TO “B” OR NOT TO “B”
I frequently get asked about the strange situation that could only exist in Spain about “B” (Black to give it its correct terminology) Money. There has existed in Spain this strange situation where one could have an agreed sale price that differed to the declared price. It is something that deserves explanation and recognition of the risks it entails – particularly in this modern world where we seem to be scrutinised whatever we do.
It is something usually only encountered with a resale although occasionally a developer selling individual houses will wish to under declare. The declared price is what is recorded in the title deed that will be registered at the Land Registry and the Hacienda (Tax Office) but there will be an additional amount paid separate to what is declared in front of the Notary. For the vendor this will mean that their liability to Capital Gains Tax will be less, the immediate benefit to the purchaser is that Transfer Tax or IVA will only be paid on the declared price. Everyone’s a winner you might think. This is a practice that has been followed in Spain since property taxes began. I suspect that at some stage EVERY Spaniard who has sold property has escaped paying tax in this way – from the very top to the very bottom. The attitude has been that if there is a situation we can exploit then why not – even if I do hold a position of responsibility in Government or wherever. The mortgage lending banks didn’t even do anything to discourage it – thus you could have a situation whereby one was buying property with a mortgage loan for 200,000€ but an official price of 100,000€.
The authorities have become increasingly aware of how much money they were losing in taxes particularly with the phenomenal development and price increases throughout Spain in the last 10 years. Consequently there are now monitors at the Land Registry to check if they think something is out of alignment. There is a procedure where the tax office will check the declared price in relation to the cadastral value and the normal market prices and will issue a letter asking for a second tax return according to their own calculations plus a fine. There is now a procedure that the Land Registry will notify Hacienda if they think there is a significant discrepancy when the property sale is finally registered. This will probably be some two to three months after completion of the transaction. They will then send their own assessor to value the property and report his findings to Hacienda. If they believe a serious under declaration has occurred they will investigate further. Unless you have arrived at the Notary carrying a bag full of cash, there will be a record of what exactly has been paid, but even if not it will be your responsibility to prove otherwise.
What then happens can be a nasty sting in the tail. However much tax they believe has been avoided the debt then falls on the property (not the previous owner). A charge is levied on the property and it takes first priority ahead of the mortgage. I am told that Hacienda can insist on payment of the tax within 28 days or they can start proceedings to possess the property and sell it to pay the debt. To add insult to injury there is a 20% penalty for the attempt to commit fraud. The common way to appease objectors in the past has been to tell them to simply under declare when they come to sell – be warned it is a practice the authorities are trying to eradicate.
Consequently mortgage lenders are no longer comfortable with large under declarations and there are more checks on the price on the purchase contract – they will not lend based on value alone. They do not want their charge relegated to the second charge.
Invariably if one is buying from a Spanish vendor they will expect to under declare – and possibly by a large amount – it is part of their heritage after all. Whether it is good judgment to buy on that basis, I will leave to you to decide.