The Spanish Senate will soon consider a draft law that will include several measures against tax fraud. The aim is for these measures to enter into force on 1 January 2022. The bill also refers to a new way of valuing real estate in Spain. Perhaps this measure will actually amount to a tax increase for inheritance tax and gift tax.
Update: the law has since been approved in the Spanish Official Gazette.
Update January 2022: more information on the New valuation rules for real estate in Spain.
How does property valuation in Spain happen now?
In property transactions, you pay taxes based on the value of the property. For example, consider the sales rights (ITP) and/or stamp duties (AJD) or inheritance tax. In principle, this valuation is done on the basis of the "real" value. Spanish case-law interprets this as the market value.
In order to avoid a deficiency valuation - for example, you deliberately have the sale price described in the deed lower than you actually pay - the Spanish tax authorities work with a system of tax (minimum acceptable) value. The tax offices of Spain's autonomous regions use a number of criteria, such as the built-up area and the valor catastral, based on which they make their own estimate for each property. This is the tax value.
If the declared value in the deed is lower than the tax value, the Spanish tax authorities will invite you to pay additional tax on the difference between the tax value and the declared value, possibly plus a penalty. It is then up to you to prove that the actual value is lower than the tax value. You can do this based on an appraisal report, advertisements of similar properties in the region, photos of the property's condition, etc. Belgium has a similar system: the control estimate.
Note: stating the price in the purchase deed lower than the agreed price is not only a crime, but also comes back like a boomerang later. On purchase, you pay between 7 - 11% transfer tax on the purchase price depending on the region. But when selling, as a non-resident, you will pay 19% on the capital gain. The lower the purchase price in the deed, the higher the future capital gains...
How does the new estimation method work?
The new way of valuing property in Spain is as yet unclear. It involves a valuation method based on data from local notaries, registration offices and municipalities. The objective is to increase the better align tax value with market value.
What are the implications?
Typically, the tax value of property in Spain is significantly lower than the market value. As a result, the tax payable for inheritance tax and gift tax is also lower. For this reason, we use the tax value to declare inheritances and gifts. If one will better align the tax value with the market value, for example by using data from notaries, the taxes payable will in practice increase.
The effects will mainly be felt on inheritances and gifts in the autonomous regions of Valenciana, Catalonia and the Balearic Islands. This is because these regions have low exemptions in inheritance and gift taxes compared to Andalusia and Murcia, for example.
Do you have questions about inheriting and gifting in Spain? If so, please feel free to contact on.
Update: October 2021