New rules to prevent tax evasion in Spain will come into force from 1 January 2022. Further to a European directive of July 2016, the Spanish government has approved Law 11/2021, which includes measures to prevent and combat tax fraud and strengthen tax control. The law brings with it consequences for the property market, with potentially increased taxes for property buyers. It will also affect Inheritance and Gift Tax as well as Wealth Tax.
Effect of the new law on Spanish property buyers
As with purchasing property in any country, there are many additional expenses that you need to allow for when buying a property in Spain. The ‘hidden’ extra costs that you need to factor in include notary fees, Land Registry fees, real estate agency fees and unfortunately a considerable amount of property tax.
Stamp Duty (AJD, Actos Jurídicos Documentados) is due when buying new build properties and Property Transfer Tax (ITP, Impuesto de Transmisiones Patrimoniales) when buying a resale property.
Up until now the taxable base for both Property Transfer Tax (ITP, Impuesto de Transmisiones Patrimoniales) and Stamp Duty (AJD, Actos Jurídicos Documentados) in all real estate transactions has been the ‘real’ value of the property (ie the property purchase price agreed between the buyer and seller) unless the tax authorities can prove that the market value is higher. In an attempt to reduce the tax litigation that has resulted from such cases, the new law has introduced a ‘reference value’ to be used as the taxable base. In the cases where the purchase price is in fact higher than this reference value’ then the purchase price will be used. This is to be introduced as of 1 January 2022.
The ‘reference value’ will be determined by the Cadastral Office annually, based on prices registered by the notaries and taking into account geographical area and the type of real estate. It will not, however, take into account the state of the property and whether refurbishment is required that would have resulted in a lower purchase price. This will mean that an apartment of similar size in the same building will have the same ‘reference value’ regardless of the state of the property and the quality of any renovation. Should a property buyer purchase a home that requires substantial renovation they will still have to use the ‘reference value’ when calculating the Property transfer Tax even though it may be well above the market value.
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Property buyers can appeal if they consider that this ‘reference value’ is higher than market value by providing evidence that the market value is lower. This is the reverse of before when it was the responsibility of the tax authorities to prove that the market value was higher than the taxable base, thereby now putting the burden of proof on the property buyers themselves rather than the tax authorities.
If a ‘reference value’ does not exist then the taxable amount will be the greater of the agreed price or the market value.
Gift, Inheritance and Wealth Tax
This ‘reference value’ will also be used as the taxable base when calculating both Gift and Inheritance Tax, as of 1 January 2022. As with the Property Transfer Tax, it will be the minimum value used when a home is inherited or gifted so even if a lower value is stated in any transaction before a notary the ‘reference value’ will be used instead.
The new ‘reference value’ also affects Wealth Tax, a tax payable on net wealth above a certain threshold (€500,000 in Catalonia, with an additional allowance for your own home) although it is not strictly used as the taxable base.
The taxable base in this case is considered as the higher of the following values: the cadastral value, the value determined for the purposes of other taxes, or the purchase price. Therefore should a taxpayer wish to appeal the value on which the Wealth Tax is based, they would have to appeal the price when the property was acquired, either through a purchase, inheritance, donation or gift.
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