Purchase taxes in Spain
This week an article in the Mail online outlined the continuing issue buyers in Spain are experiencing with the regional tax offices in Spain.
When buying ITP is payable which is the equivalent of UK stamp duty tax. This tax level varies from region to region with Madrid being the lowest at 6% and the highest in Barcelona at 10%.
During the property boom years to avoid both capital gains tax and purchase tax buyers and sellers often partook in an element of black money so declared the purchase at Notary at a lower price and exchanged cash, this was often up to 50% of the actual price being paid.
Spanish Banks involvement
When high levels of taxes were flowing into the regional coffers everyone turned a blind eye to this tax avoidance activity this included Notaries, Lawyers and Banks who were all aware of what was happening. It was just indicative in the system and seen as acceptable.
Spanish Banks at this point in time lent against valuation not purchase price so even when a buyer required a mortgage it did not affect their ability to avoid paying the true taxes.
The current situation
Move the clock onto 2013 and 2014 and the complete reverse is now true.
Black money after the jailing of various notaries and a clean up in the system is no longer considered acceptable and has more or less been removed from the buying process altogether. Buyers are made aware by their lawyers to participate in such activity would be a criminal offence and Spanish Banks only grant mortgages against a maximum loan to value of the purchase price being declared.
Property prices have dropped considerably and many true bargains can now be found.
The problem is that Spanish tax authorities somewhat after the horse has bolted and under pressure to bring in as much revenue as possible are now looking at the minimum fiscal values recorded against each property at the Town Halls, and if a property sells for less than this, claiming that an element of cash made up part of the transaction and are claiming further purchase taxes after completion on this basis.
Minimum fiscal values
The fiscal values have not been adjusted to reflect the current market conditions so many people are buying under what the tax authorities consider market value and being caught out even though they have genuinely not been involved in any tax avoidance.
We have moved from rape and pillage of the Spanish tax system with buyers and sellers systematically participating in tax avoidance to the reverse where genuine bargains and completely authentic transactions are being questioned. The Spanish tax authorities claim first and ask questions later and failure to pay the extra tax demanded just results in fines even if the buyer or seller is in fact in the right.
A good lawyer will check the minimum fiscal value before completion and may advise a buyer just pays transfer tax on the minimum value to avoid future issues or at least warns their client of the possibility of a claim from the tax office at a later date.
None of this is fair but many things within the Spanish tax system are unfair and lack transparency. Of course the fiscal values should in fact be adjusted to reflect the current market values this would allow the tax authorities to still question unrealistic purchase prices but allow for the fact prices have dropped by over 40% in the last few years.
How taking a mortgage might help
In terms of fighting a claim having a formal Bank valuation will help so for those buyers taking a mortgage they will have substantiated evidence that the price they have declared as paid is in fact the correct price. Valuation companies are managed by the Bank of Spain and must follow clear laid rules when assessing the value of a property.
Sadly for now a number of buyers will find the tax office pursues them and the reality is this is a backlash to the high levels of tax avoidance that happened between the years of 2002 to 2007.
One can only assume that the investment companies that have bought up large tranches of stock from SAREB and direct from the Banks, supported heavily by the Spanish government, have had a moratorium granted for themselves and that no regional tax office will be able to argue they paid below market value and therefore owe more tax. If this is the case the Spanish politicians need to start to look at how it is affecting individuals before the regional tax offices disrupt the property recovery.