How To Avoid Overpaying Your Tax When Buying Property In Spain

(Events have overtaken this post. To see the latest posts on the situation regarding tax on Valencia Property see this page)

When you purchase a property in Spain you have to pay tax on the purchase, currently in Valencia for new and used properties the tax is 10%, in fact it is 10% on new property all around the country. In Madrid for example the cost on used property is currently 6% having been reduced at the start of the year. The cost in other areas varies from 7-10%. However you may be in for a nasty surprise unless you take certain precautions when finding yourself a bargain. Let’s look at an example.

You find a great deal and you offer 100,000 Euros which is accepted. Therefore you go to the notary and sign, hand over your 100k and reluctantly give the taxman 10%. That is the end of the story right? Not quite.

One of our Malaga properties
One of our Malaga properties

Prices have fallen a lot since 2007 and Cadastral Values in many cases have not been revised to take into account this new situation, many cadastral values were set in 2006 and 2007 when prices were at their peak. Each property in Spain has a cadastral value and each municipality has a multiple to make those cadastral values more equal to perceived market values. In my town of La Pobla de Vallbona the multiple is 1.8. So what does this mean?

Let’s assume the property was in my town. The property was sold at 100,000 Euros and the cadastral value (Which you can find on the last payment of local council tax, the IBI) is 80,000 Euros. That 80,000 Euros is then multiplied by 1.8 to give us a figure of 144,000 Euros. This is the minimum price the property can be purchased for in the eyes of the taxman. Therefore when the property is registered they will take a look at the declared price of 100,000 and the perceived cadastral value of 144,000 Euros and say “Hold on a minute sunshine! You need to pay the tax based on the 144,000 value. This will not only cost you an extra 4,400 Euros but also a fine and the costs of not having declared the minimum value. Most people just get on with it and pay when in this situation but you do not have to.

Read on…

But before you do just to let you know why this system exists. Traditionally in Spain there were two prices, the official price you paid and the black money that was paid in hand to the seller so that both parties reduced their tax bill; the seller any capital gains tax and the buyer their purchase tax, the ITP. It was never condoned but everybody did it. To avoid this the government and taxman put up these artificial minimum values meaning that even though they were getting ripped off at least they got a minimum amount from it. Then from 1998 onwards prices exploded upwards meaning the multiples were brought in as the cadastral values didn’t keep pace with a market rising 20% year on year.

Back to our story of how to avoid this unfair tax imposition…

When the tax office inform you of the discrepancy you have ten days to respond with your “Allegations” ie informing them that the property was bought for 100k not 144k and proving it through various means. If you answer within ten days then the process is stopped and money will not be embargoed out of your account until a resolution is made for the case. Good news!

So how do you do this? Well firstly on the deeds for the property, especially if you are not going to be living there permanently, make sure your address for notifications is your lawyer’s office! Then when the lawyer receives the news of any potential embargo he can immediately put in the necessary “appeal” to stop the process. You then take various steps to prove your case and eventually as long as your evidence is conclusive then the taxman will be forced to drop the case. So you have a cost for your legal representation but no large lump sum bill from the council.

What proof can you provide?

  • Bank account detailing transaction costs?
  • Certificate from the Notary stating the full price paid.
  • Certification from an architect explaining the low price due to the state of the property
  • a few other ways which we will keep under our hat for the moment…

This situation is becoming more and more the norm as prices have dropped and cadastral values have not been revised. However if you are clever and prepare well even when you buy a great deal of a property below the minimum cadastral value stipulated by the council you will still not have to pay the extra tax. You just need to have your proof ready. Better to prepare for the worst rather than try to claim against money taken out of your account directly by the taxman.

if you need to know more or you are going to be buying a property and would like to have your interests protected just let us know and we will help you out.

Cadastral Value in Spain
Cadastral Value in Spain