When you buy a resale property in Spain you must pay transfer tax (ITP). This is currently at 7% of the purchase price. If, at a later date, the Tax Authority consider that the declared purchase price is not a correct valuation and that therefore you haven’t paid enough transfer tax, they can charge you more. This can happen up to five years after you purchased your property and is called complementary tax.
The tax originated during the property boom in Spain. As house prices increased and with them property taxes, purchasers and sellers sometimes came to an agreement. Some of the purchase price might be paid ‘unofficially’ in cash. This meant that the amount declared on the deed was below what had actually been paid. By doing this, purchaser and seller could avoid higher capital gains tax and Spanish transfer tax payments.
The Tax Authority realised this was happening and introduced complementary tax. They checked the amount the property had been sold at according to the deeds against their own valuation or Minimum Market Value (MMV). They then issued a tax demand of 7% of the difference where applicable.
The heady days of escalating house prices might be over but complementary tax is very much alive and kicking. With the cost of property diving rather than soaring, the Tax Authority is still faced with significant differences between the actual amount declared and their own MMV. This time the reason for the difference might be legitimate but the outcome is the same. A complementary tax demand.
How is it calculated ?
In order to calculate this Minimum Market Value a number of standard formulas, information from records and published regulations are used. The calculation does not take any individual circumstances into account nor are adjustments made to allow for current market values. No one visits the property – the tax is purely a theoretical formulation.
Because of this, the Tax Authority value is nearly always well above the actual value of the property. However high you declare the value to be there is always the possibility that there will still be a property revaluation and tax to pay. It is a complex tax to calculate.
In order to give you an idea we have included below two recent complementary tax case studies:
Case Study 1
Mr. D bought a holiday home in Spain when he retired. He bought the house in 2008 and felt he had a bargain at 194,000€ for a three-bedroom house in Santa Pola. He knew nothing about the possibility of complementary tax but was fortunate in being on holiday at the time when the notification arrived in March 2011.
Not expecting a tax demand and with a minimal level of Spanish, he contacted us to check his understanding of the communication. The Tax Authority had valued his holiday home at 228,587€ rather than the 194,000€ he paid for it. It was explained to him that the complementary tax demand represented the additional transfer tax of 2,421€ that would have been payable according to the Tax Authority’s valuation, plus interest.
Mr D took advice and decided to appeal. He won his case in March 2012 and now has no complementary tax to pay.
Purchased property price - 194,000€ (7% tax paid: 12,600€)
Tax Authority valuation - 228,587€ (7% tax calculated: 16,001€)
-34,587€ ( 7% tax outstanding : 2,421€)
Total to pay (with interest) = 2,795€
Case Study 2
In June 2011, Mr. B found a property close to a golf course at a bargain price of 114,000€. It had been reduced from an original asking price of 180,000€.
Pleased with his purchase, he was prepared to pay the transfer tax of 7,980€. He was also alerted by his solicitor to the possibility of receiving a complementary tax bill in addition to this amount. It was explained to him that such a bill could be received within the next 5 years but that in the Malaga region these additional charges were coming through quite quickly.
As a result, he was advised to keep aside enough to cover what the transfer tax would have been on the original asking price. He did this and was not surprised when in November 2011, only 5 months later, he received a tax demand for an additional 5,708€ plus 114€ of interest. This was slightly more than he had bargained for and following further advice he has decided to appeal.
Purchased property price 114,000€ (7% tax paid: 7,980€)
Tax Authority valuation 195,538€ (7% tax calculated: 13,688€)
-81,538€ ( 7% tax outstanding : 5,708€)
Total to pay (with interest) = 5,822€
This case study is a perfect example of the trend we’re seeing of complementary tax demands being issued earlier and earlier. A complementary tax demand can be made up to five years after the original property purchase. Now, we’re finding that in some areas of Spain, particularly the Malaga region, that they are often being issued only months after the property has been bought. A move we can only put down to the escalating economic crisis.
With the current pool of cheap properties available and people, understandably taking advantage of this, complementary tax is popping up on a regular basis. If you think you might be vulnerable and would like to find out what the risk is of you receiving a demand you can access further details by clicking here .
The possibility of complementary tax should not put you off purchasing a cheap property. However, you should be aware that the tax exists and budget for it accordingly. There is another alternative. Provided you receive your notification in good time, you do have a month in which to appeal against the tax.
have a very high success rate when appealing against complementary tax. Given that the amounts charged can be very high, this is a very good alternative for those who are on the receiving end of this stealthy source of government income.
If you would like to find out more about Abaco’s Complementary Tax Appeal Service please click the link here.