How much do people declare to the Spanish taxman?

In the UK we invariably declare the full value of a property purchase. This may be related to the fact that taxes and stamp duties on selling property in the UK are exceptionally low by world standards.  This is a delicate and controversial subject for buyers.

Here in Spain it is usual to under-declare the full sale value and this is linked to the fact that property transfer taxes are relatively high. As a buyer, you will be paying seven per cent of the declared value to the taxman. This sales tax will be paid after the completion of the sale.

Under-declaring is institutionalised

Every day in Spain you can witness this under-declaration in notary offices. It is virtually institutionalised. The notary is a highly respected and publicly appointed official found in every town or city. He or she intervenes in the registered sale of almost every property. His word is unchallengeable and it is his job to ensure that all parties understand their tax obligations and what they are signing.  

In the notary

However, during most contract signings a similar routine is repeated. Once the values indicated in the contract have been publicly agreed, the notary will excuse himself politely and momentarily disappear from the room. In this moment a large bulging envelope will appear from a jacket pockets or handbag. The cash is passed over, counted, and disappears into a different jacket pocket or handbag. The smiling notary returns to the room and discreetly confirms with a raised eyebrow that the transaction has been made as agreed.

With cash safely handed over, the notary returns to his chair, the fountain pens are uncapped, and everybody happily signs on the dotted line before shaking hands.

Spanish taxman

But what about the taxman? Surely he is not going to sit back and accept this state of affairs? The answer is that the taxman is slowly and patiently raising minimum taxable levels. Many years ago the declared values were laughably low, but they are now edging closer to the true values. Broadly speaking, the local taxman will be likely to intervene if the declared value is equal to, or less than, twice the rateable value. This rateable value is called the valor catastral and can be found on the local property tax receipt, or impuesto de bienes inmuebles (IBI). The seller should make this document available to you when you first express an interest in the property.

The taxman may also act if he believes the house has been under-declared by more than 20 per cent. Your lawyer may well be able to discover the taxman’s valuation of the property you intend to buy.  If the taxman does intervene and decides that the property was under-declared, he will then issue his own valuation for the house and charge the buyer the difference at the higher gift tax rate.  

Spanish property taxes

Obviously there are advantages in under-declaring for the buyer. What are they? The prime advantage is that the buyer pays less purchase tax, known as impuesto de la transmisión (ITP) in the case of resale properties and charged at 7%, or VAT or impuesto de valor añadido for new properties and charged at 7%. You must pay this tax at the local tax office, or Hacienda, within 30 days of completion. If you buy a resale house for €140.000 and declare only €100.000 you may have saved €2800.

And the disadvantages for the buyer? Assuming that you escape the immediate attention of the taxman, you may still later have cause for regret. When you eventually sell the property, the new buyer may well insist on declaring the true value – in which case you will be taxed on capital gains from the false value you declared when you bought the house at a rate of 15%. Your small savings today may land you with a bigger tax bill tomorrow. In short, peace of mind is best obtained by declaring the real value when you buy the property, or at least keeping any under-declarations in sensible proportions.

--------------------------------------------------------------------------

For more information on Valencia and our range of property go to:

www.rawlinsholden.co.uk or in Spanish at www.rhinmobiliaria.com

--------------------------------------------------------------------------

For more news and views on Valencia property visit:

http://valenciapropertymen.blogs.com

Web www.rawlinsholden.com www.valenciapropertymen.blogs.com