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Tax reforms for housing 2017

| News | Tax

The impact of the Rates Review on various taxes and the future reform of the law on municipal capital gains tax

During the crisis in the property market the taxation of real estate was not exactly a help in fighting the slowdown in this part of the economy, with only minimal tax measures to encourage the acquisition, use and sale of property. And now, when the market is clearly recovering, the legislator has even less reason to see the need to introduce regulatory changes to promote property investment.

At the end of March it can now be stated that the only new development in this area for 2017 is precisely in the opposite direction: the Rates Review of Royal Decree-Law 3/2016.

The rates review

At the end of 2016 Royal Decree-Law 3/2016 was published which included the approval of the coefficients for the updating of municipal official property values for 2017, a result of pressure on the Ministry for the Economy from approximately 2,500 town halls. The measure is designed to increase municipal, regional and also national government funding.

As regards municipal tax collection the increase in municipal official property values has as a direct consequence an increase in the amount payable in Land Tax (Impuesto sobre Bienes Inmuebles or IBI), a tax which falls due on 1 January each year.

For this reason implementing the Rates Review in December of 2016 meant that, a few weeks later, town halls were to see an increase of tax revenues which, although it may have been foreseen by those with first-hand knowledge of the negotiations between the municipalities and the Ministry, was probably not reflected in the numbers in the town halls' budgets.

The Rates Review also has a direct effect on local taxation in relation to the municipal capital gains tax (Impuesto sobre el Incremento de Valor de los Terrenos de Naturaleza Urbana or Plusvalía Municipal).

If municipal capital gains tax is based on the official or rating value of the property which has been transferred, obviously an increase in that value leads to an increase in the amount of tax payable. It should be recalled that the amount payable for municipal capital gains tax is the result of multiplying the rating value of the land by the number of years the transferor has been the owner of the property, by a coefficient which varies from 3% to 3·7% and, finally, by the rate of tax (which is set by each town hall but which may not exceed 30%).

While the effect on IBI and municipal capital gains tax is being immediately felt, the Rates Review has also led to an increase in regional government tax revenues, although this is not a result of a direct increase of a particular tax, but rather of its effects on the valuation of property and the impact this has on Transfer Tax (Impuesto sobre Transmisiones Patrimoniales Onerosas or ITP).

In this regard it should be said that ITP on property is charged on  transfers of property by persons not subject to VAT, and transfers by persons subject to VAT (i.e. companies or traders) classified under VAT regulations as “second transfers of buildings”, without prejudice to the waiver of the exemption. Without going into detail, as an explanation of treatment as a first or second sale for VAT purposes would require a report in itself, it may be said that a "second transfer" is equivalent to the transfer of used housing. I.e. housing which is not newly built and which has not been fully renovated.

Thus continuing to trace the connection between the Rates Review and ITP, it should be noted that any transfer of property subject to ITP is based on the real value of the property transferred. Here we must make a brief reference to the fact that ITP is a tax legislated for at national level, although the autonomous regions have some room for maneuver in regulating this tax and have full collection powers. We say this because the common regulatory framework, Royal Legislative Decree 1/1993 of 24 September, defines the tax base for ITP in these terms:

“The tax base consists of the real value of the property transferred or of the right created or assigned. Only charges which reduce the real value of the property shall be deductible, not debts even if secured by pledge or mortgage.”

As may be seen, the rule refers to “real value”. You may ask: what does the “real value” of property for ITP have to do with the Rates Review? The answer is this simple: in transfers of property subject to ITP, “playing” with the sale value in order to reduce the amount of tax payable is in many cases even more dangerous than before 2017.

That is because the tax base for ITP, to which the rate of tax is applied (in most regions between 8% and 10%), is the real value of the property. What do we normally take as the “real value”? The market value, which is assumed to coincide with the sale value.

Despite this however the parties may on an agreed basis, and without acting completely outside the law as you might think but simply because of the state of the market, the need for a quick sale or merely because the opportunity arises, give the transaction a value which is not the “real value”. To resolve this, or perhaps we should say to adapt the transaction price to what in principle  should be the “real value”, some regional authorities such as that of Catalonia decided to lay down parameters for what is known as the “no inspection priority value”. I.e. the minimum value at which the tax base for ITP will not in principle be reviewed by the regional tax inspectorate.


For further information, please contact:

Jordi Rius i Perramon


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