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.