Careful With the Tax Office When Selling or Buying at a Discounted Price
Spanish tax law is slow to keep up with the new times and so when buying (and selling) at discounted prices, a common occurrence these days, it may well happen that in 6 months from completion we receive a letter from the tax office asking us to pay more tax.
This is exactly what happened to a client who approached us after purchasing a property in Benahavis for €250,000, when he was sent the letter asking him to pay an extra €3,850, on account of Transfer Tax (7%) on €305,000 which is the value property should have, according to the tax office.
Why does this happen? Well, the regional Tax Offices in charge of transfer taxes uses a calculator which tells us what the minimum value each property should be sold at and therefore, if any property is sold under this value they will recalculate our tax declaration and will request that we pay the balance, using the property which has been bought as a guarantee of payment (a charge is immediately placed in the land registry).
Possible scenarios and options:
- What can be done before you buy? If you are buying a property at a discounted price we suggest that the minimum value is known prior to entering into negotiations with a seller and if there is a likelihood that the tax will be more then use when negotiating a price, to your advantage. So if you want to know what is the assessed value for tax purposes of a property in Andalusia, according to the Tax Office, you can do so by using this calculator (note that although an accurate calculation it is not legally binding).
- And if you have already bought and receive the letter…? If it was already known and made part of the deal then it gets paid, but if we receive the letter “out of the blue” (because we never suspected it could happen) then it can either be paid or appealed, a process likely to run into a 2 year period (but nowadays they can be won as judges consider that a calculator is no substitute to a proper valuation to be carried out in situ).
- And what if we are selling? This is a more complex case as the tax office in charge of capital gains tax (CGT) is the national AEAT, which does not use the above calculator but does actually send over property valuers. If this is the case, of which our firm has had very few in the last seven years, we will analyze the facts and merits of the case and advise on what the best course of action is. In one case we had our client had sold cheap (€350,000) because he had personal financial matters to resolve and soon after selling he left the country with the proceeds (very small, incidentally), so we have not heard more from the AEAT Tax Office who reported the real value to be of €450,000. Again, an appeal here is also an option.
If you want to avoid surprises it is possible to apply for a legally binding value report, whether you are buying or selling, which your lawyer can apply and obtain for you.
Discounted prices!
How will the taxman know if a property is sold at a discounted price, or at genuine market value? I just used the calculator to work out the ‘official’ value of my small 2 bedroom apartment in Benalmadena and am absolutely astounded to see the taxman thinks it’s worth 388,000 euros!
I wish it were, but more importantly I wish I could get that amount for it! No one would even consider it at that price and I would like to know basis of their calculations? Are factors such as the current economy not taken into consideration and the fact that for 388,000 euros people would expect a 4 bedroom villa with a private pool?
If I were struggling to meet my mortgage payments and had to get rid of the property for financial reasons, which I might have to very soon, I’d be lucky to get 150,000 right now. And the winners will be the mortgage lender and the taxman, whilst the property owner would lose all their life savings and every penny they’ve paid to date.
This is wholly unethical and unjust for people who are genuinely struggling to keep their financial commitments to everyone. Surely there must be some sort of compromise? If everyone is having to revise their figures, why can’t the govenment revise their ‘official’ values?
Thank you for your professional advice on this. I shall certainly be seeking to get a legally binding valuation from a professional agent.