Mark Stücklin
The Property Transfer Tax (ITP) bill you now get when you buy a property in Spain might assume your new home is worth much more than you paid for it, as many buyers in Spain have been finding out since the start of the year.
They say the only certainties in this life are death and taxes, but at least you can normally be certain you will only be taxed on the value of whatever you are being taxed for, be it income, property, or goods and services that attract VAT. But not so when it comes to buying property for sale in Spain, where the taxman gets to decide the taxable value of any property you buy, and it could be significantly different to the actual price paid.
How so? Well, since the start of this year, the Spanish tax authorities have been using a new way to calculate the taxable base of property transactions for paying the Property Transfer Tax, known in Spanish as the Impuesto de Transmisiones Patrimoniales, or ITP for short. In the past the taxable value used to be the price paid, but since the start of this year the price paid has been replaced by a new ‘Reference Value’ based on recent transactions in the municipality where the property is located.
The new Reference Value is also used to calculate the taxable base of property for Spain’s Wealth Tax (Patrimonio), and in the case of gifts and inheritance, so it can inflate the taxes that have to be paid for years to come. If nothing else the new Reference Value is a crafty way for the Spanish government to squeeze more money out of property buyers and owners without putting up the tax rate.
Now an article in the Spanish financial paper El Economista confirms that buyers are getting hit with massively inflated tax bills based on the new value. The article reports that the Reference Value from the Cadastre is 60% or more higher than the actual price in many cases, and more than double in some cases. A buyer in Madrid paid €350,000 but got a Reference Value of €588,000, an increase of 68%. All those buyers will be paying significantly more tax as a result, the article points out.
How does the government justify using a taxable base that is not the actual price paid? Perhaps buy arguing that because many people in Spain pay for property in part with cash under the table, the declared price can’t be trusted. However, undeclared cash payments, which used to be called ‘B’, are rare these days, and anyway, the reason why people resort to ‘B’ is because taxes are so high in Spain. The black economy would be smaller if the government reduced taxes, but with public finances in worse shape than ever, that’s unlikely to happen. So just make sure you check the ITP you have to pay before you sign on the dotted line. See this article explaining how to check the Reference Value of a property before you buy, allowing you to calculate the Property Transfer Tax (ITP) you would have to pay.
SurveySpain says:
Survey Spain keep a record of all the Reference Values we inform our clients about in our reports. We calculate the average difference between the reference value and either our current market valuation, if that’s what we’ve been doing, or the asking price for the property if it’s a building survey.
At present it’s averaging 80%.
It varies from 138% down to 56%.
The system is definitely not fit for purpose and must be changed.
It appears like a bargain if the reference value is low, but that will be the base that is used when the property is sold again in the future, so it will appear that there has been much more capital gain made than there has been in fact. Also, Reference Values are to be recalculated every October, so if the recalculation moves the value above what you can sell the property for, the tax ‘hit’ will be even worse.
SurveySpain says:
With their comparatively low tax regimes, it makes buying in Andalucia and Madrid, more attractive places to buy than Valencia or Barcelona.
Mark Stücklin says:
This is a very good point that deserves an article of its own.