If you have sold any property in Spain you know you have to pay the so called Plusvalía Municipal or the Impuesto sobre el Incremento de Valor de los Terrenos de Naturaleza Urbana (that we could translate as urban land appreciation tax).
What is it? And is it still in force?
This specific local tax charged after 30 days of the sale through Public Deed at the Notary by the local council does not tax capital gains as such, but a theoretical increase in the cadastral value of the urban land on which the conveyed property is situated calculated on the base of the cadastral value, the years held in property, a percentage established and tax rate by the local councils. According to this formula when selling a property it always resulted a taxable land appreciation even of the property was sold with losses.
In the past years of crisis a lots of properties and real estates were sold under acquisition price in Spain and so the Spanish Constitutional Court was forced to declare in Sentence of 16th February 2017 STC 11/2017 that there was no tax to be paid in respect of those situations where capital gains on conveyed urban property were absent, opening, in turn, the possibility of recovering said tax, provided the 4 years prescription are not over.
In this regard, the Constitutional Court deemed that the tax, as established in the Local Tax legislation, automatically taxed urban land appreciation simply by reason of owning urban property for a certain period of time, that is, the tax would be levied on urban land appreciation that could be fictitious or inexistent in those cases where, at the time of the sale, financial losses resulted from the difference between the transmission price and the acquisition price. In such situations, common due to the crisis that has hit the Spanish real estate market in recent years, taxpayers would have been compelled to pay tax for inexistent gains, contrary to the income principle provided for in art. 31(1) of the Spanish Constitution.
Now, the Tribunal Superior de Justicia of Madrid (High Court of Madrid) has gone one step further declaring in a recent resolution last 19th July that due to the fact that the articles of the Law that covers the “Plusvalía” have been declared unconstitutional there now is no obligation at all to pay the tax, no matters if the sale had or not a real capital gain. Of course this puts more uncertainty as the Local Councils will not give up so easily.
We will have to see how the Law is amended but in the meantime if you are in any of those cases, that is in a position of recovering tax or having sold with or without capital gain you better go and ask for advice the best and tax efficient solution.
By Roy Duns – +44 191 38530
St James’S Place Wealth Management