What happens if Government lets the VAT reduction on new homes expire?

The cost of buying a new home in Spain will jump if the Government doesn’t extend the VAT reduction on new homes, set to expire at the end of the year.

VAT (known as IVA in Spanish) is currently charged at a super-reduced rate of 4pc on new homes, having been slashed from the reduced rate of 8pc by the previous Government, in an attempt to stimulate new homes sales and deal Spain’s problematic housing inventory, as I reported here: Government slashes VAT on new homes by half, to 4pc and here: Extension of VAT reduction to apply to holiday homes.

Now that the chickens of Spain’s economic mismanagement are really coming home to roost, the present government has been forced to increase VAT on most goods and services (the normal rate from 18 to 21pc, and the reduced rate from 8 to 10pc), but has so far said nothing about the super-reduced rate on new homes.

Who know’s what this silence means but to my ears it sounds like they haven’t made up their minds yet. All we can say at this point is they have failed to confirm that they will extend the super-reduced rate next year, which means that VAT on new homes (from a developer, and in some cases from a bank) could go up from 4pc to 10pc next year, pushing the cost of buying a new home worth €200,000 up by €12,000. That would be very bad news for the residential construction business in Spain, already struggling with the worst slump in its history.

The following table shows the cost difference of new homes under the two VAT scenarios. The column on the left gives the house price, the next column the VAT at the present rate, then the new rate, and finally the cost difference in red. VAT on a million Euro home would increase by €60,000.

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