Making the property market even more interesting in Spain is a major change to the local taxes normally payable by vendors or inheritors of property – the plus valia – or local capital gains improvement tax. The varying rates charged by different municipalities, particularly when there could be a very large variation between two neighbouring properties, has already led to many challenges in the Spanish courts.
A Constitutional Court decision of 26th October made by 9 Judges of the highest court in Spain has now ruled that the way the tax is calculated is contrary to the principle that all contributors should be treated equally throughout Spain. The court has also stated that the tax system at all levels should look to the economic capacity of the contributor.
The charging of this tax has been a major source of income to Town Halls and has clearly helped in improving infrastructure in areas of rapid property development and resales. It has also affected many beneficiaries or heirs to Spanish property. Although there have been some set offs for widows and children, in many cases beneficiaries have been faced with high plus valia charges on the inheritance of a property when wanting to move to smaller properties.
Importantly this decision is not retroactive, so if you have been charged this tax on a sale or inheritance prior to the 26th October 2021 this cannot be used as a ground to appeal or overturn the payment. What is less clear is what will happen to those cases already subject to appeal prior to the decision and to those cases where the Town Hall has received a request to pay the tax but has not yet issued the payment demand.
IMPORTANT UPDATE NEW CALCULATION PLUS VALIA
The Spanish Council of Ministers has published the Royal Decree-law that adapts the tax on municipal capital gains to the ruling of the Constitutional Court of 26th October that declared the calculation system null and void.
The new tax system allows taxpayers to choose between two calculation methods the one that benefits them the most:
- It is possible to calculate the rate using the cadastral value of the land at the time of the transfer using the new coefficients that have been established by the Government according to the fluctuations of the property market and that will be updated yearly – the Town Halls will have a term of 6 months to establish their own coefficients within the limits established by the Government.
- The tax can be calculated on the difference between the purchase value and the sale value and no tax is due in case of a loss.
Operations of less than one year, which until now were exempt, will also be taxed.
The Government has given various examples to understand how the new calculation system works: if a property is sold in 2021 for 350,000 euros and was bought for the price of 310,000 euros in 2017, the real capital gain is 40,000 euros. If the total cadastral value is 100,000 euros and the value of the land is 60,000 euros, in order to calculate the tax base according to the real capital gain, it will be necessary to take into account 60% of the profit, that is 24,000 euros and calculate the Plusvalia tax on this amount; if we use the cadastral value to calculate the tax, the corresponding coefficient would have to be applied to the 60,000 euros of the property’s cadastral value, in this case the coefficient would be 0.17 and the Plusvalia tax due would be lower as it would be calculated on a taxable base of 10,200 euros.
In general the tax will be higher for short term sales, and lower for a property that were purchased during the economic downturn.
All property questions on purchases, sales, tax and property investment are unique to the individual and the particular property, whether it is a luxury coastal villa or a rustic inland farmhouse. At De Cotta Law we have been dealing in Spanish property in the mainland and the islands for more than 35 years. For independent advice with local knowledge and an international reach call us on +34 952 527014 or email on [email protected]
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