have a survey. It is certainly worth it, as it is in your home country, to highlight potential or existing problems.
You should also ensure that your real estate agent is licensed by the national ruling bodies. The agent is obliged to include his licence number on all advertisements and literature.
Some real estate agents will tell you that they can also act as your legal adviser and can prepare all the necessary paperwork for the contract, but it would be better to have an independent legal adviser. Remember that you are dealing with a different system, with different requirements: your legal adviser is paid by you: a real estate agent is paid by the seller of the property.
Q: Do I really need a lawyer?
A: Yes. It is essential to have a lawyer to help you through the process of purchasing a property in Portugal. This is not an area in which to cut corners. Lawyers understand the various documents that are necessary to complete a contract, so that everything is in order, not only for you to buy the property, but also looking forward to when you come to sell. It is the role of the lawyer to protect your rights throughout the process, but very often you will receive much practical advice along the way about various aspects of life in Portugal!
You may well find that particular real estate agents have lawyers with whom they work on a regular basis for property purchase: there is usually nothing wrong with this arrangement, as it ensures a high level of service for the client. You can, of course, select your own lawyer. Alternatively your bank or the Chamber of Commerce should be able to do the same.
Q: Can I get a mortgage?
A: It may be that you have sufficient funds available to purchase your property without additional financing. On the other hand, if you prefer to arrange a mortgage, this can be handled through a reputable bank with relevant experience in funding a purchase of property in Portugal by a foreign national. The availability of finance seems to be easing again and your real estate agent should be able to help you with this.
Part II - The legal process of property purchase
These answers to FAQ´s must be considered as notes of guidance only.
Q: What is the first thing to do?
A: It all starts with the Purchaser asking his lawyer to prepare a Contract of Purchase and Sale (called a Promissory Contract) of the property. When this is signed by the Purchaser, he will have to pay the agreed deposit and he will then be legally bound to purchase the property. There are set penalties for defaulting after this. Seller is also legally committed to the transaction at this stage.
Q: What happens before contract and when should I pay any money?
A: Prior to paying over any money or signing any Promissory Contract, the Purchaser should instruct his lawyer to undertake thorough pre-contract enquiries. Once money has changed hands, it may be difficult to retrieve it if the Title Deeds of the property are subsequently shown to be incorrect. The Vendor of the property should have a complete set of Title Deeds, which show that the Vendor is indeed the person legally entitled to sell, and that the property being sold is actually the property which the Purchaser has agreed to buy.
Q: How can you find that out?
A: A full search on the local Land Registry Office (“Conservatoria do Registo Predial”) will give details of:
- description of the property
- mortgages on the property
- any charges on the property
- any third-party interests.
Q: What about taxes?
A: Every property has to have a “Tax ID” called “Caderneta Predial” which is a taxation identification certificate and sets, among other things, the rateable valuation. This valuation is important for the determination of IMT tax (sales tax), “IMI tax” (local tax), Notarial and Registration fees.
Q: Is it fundamental to get the licence for the property?
A: Yes, the Habitation Licence or if the property is still under construction the Construction Licence. Your lawyer will check the records at the local authority (Municipal “Camara”) for the Habitation Licence in case the Vendor does not have it. All residential properties constructed since 1951 need a Habitation Licence, which confirms that the Camara has inspected the property; that planning permission has been granted, and that it complies with the relevant building regulations for a residential property. All properties under construction MUST have a valid Construction Licence.
Q: What else needs to be done?
A: These checks and enquiries should always be undertaken. There are other enquiries, which should be carried out, unless there are exceptional circumstances. For example, examining, the local development plan to ensure that there are no infrastructural developments planned for the area. These items do add to the expense, but it cannot be stressed enough that problems may well arise if these enquiries are not made.
Assuming that the results of all the searches and enquiries are positive and in order, your lawyer will then advise the Purchaser to proceed to enter into a contract to purchase and can, if circumstances require, make a provisional registration of the purchase at the local land registry.
Q: After the contract is signed, what happens next?
A: There will usually be a period between the signing of the Promissory Contract and Completion. This will vary, and will depend on agreement reached between the Vendor and Purchaser. It may be, for instance, that the Vendor has requested use of the property until a specific date, or certain documents need to be put into order or if construction of the property has not been finished yet.
Q: What do you do at the completion?
A: Completion of the transfer of title always takes place at the office of the local Notary. The Notary records the transaction, which is signed in his presence from copies of the document relating to the property: this is usually referred to as the “Escritura”, or Deeds. The contract is always read out loud, and in the language of the Purchaser, if he is present (alternatively he can give his lawyer power of attorney to represent him at the Deeds). The remainder of the purchase price is payable on completion. The Purchaser now takes legal possession of the property.
Q: Is this enough? Do I have full title at this stage?
A: Not yet. Once the transaction has been entered into the Notary’s records, your lawyer will take a copy of the “Deeds” and register the transaction at the land registry. This formally registers the purchaser’s legal ownership of the property.
Q: How much will it all cost?
A: It can be seen that there is expense involved even before the contract is signed. The Purchaser may decide not to proceed with the purchase if the searches reveal problems, but this would be a prudent expense. It is usual for the Purchaser to provide their lawyer with “start-up funds” to cover the costs of basic searches. Quotations can always be obtained for surveys if required by the Purchaser.
If the purchase goes ahead, your lawyer should ensure that all of the following are in order and up-to-date:
- Developer’s service and infrastructure charges
- Local property tax (IMI formerly Contribuicao Autarquica)
- Condominium service charges
- Electricity supply (EDP)
- Telephone (PT)
- Local authority (Câmara). The search at the Câmara referred to earlier does not confirm that the property as it now stands comprises that covered by the Habitation Licence. There may have been additions since construction, e.g. a swimming pool. This may require the services of a surveyor whose fees will have to be paid.
Your lawyer will ensure that all outgoings and charges are paid and up-to-date on completion.
Q: What about the transfer tax?
A: This is the Portuguese Purchase Tax (IMT) and must be paid prior to completion. The amount payable varies with the value of the property, and your lawyer will always advise the Purchaser of the figure before any expense is incurred. IMT may not payable if the property is owned by an off-shore company since in that case the purchaser is buying the shares of a company and not the property directly (see below). IMT top rate is 10% for blacklisted off-shore companies and 6% or less (depending on the value) for everyone else. Purchases of properties for permanent habitation below 92.407 euros are exempt of IMT.
Q: Any other exemptions?
A: For investment (purchase to re-sell) purposes is possible to use a Portuguese “IMT exempt” company to buy the property. The tax is not payable if the property is sold by the purchasing “IMT exempt” company within three years.
Q: What about the local tax (IMI)?
A: The annual rate is between 0.3% and 0.5% (the final rate will be determined annually by the local council) over the valor patrimonial (rateable value) of the property.
IMPORTANT NOTE: If the property is owned by somebody residing in a country outside the EU or is owned by a company registered in a country outside the EU then it is necessary to appoint a local Fiscal Representative who is the person that deals with the payment of annual rates (IMI) and filing of annual returns. This applies whether or not the property is receiving any rental income. There are a number of local companies that provide this service. It is of the utmost importance that this is dealt with immediately as failure to do so can mean IMI and other Finanças communication not being received and the Finanças taking action against the property.
Q: Any other costs?
A: Notarial, Stamp Duty and land registration fees are also payable by the Purchaser on completion. As a guideline, they will be approximately 1% of the purchase price.
Q: What about VAT (IVA)?
A: IVA is the equivalent of VAT, and is charged at 23% on professional fees unless the client has a VAT number in his country of origin.
Q: Do I have to give a power of attorney?
A: A Power of Attorney allows your lawyer to act on your behalf during the Property Purchase transaction. This is usually the first thing to do and it is far more practical than the Purchaser having to attend the Notary’s office to sign the various documents at various stages of the process. Your lawyer will provide a suggested format for a Power of Attorney, which the Purchaser can complete and have Notarised.
Q: What about buying a company?
A: If a company already owns the property being purchased, your lawyer will certify the title of the company to the property in the usual way and will then prepare an agreement to transfer either the shares or the beneficial ownership in the company to the Purchaser. Your lawyer will conduct the usual extensive enquiries into the company’s affairs prior to proceeding.
On completion of the transaction, the ownership of the property will not have changed, only that of the company that has the property as an asset.
Q: What is the advantage?
A: The logic behind having a company to buy and own a property is to avoid IMT tax, Notarial and Registration fees. As stated above, IMT tax is paid by the purchaser and is based on the purchase price. With a property held in a company, the property itself is not sold, it is the shares in the company which are transferred to new ownership. On a subsequent disposal, a company-held asset could be more attractive to a purchaser.
Q: Does this avoid any inheritance tax in Portugal?
A: There is no inheritance tax between spouses and to parents and children in Portugal. However there is an advantage in the avoidance of Portuguese Inheritance Tax (stamp duty) on the death of the beneficial owner if the property is to be left to a relative or a stranger.
Q: Any disadvantages?
A: At the present time, the only disadvantage of company ownership is the annual cost involved in running the actual company: this can be from GBP 700 to GBP 1,200. Any decision must therefore be based on a cost/benefit basis. In the case of blacklisted offshore companies they are subjected to punitive IMT (10% transfer tax) and IMI (7,5% annual tax).
Q: And what happens after completion?
A: If the registered owner of the property changes in the transaction, new contracts will have to be entered into with the utilities companies for the provision of electricity, telephone etc. These can involve personal attendance at the offices of the various service providers and are invariably very time-consuming. Your lawyer will usually deal with this.
Part III: Now the property is yours . . .
Q: How can I get utilities connected?
A: As has been mentioned above, one of the first things to be done is to arrange contracts with the various utilities companies, namely EDP for electricity and Portugal Telecom for a telephone line, and the local authority for water. Although some of the personnel in some of these offices speak a little English, it is far easier if done with someone who speaks Portuguese and is familiar with the procedure. It is now possible to make payments for these utilities by Direct Debit, or at any Post Office if within the given period. If you are going to be away from the property for long periods of time, it is usual to arrange for your Property Manager to take care of this for you. In that way, you will not return to your property to find that the electricity has been cut off!
Q: Is it easy to find someone to clean the property when I am not there?
A: If you have a large villa, or even a small apartment, you may want some help in the house and/or the garden. If you have a Property Manager, then they can arrange all that for you, and that is a sensible solution, because they will know the people they are employing and can guarantee a level of service in your absence.
Q: What about furnishing my property?
A: For those setting up a home for the first time, and wanting to start “from scratch”, there are shops and individuals who will take care of everything. Typically, an independent consultant will take you to a number of shops so that you can select everything. She will then do the measuring and ordering and liaising with the various shops and suppliers, so that when you return, everything is there, in place.
AND FINALLY -
You can relax as you sit on your terrace on a warm summer evening, sipping your favourite Portuguese wine, looking over the sea or the golf course. Having taken the time and trouble in the early stages to talk to professionals, take their advice and stick to the rules, you know that everything is in order, and you can enjoy your time in Portugal – welcome!