The Spanish state picks your pocket with high purchase taxes, and then has the gall to tax as ‘wealth’ the money it has taken from you.
A reader has brought to my attention that Spain now considers taxes-paid as part of your wealth when it comes to calculating the taxable base of property for the Spanish Wealth tax and the ‘Temporary Solidarity Tax on Big Fortunes’. Maybe I’m the last person to know but just in case you didn’t know either, I’m bringing it to your attention.
Spanish property purchase taxes
First let me refresh your memory about the taxes you pay when you buy property in Spain. If you buy a resale property you pay a tax called the ‘Impuesto sobre Transmisiones Patrimoniales (ITP)’ or Property Transfer Tax that varies from region to region, often with a sliding scale. The national rate is currently 7% but Catalonia charges 10% up to €1m and 11% over that, whilst the Balearics have a top rate of 11.5% for the moment, expected to increase soon. When you buy a new home you pay VAT of 10% in all regions with the exception of the Canaries. So when we talk about Spanish property purchase taxes, we’re not talking about a few bob. Typically we’re talking about between 7% and 10% or more of the purchase price of one of the biggest investments most people ever make.
Spanish Wealth Tax
Spain is one of only four countries in the OECD club of mainly rich countries that have a Wealth Tax because most other countries realise that a Wealth Tax does more harm than good. It’s highly distortionary, and net-negative.
Spain’s Wealth Tax rates are pretty much the highest in the small group that tax wealth, and Spain is the only country to have introduced a new Wealth Tax on top of the existing one because some Spanish regions like Madrid and Andalusia realised that a Wealth Tax was counterproductive, and so set it at zero. The national government didn’t like that so introduced a new tax on wealth, called a ‘Temporary Solidarity Tax on Great Fortunes’ to make sure that every region taxes wealth of €3m or more. This new tax is particularly hard on foreign investors.
You pay the Wealth Taxes mentioned above if you live in Spain and are worth €2m or more (regional variations apply), or you live abroad but have assets located in Spain like property with a taxable base of €3m or more.
Spain now taxing taxes
What has changed? The Spanish tax authorities now include taxes-paid when it comes to calculating your wealth in Spain. They have also thrown in notary and land registry fees, making sure that more people fall into the Spanish Wealth Tax trap. You can read the official guidance here.
The argument the taxman uses, in this binding resolution, is that taxes like ITP, VAT, Stamp Duty (Actos Jurídicos Documentados), and notary and land registry costs are all expenses “inherent to the purchase of property” and therefore should count as part of the taxable base when it comes to calculating the value of property for Wealth Tax purposes. It doesn’t matter that those expenses all reduced your wealth. The Spanish tax authorities can’t distinguish between assets (wealth) and expenses paid. They are taxing your taxes, money you already handed over to the government, and calling it “your wealth”. They could use the same argument for income tax, which is an inherent cost of making money considered wealth if you have any left after the taxman has taken a huge bite. Income tax paid should be considered as wealth by this argument.
I’m not sure when exactly this happened, but it seems around 2017. I think before then it was clear that, as far as the Wealth Tax was concerned, in the eyes of the taxman, the “price or acquisition value” paid for a property meant the value stipulated in the title deeds, and did not include taxes and expenses. There is a ‘binding resolution’ to that effect issued by the Tax Office in 2013 regarding property purchased abroad, and in this respect it doesn’t matter where the property is located – it’s a principle: Are taxes paid and handed over to the government considered part of your wealth or not?
To make matters worse, since the start of 2022, the Spanish government has started inflating the ITP tax you pay when buying a resale property with the introduction of a ‘reference value’ as the taxable base, rather than the actual price paid. It no longer matters what price you actually pay, the Spanish government will come up with a different value, often higher, that inflates your Wealth Tax bill if you fall into the Spanish wealth tax net. A double-whammy.
“Based on everything we have read online, we were expecting the taxable-value to be the higher of the actual purchase price paid or the cadastral value,” writes reader Alan Gregory, Professor Emeritus of Finance at the the University of Exeter, who bought a property in Mallorca in 2021, and alerted me to this situation by email. “Not so! It turns out the value is deemed to be the purchase price PLUS the purchase taxes paid. This is little short of scandalous in my view – first the tax authorities reduce your wealth by taking a huge amount of property purchase tax, and then simultaneously impose a wealth tax on the very wealth they have just taken from you. It’s unbelievable, but apparently true.”
This won’t affect the vast majority of foreigners who buy property in Spain because they don’t end up snared in the Spanish wealth tax net, and wealthy foreigners can usually get around the Wealth Tax by using mortgages and other tricks that money can buy. But it should worry everyone with property in Spain because it says a lot about the tax regime in Spain. You can’t trust them to play fair, and nobody likes a cheat.