Higher property taxes on the way as Spain’s shaky foundations get hammered by Covid-19

Spain has a bad case of the coronavirus, and the economic cost will almost certainly be paid for by higher taxes on property and wealth, which the left wing in power are already pushing for with enthusiasm. 

When seen in terms of cumulative confirmed cases of Covid-19 (though not other measures), Spain has one of the worst coronavirus cases in Europe, with France and the UK not far behind (chart above). Who knows what the virus picture will look like in six months time, but what is already clear is that the Spanish economy is one of the hardest hit in Europe, with a 13% decline in output forecast for 2020 (IMF).

All countries are struggling with the economic impact of Covid-19, but Spain’s shaky political and economic foundations will not help the country rise to meet the challenge. Politically, Spain is very fractured right now, and the Spanish economy, with its reliance on tourism, is particularly vulnerable to a shock like the coronavirus. If the Spanish government responds with more taxes and regulations, as is likely, the Spanish economy will struggle even further with the extra costs and bureaucracy. High costs and red tape partly explain why Spain has one of the highest unemployment rates in the West, even in good times.

The economic damage of C19 and lockdown is obviously bad news for the housing market, especially the second-home market in coastal areas that relies of foreign demand.

The international ratings agency S&P has just released a report forecasting and decline in Spanish property prices of 1.4% this year, second only to Ireland on -1.6%. S&P’s Spanish forecast looks deliriously optimistic compared to other recent forecasts like one from the Spanish bank Bankinter (-9%), property consultants Acuña & Asociados (-6.1%), and Gonzalo Bernardos (-16%). Whomever you choose to believe, all the Spanish housing market forecasts are negative for this year and next.

Higher taxes on property

Another threat to the Spanish property market is likely to come in the form of higher taxes on wealth and property in Spain. This has implications for foreigners owners of Spanish property, who might be facing higher costs if taxes go up.

Higher taxes are likely on the way to pay the coronavirus bill in many countries, but the left-wing coalition of Socialists and neo-Marxists currently running Spain would welcome them anyway.

As far as the hard-left Podemos faction of the government are concerned, private property and wealth are a curse to be minimised through higher taxes and repressive regulations on private enterprise, in particular the private rental market.

Podemos, led by Vice-President Pablo Iglesias, and his cabinet minister partner Irene Montero, are pushing hard for higher taxes and nationwide rent controls. Mr. Iglesias recently said, sarcastically, that rich property owners would welcome higher taxes.

Controversial new ‘reference value’ for property taxes

But Podemos are having some success. The government is already drafting changes to the wealth tax (Patrimonio), Inheritance and gift tax (Impuesto de Sucesiones y Donaciones), and property transfer tax (Impuesto de Transmisiones Patrimoniales), and stamp duty (Actos Jurídicos Documentados AJD). They are, however, still arguing about whether or not to introduce nationwide rent controls like Catalonia has done, at a time when rents are falling fast anyway.

At the heart of these changes is a controversial measure to introduce a new ‘reference value’ (valor de referencia) for calculating property taxes such as transfer tax, IHT and wealth tax. The Cadastre will be responsible for calculating the reference value, based on comparable sales values provided by notaries and registrars. 

The problem with reference values when it comes to property, is that no two properties are exactly the same, for lots of different reasons. For example, it takes no account of the condition of a property, which might be renovated or dilapidated yet have the same reference value. 

The corresponding change in taxable values could put a lot of properties into higher tax bands, and hit owners with bigger tax bills, especially when properties have been owned a long time, warn experts. 

These changes are expected to be introduced in the first quarter of 2021, so get prepared.

Thoughts on “Higher property taxes on the way as Spain’s shaky foundations get hammered by Covid-19

  • So in reality Spain should have moved to a higher yearly property tax about 10 years ago. I know Europeans hate to hear that but it is unsustainable to have an aging population, removal of the inheritance tax, keep yearly taxes low, and have a huge purchase price. That is not a good receipt for success to rejuvenate a country for a younger agile population. Too many cities have empty properties where the owners have no incentive or motivation to sell, reform, or forfeit. I do understand some brought at the highs and there’s minimal rental recourse against squatters and if executed too fast could negatively impact valuations which in turn impacts bank insolvent, again! But, the tax increase needed to start.

  • So, sounds very much like Podemos doesn’t want to see an influx of Brits and other Northern Europeans buying and brining their Billions in purchase taxes to help rebound from Covid. There was I would venture a surprising rebound after 2008 even after the increases in taxes then. One would have thought a lesser tax now might have enticed foreigners to buy up all that new build, some of it still around since 2008, but sounds like it is going to be an increased tax to buy… Mmm, its never just been the tourists who brought much needed income, its been in large part the residential holiday owners too. Will be an interesting year ahead hey! If prices fall like stone may the effect of tax increases piling on can be countered, but what will buyers do in the face of this news? That’s assuming of course that there will be any out there with funds so disposable as to want to buy next year. I think it will be a sad time ahead for Spain if Podemos continue to gain traction. Unless of course the whole idea is to return all coastal ownership to nationals and be done with us pesky foreigners. Then fair play, they are going the right way. Hate to say it, might just be time to give up on Spain full stop.

    • Mark Stücklin says:

      I don’t think the likes of Podemos, or any of the political parties in Spain, really care what happens to residential tourism. They certainly don’t bother to think through the ramifications of their policies. They are too emotional and lazy to do that. Badly drafted laws are a Spanish speciality.

  • Couple of grammatical errors in my last post and not well constructed a point of view at all, I pressed reply thinking there was always an edit button here, but seems to have gone, but I assume my point will come across regardless, and yep good save on the €200 mailing cost, I think it comes across much more personal, but perhaps you should know, your mail did got to Junk Mail this time which of course can happen with your normal mailer…

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