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Town Hall Tax

Town Hall Tax Abolished for Negative Equity

Town Hall Tax Abolished for Negative Equity

Jerez, famous for sherry, horses, motorbikes . . . and common sense. No gain = no profit = no tax. Right? Wrong.

Anyone who had to pay tax to the Town Hall when selling a property at a loss will be delighted to hear that the local government laws in Spain are changing. It is a shame that it has taken this long, especially when during the leanest years people had no redress. Anyhow, it is good news that the property market has turned the corner and it is safe to say there will never be a better time to buy. Because prices are going up.

Having said which, when the bubble burst the fall out was considerable and cases are still being decided. Thankfully, sellers with negative equity are now being treated fairly. There was a landmark case on Feb 16th of of this year where a national judge determined that a seller with negative equity should not be liable for a tax to the Town Hall which demanded payment just because the property was sold. This case was huge as it partially rewrote the Constitution. Other cases were also decided in the same vein, until a leading Judgment tried to stamp order on proceedings. (Case 59/2017 in May in the Administrative and Constitutional Law Courts of Jerez,) A major Bank foreclosed on a Real Estate Company and the prices adjudicated were 50% of the price the company bought them at. A clear example of negative equity. To add insult to injury, the Estate Agents received an invoice from the Town Hall for Capital Gains. There were not any. So they turned to the Courts for justice. The judge hearing the case declared articles 107.1, 107.2 a) and 110.4 of the Local Authorities Tax Laws were unconstitutional making them null and void in respect to negative equity. The Court also invited the legislature to change the law. The judiciary is bound by legislature, but on this occasion the judicial tail wagged the legislative dog and brought it to heel.

Draft Bill Going Before Legislature

While all of this was happening, a Draft Bill was being prepared to go through parliament; it is now in the final throes, but from May 2017 until the end of July 2017 the courts were deciding on a case by case basis. The lacuna still existed where the tax had to be paid even when selling at a loss. Such instability had to be stemmed and it was. The hapless victims of negative equity can now reclaim what they had to pay.

In July 2017 new legislation passed which amends the Local Authorities Taxation legislation and redacts clauses in the Constitution to enshrine a right in law that no tax is due if no profit has been made. So, in future people selling at less than the purchase price will not have to pay. But those who already have done so despite negative equity can claim it back. It may be subject to four years of Statute of Limitations, at this stage that fact remains unclear. What is certain is that up until the end of July 2017, taxes had to be paid even when no profit accrued.

In theory, all legislation covers everything. Especially taxes. In practice, this is the problem. Tax law is governed largely by the General Taxation Law and Article 57 permits seven different methods to be used independently or in combination with any or all of the others to arrive at a method for any given autonomous region. Phew. In Andalusia, for example, 3 different coefficients are analysed to arrive at the ‘real values’ that are used. (revised cadastral values, market value and variations in market value.)

The old name for this local authority tax is Plusvalía which could be translated as capital gain or ‘above value’ Significantly, the name was changed a few years ago, to Impuesto sobre el Incremento del Valor de los Terrenos de Naturaleza Urbana (IIVTNU) A tax on the increase of the value of the land. It seems counter intuitive, then, to charge a Seller after they sold at a loss and have negative equity. Even so, the local authorities continued applying a charge on any urban property sale according to their own legislation. They based their figures on calculations arrived at from before the collapse of both the property market and fall of the banks in 2008. Up until this July 2017 a few different methods were used. The most prevalent being a rigid formula which looked at the rate of land assessed by the local authority via the Cadastral Rate – roughly half the title deed price – and then a sliding-scale of coefficients applied. (With 20 years of property ownership as a cut off point.)

Local, autonomous, and federal tax authorities all agree that a clearer blue print is needed for fiscal certainty. The way the Bill currently leans, the title deed price will be preferred to the Cadastral Value in the case of a loss – unless the authorities contest these values.

The Bill still has not become Law, but an interim measure exists in an amended law which allows anyone who paid tax on a property sold at a loss to claim their money back. The date this became law is 15th June 2017, in essence, backdated at the date of the new interim statute. Curiously, it is valid until the end of July 2018. As if not having an expiry date would prevent legislation being passed into law.

It seems people will have four years from 15th June 2017 to claim back monies that were forked out when a loss was made. It is equally unclear how far back people can claim from.

Light at the end of the tunnel

Proposals have been submitted to make the laws more homogenous. A committee of experts has recommended a single method for all autonomous regions to use based on title deed price. This would be applied to urban and rustic property alike.

In order to avoid double taxation, taxpayers would be allowed to deduct the tax paid from the tax base of the other taxes that also tax the capital gains (IRPF). In practice, it is often accepted that if you paid the Town hall tax you don’t pay it again on your IRPF for residents and IRNR for non- residents declaring assets held in Spain.

The recommendation is that the taxable base would no longer be calculated by applying increment coefficients but by calculating the actual increase obtained by comparison between the transmission value and the acquisition value. In order to avoid double taxation, taxpayers would be allowed to deduct the tax paid from the tax base of the other taxes that also tax the capital gains (IRPF)

Good to know.

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Judicial Auction in Spain

Judicial Auction in Spain

What is a Judicial Auction?

It is an auction authorised under Spanish Law and executed by the law courts to sell a property usually burdened with debts. Without this special action, the property cannot be sold because of a mortgage or other charge levied against it which acts to prevent its sale as you cannot buy good title.

Anything that has an economic value can be auctioned: real estate, vehicles, furniture (Jewellery, pictures, machinery, etc.) and any other class of goods or rights.

The asking price is agreed between the creditor and debtor or by reliance upon a Judicial Report and in practice calculates the amount outstanding on the debt plus interest and costs, in an unpaid mortgage for example.

A Judicial Auction can also be used in the case where there are co-owners so that it acts alike a Trust for Sale where the money is divided up and allotted by the courts on a case by case basis.

The auction is presided over by a court clerk, who is also responsible for transmitting and delivering the sale.

Buying Existing Debts

Clearly, you need to know if the item being auctioned is sold subject to or free of debts and third party rights.

In the case of several charges against the property or goods, it is straightforward to know which is the one that gives rise to the auction, because the registrar states with respect to it that “it subsists and is not cancelled.”

By the mere fact of participating in the auction, the bidder acknowledges notice of the charges or third-party rights which appear on the Property Registry Certificate which were lodged prior to the Creditor’s claim that is being realised by the auction.  These rights to property or money lent against the property remain valid. And if you are finally awarded the Property, you agree to place yourself in the place of the previous debtor, so you will have to honour those debts. Make sure you know what remains outstanding prior to entering into the auction.  You are not liable for any charges which accrue after the notice of auction of the property. Should such a situation arise the Court clerk may order the Property Registrar to cancel them. The only thing that you would have to pay is your fees and taxes for that cancellation.

What if No Bids at Auction?

When the auction is held and no-one makes any bids, this fact is declared by the auctioneer. The next stage is where the Creditor who brought the auction requests an adjudication by the courts to arrive at a price for sale.

Certain factors must be taken into consideration:

If it is the main home of the Debtor that has been auctioned, the Creditor cannot ask for an adjudicated selling price of less than 70% of the valuation price. An exception to this is when all of the debts levied against the property are less than 60% of the property valuation.

In the case of a second home or any property that is not the Main Residence, the Creditor cannot ask for an adjudicated price of less than 50% of the valuation unless total debts, as in the above situation, are less.

In the case of Goods/Chattels the Creditor cannot ask for less than 30% of the valued of the Goods.

If the Creditor did not ask for an adjudication, the embargo on the property would be lifted.

Charges Against Property.

The law requires that this certification be available to all interested parties at the Judicial Court where the right is lodged.

In some cases, it may also be available through the internet, in the Portal of Judicial Auctions of the Portal of the Administration of Justice.

Where applicable, the file will also contain information relating to any goods auctioned.

How Much to Bid at Auction.

If the auction is brought because of an unpaid mortgage it’s generally just these debts and costs incurred. If a valuation has been placed on the property by a Valuer and it includes outstanding debts in effect at the time of the request for a Judicial Auction, these subsisting charges must be deducted from the auction price so the bidder knows what is outstanding from the Creditor bringing the action. You would be liable for the other debts itemised in the Property Register as still standing.

Bid Accepted. Now What?

If your bid is the highest you do not know for certain that you have acquired the Property/Goods until the Court Clerk issues a Resolution which is decreed and approved. Until that point, the debtor can claim back rights to the property by payment in full of the debt outstanding. Where you have underbid (less than 70% or 50% respectively,) and been the highest bid at auction the courts can offer the Debtor and the Creditor the right to raise the price and claim the auctioned property or goods.

If your bid has been successful, but you fail to come up with the money in a set time frame, the other bidders have the right to buy at the price settled at auction by your highest bid. (You have 10 working days to pay in the event of Goods/Chattels and 40 working days for property.) If you don’t put the money together in time you lose your initial stake and the auction is deemed ‘bankrupt auction’.

Transmission of Property and Tax Due from Assignment after Adjudication or Highest Bid

The Creditor bringing the Auction can avoid paying the Property taxes in the event that the property will be assigned by the Creditor to a third party via auction or adjudication. This can be done in the event where the Creditor is the sole bidder and also where there are no bids at all.

Buying at Less than Amount Owed

When you succeed at auction and your bid is less than the amount outstanding against the Creditor who brought then action you are not liable for the outstanding amount. The amount you pay is put towards the Debt and the Creditor then has the right to offset this outstanding amount by going after any other assets the Debtor may have.

Property Taxes

There is no pre-requirement of registering ownership in the Land Registry before receiving the property, but you must pay the taxes and it is this that allows the Courts to confirm the purchase and if necessary evict the previous owners. This also allows you to then register the property in your name at the Land Registry.

Queuing Creditors

Always be aware of outstanding Creditors waiting to be paid. That is why they have placed a charge against the property and in so doing have earned the status of Priority Creditor. In the case of a second or third mortgage against the property the Buyer is expected to pay the updated charges including interest. If you consider them to be excessive you can lodge an appeal.

If you think you might like to take part in a Judicial Auction and don’t wish to do it yourself, get in touch to find out more.

Please note this has been based on content redacted and informally translated from Guia nº 5 Subastas Judiciales. TMT Spain has provided no more than an overview and it is not in any way to be relied upon legally.

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Spanish Mortgage Costs Supreme Court Ruling – Lender Pays.

Good news for people buying Spanish Property with a Spanish Mortgage: Spanish Mortgage Costs Supreme Court Ruling – Lender Pays.

Spanish Mortgage Cheaper

In the past, buying a Spanish property by taking out a mortgage added up to 4% on the Property Purchase Price. This pushed the costs on top of the net property price to as high as 15%. Much of this happened because the mortgage lender forced you to assume the costs of the mortgage. Incidentally, this was a cost you could not claim against or offset as costs against income when you submitted your tax return because you were not the benefactor of the arrangement.

Spanish Legal System Defends Consumer

The Spanish Legal System should be applauded for its support of the ordinary consumer in this way and let’s hope it leads to renewed confidence in the property sector within Spain. Once more, the conclusion is that, with property prices still subdued, it is a Buyer’s Market and there has never been a better time to dip your toe’s in the market. This applies if you seek to take out a mortgage or pay for the property outright.

[Sentencia TS 705/2015]

The Supreme Court has analysed contractual terms between banks and consumer and adjudged them to be Unfair Contract Terms. As a result, all costs attributed by the bank to the consumer in which it is the bank who is the passive subject and could, in theory, deduct such costs from tax returns, must be borne by the bank.

Obiter Dictum

The Obiter Dictum of the decision looked at costs derived as a by-product of contracting the mortgage. This refers to Notarial, Land Registry (notifying the Charge against the Property  on behalf of the Mortgage Lender), Transmission Tax, Stamp Duty for documents drafted in the Notary and other costs stemming from the mortgage – including Mortgage Indemnity Protection.

The judgment is available here, (in Spanish only): http://www.poderjudicial.es/stfls/TRIBUNAL%20SUPREMO/DOCUMENTOS%20DE%20INTER%C3%89S/TSCivil%2023.12.15%20%282658-13%29.pdf

Minutes of the Decision here, (in Spanish only):

http://www.poderjudicial.es/stfls/TRIBUNAL%20SUPREMO/DOCUMENTOS%20DE%20INTER%C3%89S/Nota%20de%20la%20Sala%20de%20lo%20Civil%2021%20de%20enero%202016.pdf

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