Starting this year the Spanish tax authorities are using a new formula to calculate the transfer tax that buyers must pay when they purchase a home in Spain. This is catching foreign investors by surprise, and leading to significantly higher tax bills in some cases, so be sure to check how much ITP tax you will pay before making any commitment.
The Spanish government has come up with a crafty way to squeeze more tax out of property buyers without putting up the tax rate (so it doesn’t look like they have raised taxes). It’s a sneaky trick, and it could well catch many foreign investors by surprise. Fortunately, there is an easy way to check your tax exposure before you make any commitment, and this change doesn’t affect new homes.
The Spanish Asset Transfer Tax – Impuesto de Transmisiones Patrimoniales (ITP)
When you buy a resale property in Spain (as opposed to a new home), you pay an asset transfer tax called the Impuesto de Transmisiones Patrimoniales (ITP) that used to be based primarily on the declared value of the sale – how much the buyer paid the vendor. This was the amount declared in the deed of sale, or escritura. ITP varies by region in mainland Spain (the Canaries have a different system), and can be as high as 10% in regions like Catalonia and the Valencian Community.
What the government has done is introduce a new formula for calculating the taxable value of the sale for the purpose of ITP. From the start of this year, the tax authorities are using the higher of the following: either the price paid to the vendor, or, and this is the novelty, the Cadastre’s ‘Reference Value’. So, if the Cadastre’s ‘Reference Value’ is higher than the price you have agreed with the vendor, you will end up paying more tax.
What is the Cadastre’s ‘Reference Value’ for Spanish property?
It is a value formulated by the officials who work in the Spanish Cadastre’s office based, in theory, on market prices in each area. It is supposed to be updated every year in each municipality in Spain based on home sales witnessed by notaries, and therefore depends on the number of sales in each area. It’s easy to something how this blunt reference value can diverge from actual market prices with something so heterogeneous as property. And the fewer sales there are in an area, the more skewed the reference value will become.
Under the new rules you have to pay ITP based on the new Reference Value if that is higher than the price you paid the vendor, though you are allowed a 10% reduction of the price when using the reference value (take the reference value x 0.9 to get the taxable value). The unique features of the property you bought make no difference at all. And if you declare and pay ITP based on what you actually paid, rather than the Cadastre’s Reference Value’, you could face fines if it means you have paid less tax.
Buyers are being punished by the new rules for Spanish ITP
I’m hearing stories of some deals not going through because municipalities don’t have the Reference Value ready yet, and other cases where buyers are being forced to back out of purchase contracts and lose their deposits because the tax bill has broken their budgets. Foreign investors are more likely than local buyers to be caught out by this.
I know of a home sold in Barcelona in December last year that would have cost the buyer €14,500 more in ITP had it gone through in January of this year. And Darren Gaskin, the Sales Director of Blue Lagoon Casas, an estate agency in Villamartin, Alicante (Valencian Region), on the South Costa Blanca, tells me he sold a home in Torrevieja close to the beach for 70,000€ in January that was given a reference value of 88,823€ (that’s 18,823€ more than the actual price, or 27% higher) meaning the buyer had to stump up almost 1,800€ more in ITP tax, amounting to an extra 2.6% of the sale price because of the new formula.
Why has the government done this?
This is a sneaky way for the government to increase the ITP tax without raising the headline tax rate, which would attract more attention. The tax authorities can now increase the taxable value of property with little scrutiny because the Cadastre’s ‘Reference Value’ is far from transparent. How is it calculated? Nobody knows. No doubt there is a formula, but it will never be accessible or comprehensible by the general public – the people who actually have to pay the tax.
What’s the justification? I have yet to hear one. Years ago, when it was common for property sales to involve a big chunk of cash under the table, there was an argument to be made for charging tax on an indexed-price because sales prices were being under-declared. But these days the vast majority of sales are declared at full price, as far as I know. It’s just too difficult to handle cash in the world today.
Will it increase the tax take? Perhaps in the short-run, but in the long-run it could well reduce the ITP tax by discouraging sales.
How to check the new ‘Reference Value’ for ITP property tax?
So how do you check the taxable value of a resale property before you make a commitment like paying an arras reservation contract? Your conveyancing lawyer should do this for you, but if you have a Spanish NIE number you can also check it yourself. Click here or go to the Spanish Cadastre online and click on the ‘Valor de Referencia’ button on the home page then ‘Consulta de valor de referencia’ and plug in your NIE number and support number (also on your NIE document). On the next page select ‘Efectos informativos’, today’s date, and plug in the cadastral reference number of the property you want to check before submitting the form. If everything is correct the next page will give you the reference value, and the option of downloading a reference value certificate. If the reference value is higher than the price agreed with the vendor, then that will be the taxable value used to calculate the ITP you have to pay.
For example, if you are buying a property for sale in Barcelona with an agreed sale price of 500,000€ and a reference value of 600,000€ the ITP would be 54,000€ (10% of 540,000, which is the result of 600,000€ x 0.9).
Although the Spanish property market seems to be buoyant at present, this new formula for calculating ITP is likely to increase costs and uncertainty, and discourage foreign investors, who can choose to go elsewhere. New homes are not affected by the change, and still attract VAT of 10% of the sale price, so this new formula might also push buyers away from the resale market and towards new homes for sale in Spain.
Thoughts on “New tax law punishing buyers, so check how much ITP tax you have to pay before committing to buy a property in Spain”
Previously, the tax authorities used a multiplier on the Catastral value for each municipality, with the resulting value used as the base value for tax. If it was higher than the declared purchase price, an extra tax was charged, delightfully called the ‘complementario’. This could be appealed by the taxpayer, by submitting a formal valuation and then the tax authority had the right to challenge that by requesting a further ‘independent’ valuation, at the taxpayer’s expense. Only if those showed the authorities value wrong, would the complementario be rescinded.
Now, with the Reference Value, at least most people know about it and will be able to plan for it. Estate Agents should be obliged to show it on their sales details. According to the tax authority publicity, it will be calculated every October for the following year by reference to the Notary and Registry information supplied to them. So, as 2022 progresses, the information their values are based on relates to evidence that could easily be a year old. In a rising market, that should mean that the Reference Value will be low and appears not to be a problem. However, that value will be the base used for Capital Gain in the future and so the gain may be artificially high and so the taxman wins in the end.
For general information and access to links to maps showing the Reference Values anywhere in Spain, go to the Catastral Changes section of https://surveyspain.com/2022/01/17/property-market-report-january-2022-part-1/
The madness of this system is shown by an unimproved, 2 bed apartment just sold in the last few days at 130,000€, having a Reference Value of 94,015€, and the 3 bed, greatly modernised apartment opposite having a Reference Value of only 3,300€ more.
Both buyers and sellers must be aware of the reference value of the property they are buying and the consequences of any difference to the actual market value. In this instance, if the buyers were to immediately sell at 130,000€, making no profit, they could still be taxed on the notional gain of 36,000€.