It is possible not to pay enough for a property - according to the tax man!

03/09/09

And you thought that you could sell the property at whatever price you wanted! Not so, according to the Spanish tax authorities.

To be fair to them they have traditionally had to struggle with chronic under-declaration of sale prices, with undeclared ‘B’ money cash payments on which transfer and capital gains tax was not paid, often being a substantial percentage of the price. So the tax authorities worked out a scheme and put into law that effectively the tax is levied on the higher of a notional 'market' value for the property or the price at which it is sold. This ‘notional’ value is calculated by applying a multiplier to the Catastral Value, which is a capital value estimate calculated for every property registered in Andalucía. It's the one that the annual property tax payment, the IBI, is calculated. As there are a huge number of properties, these Catastral values are regularly reviewed in rolling programme of Municipalities to reflect how market values change. Thus, to achieve the ‘notional’ value, each municipality has it's own multiplier depending upon when the Catastral Value was last revised. For example, currently Estepona revalued in 2008, has a multiplier of 1.3, whilst neighbouring Benahavis has a multiplier of 3.2, not having been revalued since 1996. Right, so that all seems fair enough although it is effectively a bit of a ‘post code lottery’.

HOWEVER, lets assume that you are desperate to sell, ‘distressed’ as it is termed, and you sell your ‘Bargain’ property at a genuine total price of say 300,000€ euros. BUT if the ‘notional’ value calculation shows say 400,000€ euros, it’s that latter value that the tax has to be paid on. It affects both Capital Gains Tax and the 7% Transfer Tax, so both the Seller and the Buyer are hit. If the taxes are paid ‘only’ on the full price actually paid, which any honest buyer and seller would do unless the lawyers advising their clients point out this problem, the additional tax bill based on the ‘notional’ value can arrive many months after the sale. If it's not promptly paid, bank accounts and other property can be embargoed. There is a right of appeal, but that involves getting independent valuers to provide reports showing the sale price was ‘fair’. But what if they cannot? What if the price was well below the market because the ‘distressed’ seller had to attract any buyer to urgently get ‘immediate’ money that maybe didn’t relate to the market value of the property. Plus they will have the inevitable accountants and lawyers fees. All because the tax authorities have assumed, without any direct evidence whatsoever, that the buyer and seller are evading tax, which is now officially criminal money laundering.

Surely this cannot be right as it's ‘hitting a man when he is down’. Both buyers and sellers are being branded as criminals and forced to pay tax on non-existent money.

December 2010. A petition has been raised to get the authorities to reduce the 'multiplier' mentioned above.

As everybody is being treated 'equally' there is no injustice. What's being asked by the petition is for Town Halls, the Andalucian Government and central Government to reduce the tax income they get from property and property transactions. In times of desperate lack of income for them, it's just not going to happen. If they reduce the coefficients they will have to increase the tax rate, which is politically less acceptable and so they will avoid it.

If people are not buying it's because of the 'surprise' element of it being discovered late on in the negotiations and the apparent unfairness of paying tax on a value higher than actually being paid. By checking on http://www.juntadeandalucia.es/ the agent can calculate and declare that value as part of the sales promotion and even make a selling feature of it e.g. "Look, the house is even being offered at a price less than the tax value". The individual seller does not need to reduce their price in comparison with others as everybody is treated equally. There should be no 'surprise' in the value on which the tax is calculated and if that is happening at the end of the negotiation process it because it wasn't declared openly at the beginning.

However, if in comparison with other nearby properties, the tax value is much higher, then an appeal should be registered with the Catastral Office to get their valuers to check that the property details are correct. However, in our valuations we often find that sections of the property are undeclared and therefore revaluation might even raise the Catastral value.

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