Since January 2022, Spain has had a new way of valuing real estate. The Spanish government now uses the Valor de Referencia del Mercado (hereafter: reference value) as a starting point. Today, we are several months on, so we can make an initial assessment of the impact on buyers, sellers and heirs.
Briefly, what is the tax reference value in Spain?
The Spanish Land Registry calculates the reference value based on registered prices at local registration offices. The government then uses this reference value to assess the minimum acceptable value of a property transaction. The Spanish tax authorities can therefore choose between the market value on the one hand and the reference value on the other for calculating the applicable transfer tax. You understand that the government chooses the higher of these two values.
Note: Do not confuse the reference value with the cadastral value (valor catastral). The cadastral value is significantly lower than the market value and is used to calculate municipal taxes.
What do we see in practice?
The reference values are generally close to the market values. However, we also see outliers, both positive and negative. For example, the reference value does not take into account a recent renovation or long-term dilapidation of a property. Because the valuation is automatically calculated based on local market prices and is independent of the building's current condition, reference values sometimes feel unfair. However, in nine out of 10 cases, we see that the reference value comes out higher than the pre-2022 calculation method.
Impact on buyers
If the reference value is higher than your agreed price, you will pay more transaction taxes. In the case of a resale, these are the registration fees (ITP).
Suppose you agree a purchase price of EUR 500,000 for a villa in Altea. However, the reference value turns out to be EUR 580,000. In this region, the registration fees are 10%. You will then pay EUR 58,000 registration fees instead of EUR 50,000.
The reflex of some then consists of a "creative solution" to reduce the price, which all too often amounts to price manipulation (= fraud). Apart from its illegality, these tricks of the foor are detrimental to the buyer. The chance of being caught is quasi 100% since the new system and results in fines. Also: the lower the official purchase price, the higher your subsequent official capital gain on sale. And the capital gains tax is higher than the registration fee.
Consequences for sellers
With capital gains tax, we end up with the seller. As a seller, you have a similar problem. The reference value in Spain can also be used as the basis of capital gains tax. For non-residents in Spain, the capital gains tax is 19% on the capital gain actually realised.
We take the same example. The seller's capital gain for the villa in Altea will potentially be calculated based on the reference value of EUR 580,000 instead of the agreed EUR 500,000. Worst case this is still an additional tax of EUR 15,200.
Consequences for heirs
In our view, the biggest impact is for heirs. By heirs, we mean not only individuals receiving an inheritance, but also families considering donating property.
If the testator was resident in Flanders, Flemish inheritance tax is due on the worldwide estate, including real estate in Spain. Inheritance tax for the direct line (groups I and II) is not too bad in most Spanish regions because of various exemptions and deductions. However, there is also the Flemish inheritance tax, which is already significant with its rates of 3/9/27% in the straight line.
Before 2022, we could use the tax value, which was generally much lower than the market value. However, with the new reference value in Spain, the taxable base for inheritance tax goes up sharply. It mainly benefits the Flemish government. An example.
A three-bedroom flat in Estepona. Before 2022, the Spanish government valued this flat at EUR 210,000. Since 2022, however, we arrive at a reference value of EUR 305,000. A difference of EUR95,000. The inheritance tax payable in Spain is EUR 0.00 because there is an exemption of EUR 1,000,000 per direct line heir in Andalusia. In Flanders, the EUR305,000 is added to the estate's estate. The 27% rate applies from EUR 250,000 per heir. So that extra EUR95,000 quickly results in a higher assessment.
Also implications for donations
Gifts of Spanish property are not taxed in Belgium. However, gift taxes in Spain are usually higher than inheritance taxes. In addition, there is also capital gains tax on the difference between the donated value and the acquisition price (less demonstrable costs). If the property was purchased at the time in pesetas and one applies the reference value now, the taxable capital gain can be high.
Your parents bought a property near Platja d'Aro in the 1980s for 9 million pesetas. Converted to euros, we are talking about around EUR 55,000. Today, this villa has a reference value of EUR 480,000. Both Catalan gift tax and capital gains tax are calculated based on the EUR 480,000. A rate of 19% on a capital gain of EUR 425,000 is EUR 80,750.
What are the solutions to a high tax reference value in Spain?
If the reference value turns out to be higher than your agreed value, there are three options.
- You accept the higher value and pay the taxes due at once.
- You do not accept the higher value and you pay the tax due based on the value you agreed upon. Should there be a later challenge by the taxman, you will have the opportunity to refute the reference value. If the taxman does not accept your protest, there will be an increase + a negligence interest.
- You do not accept the higher value and you immediately dispute the reference value. In this case, you submit a substantiated file with the declaration.
There is no doubt that the new reference value indirectly results in a tax increase. That is why it is important to have the reference value of your property calculated in advance. That way, you can take appropriate action and avoid unpleasant surprises. Confianz calculates the reference value of the property in every case and assists you with the preparation of a dispute.