And you thought that you could sell the property at whatever price you wanted! Not so, according to the Spanish tax authorities.
To be fair to them they have traditionally had to struggle with chronic under-declaration of sale prices, with undeclared ‘B’ money cash payments on which transfer and capital gains tax was not paid, often being a substantial percentage of the price. So the tax authorities worked out a scheme and put into law that effectively the tax is levied on the higher of a notional 'market' value for the property or the price at which it is sold.
This ‘notional’ value is calculated by applying a multiplier to the Catastral Value, which is a capital value estimate calculated for every property registered in Andalucía. It's the one that the annual property tax payment, the IBI, is calculated. As there are a huge number of properties, these Catastral values are regularly reviewed in rolling programme of Municipalities to reflect how market values change.
Thus, to achieve the ‘notional’ value, each municipality has it's own multiplier depending upon when the Catastral Value was last revised. For example, currently Estepona revalued in 2008, has a multiplier of 1.3, whilst neighbouring Benahavis has a multiplier of 3.2, not having been revalued since 1996. Right, so that all seems fair enough although it is effectively a bit of a ‘post code lottery’.
HOWEVER, let’s assume that you are desperate to sell, ‘distressed’ as it is termed, and you sell your ‘Bargain’ property at a genuine total price of say 300,000€ euros. BUT if the ‘notional’ value calculation shows say 400,000€ euros, it’s that latter value that the tax has to be paid on.
It affects both Capital Gains Tax and the 7% Transfer Tax, so both the Seller and the Buyer are hit. If the taxes are paid ‘only’ on the full price actually paid, which any honest buyer and seller would do unless the lawyers advising their clients point out this problem, the additional tax bill based on the ‘notional’ value can arrive many months after the sale.
If it's not promptly paid, bank accounts and other property can be embargoed. There is a right of appeal, but that involves getting independent valuers to provide reports showing the sale price was ‘fair’. But what if they cannot? What if the price was well below the market because the ‘distressed’ seller had to attract any buyer to urgently get ‘immediate’ money that maybe didn’t relate to the market value of the property.
Plus they will have the inevitable accountants and lawyers fees. All because the tax authorities have assumed, without any direct evidence whatsoever, that the buyer and seller are evading tax, which is now officially criminal money laundering.
Surely this cannot be right as it's ‘hitting a man when he is down’. Both buyers and sellers are being branded as criminals and forced to pay tax on non-existent money.