News on the Spanish property market

June 2009 - Low property prices could cause tax headache for buyers

Purchase tax on Spanish property is paid by the buyer at the time of completion of the sale. This is currently 7% of the purchase price. However, there can be a sting in the tail for the new owner. When the purchase price is below the price that the tax authorities believe it should be, the authorities can levy an additional tax on the purchaser based on the rateable valuation of the property. Each property has a rateable valuation and this valuation has a multiplier applied which the tax authorities consider the true value of the property. If the purchase price is lower than this true valuation, there can be a significant outstanding tax amount which has to be paid after the sale has been completed.

This power to levy a retro tax was brought in to counter tax avoidance where significant amounts of 'black' money were used in property purchases. It was common practice to pass over large amounts of cash 'under the table' and declare a much lower purchase price than was actually being paid. But the current usage of this power seems to ignore economic realities. The fact is that many properties are genuinely being sold at greatly reduced prices. A number of factors are contributing to this.

There is huge over-supply in the market coupled with a dramatic fall in prospective buyers. The global economic slump and banking crisis have made it very difficult to get a mortgage. The collapse of sterling against the euro has brought severe problems to British owners of Spanish property. Those living in Spain but who are reliant on income from home, for example a UK pension, have seen a drop of around 30% in their disposable income, in a very short time period, making it difficult to meet mortgage payments in Spain. On the other hand, those who remain resident in the UK but have bought property using a Spanish mortgage have seen their monthly payments effectively rise by 30% (they need to spend more pounds to buy the same amount of euros).

The net result of all these factors is that many UK property owners decided to sell up. The weakness of sterling meant they could effectively undercut euro zone property owners by up to 30%. For those lucky enough to be in a position to purchase, the combination of factors has presented the opportunity to genuinely buy at greatly reduced prices, something which the tax authorities seem not to take into account.

Purchasers do have the option to appeal against the higher tax assessment but in practice this is very difficult because it is impossible to prove that there was no hidden cash involved in the purchase.

Until the authorities eventually recognise what is actually happening in the property market, purchasers need to factor into their budget the possibility of having to pay this excess tax. Prospective buyers can protect themselves from a nasty shock by calculating what the full tax liability might be. Check the rateable valuation of the property (available from the local Ayuntamiento) and apply the multiplier (in Malaga, 2 at present but needs to be checked). Thus, real tax liabilty could be 7% of rateable valuation multiplied by 2. At time of purchase, 7% of the purchase price will be payable as part of the purchase process but the tax authorities may later demand payment of the difference between real tax liability and the actual amount paid.

To clarify, the following is an example:

In this example, the purchaser would have needed to set aside an additional 4.2% over and above all other costs involved in the transaction.