Kelly Summerell Spanish Property Insights
January 2022 5 minute read
In short, yes... and no!
The high court has declared the method of calculating the Plusvalía tax annulled, forcing the Ministry of Finance to review the controversial tax which generates 2.5 billion euros per year for the local municipalities.
What is Plusvalía tax?
Plusvalía is a tax based on the increase in value of the land (IIVTNU), calculated and payable to your local municipality when a taxpayer sells, inherits or gifts a home.
Who is responsible for paying the tax?
If a home is sold, the seller is held responsible for paying the Plusvalía tax, along with capital gains tax/or a 3% retention (depending on whether the seller is a fiscal or non-fiscal resident) which is a separate tax.
Plusvalía municipal is a tax paid to the town hall based on the increase of the value of the land from when you bought to when you sell. It should not be confused with Capital Gains Tax in English, that is paid to the state.
If a home is gifted or inherited the receiver or heirs are obliged to pay the Plusvalía, along with inheritance tax (if applicable).
How is Plusvalía calculated?
Previously to calculate the gain, which has now been declared unconstitutional, the value of the land will be determined by the cadastral value of the property, multiplied by the number of years that have passed by a predicted growth percentage.
Depending on the municipality, the maximum rates are 3.7% for a period between 1 and 5 years, 3.5% for a period of up to 10 years, 3.2% for a period of up to 15 years and 3% for a period of up to 20 years.
That will give you the amount the land has increased in value, which is then taxed at a rate decided by the municipality, up to a maximum of 30%.
The cadastral value of a home is the monetary value officially registered in the ‘Catastro’ (the Spanish name for the land registry) which records the value of all properties and land.
For example, if a taxpayer bought a property in 2011 with a cadastral value of the land of 50.000 euros and sells it this year, 2021, they would need to multiply 3.5% by the ten years it has been owned.
This would give you 35% which you would then apply to the value of 50,000 euros.
Meaning that the predicted increase would be 1.750 euros
This amount would then be taxed at a maximum of 30%
The amount to be paid would be 525 euros.
Why did the Constitutional Court annul the tax?
The high court ruling declared three sections of article 107 of the Law Regulating Local Treasuries 'unconstitutional and null’. These sections provide the calculations to determine the taxable base for Plusvalía.
These calculations presume there has always been a steady increase in the value of the land over time.
This formula doesn’t take into account the actual profit made from the sale or indeed if there has been any profit or even a loss, because they are based on pre-established tables (cadastre) decided by the municipalities.
This is very unfair; we all know that land is unique and values differ greatly depending on many factors.
Why should you have to pay a tax on a gain you didn’t receive!?
What happens next?
The details of the ruling have not yet been published, but from what we know so far, it is a possibility that the municipalities may have to return taxes that were contested at the time, for unfairly imposing capital gains over the last four years.
Until the legislator has modified the tax law, it’s possible no Plusvalía will be taxed, as without a fair formula they cannot calculate the amount of tax due.
What does this mean for city councils?
According to the latest official statistics released by the Ministry of Finance, more than eight thousand municipalities in Spain received around 2.5 billion euros in capital gains tax in 2019. Plusvalía tax is the second highest tax after real estate council tax (IBI), from which they made 14 billion euros.
According to official data, Plusvalía tax contributes between 6 - 8% of the total tax revenues of local municipalities.
The municipalities will not be able to collect Plusvalía tax, once the final judgment has been published, until the treasury reforms the tax, effectively cancelling the tax until then.
The municipality budgets will see a significant dip as they will lose a minimum of three months’ income from this tax, the period in which the government will take to correct the rule.
The new rule should allow the reestablishment of the tax with fairness of collection.
In 2017 the Constitutional Court prevented Plusvalía tax from being taken when there was a loss of profit.
In 2019 the high court ruled that the tax would also not be collected if the profits from the sale were lower than the amount of tax due.
It is thought the sentence may have come from a weariness with the legislator from the high court, as despite previous warnings they had not modified the rules.
The legislator now has no choice but to modify the Plusvalía tax law; they have effectively been ‘checkmated’ by the high court.
