The new Law causes a potential tax increase for property buyers from January 1, 2022. It will also affect the Inheritance and Gift Tax, as well as the Wealth Tax.
Effect of the new law on property buyers
As with buying a property in any country, there are many additional expenses that you should take into account when buying a property in Spain. Additional "hidden" costs to be taken into account include notary fees, Land Registry fees, real estate agency fees and a considerable amount of property taxes.
The Tax on Documented Legal Acts (AJD) must be paid when buying newly built properties and the Property Transfer Tax (ITP) when buying a resale property.
Until now, the taxable base of both the Property Transfer Tax and the Documented Legal Acts Tax in all real estate transactions has been the "real" value of the property (i.e. the purchase price of the property agreed between the buyer and the seller), unless the tax authorities can demonstrate that the market value is higher. In an attempt to reduce the tax litigation that stems from these cases, the new law has introduced a "reference value" to be used as a tax base. In cases where the purchase price is in fact higher than this "reference value", the purchase price shall be used. This will be introduced from 1 January 2022.
The "reference value" will be determined by the Cadastre Office annually, based on the prices recorded by notaries and taking into account the geographical area and type of property. However, it will not take into account the state of the property or if a reform that would have meant a lower purchase price is necessary. This means that a similarly sized apartment in the same building will have the same "reference value", regardless of the condition of the property and the quality of any renovation. In the event that a buyer acquires a home that requires substantial renovation, he will have to use the "reference value" to calculate the property transfer tax, even if it is much higher than the market value.
Homebuyers can appeal if they consider that this "reference value" is higher than the market value, providing evidence that the market value is lower. This is the opposite of what happened before, when it was the responsibility of the tax authorities to prove that the market value was higher than the tax base, so now the burden of proof lies with the buyers of real estate themselves and not with the tax authorities.
If there is no "reference value", the tax base will be the agreed price or market value, whichever is greater.
Gift, Inheritance and Wealth Tax
This "reference value" will also be used as a taxable base in the calculation of the Gift and Inheritance Tax, as of January 1, 2022. As in the Property Transfer Tax, itwill be the minimum value that will be used when a home is inherited or donated, so even if a lower value is declared in any transaction before a notary, the "reference value" will be used instead.
The new "reference value" also affects the Wealth Tax, a tax levied on net worth that exceeds a certain threshold, although it is not strictly used as a taxable base.
The tax base in this case is considered the largest of the following values: the cadastral value, the value determined for the purposes of other taxes or the purchase price. Therefore, if a taxpayer wants to appeal the value on which the Wealth Tax is based, he would have to appeal the price at which the property was acquired, either by purchase, inheritance, donation or donation.
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