Spanish Capital Gains Tax Arising From The Sale Of A Property – Implications For Non-Residents
Non-residents are liable for payment of Spanish Capital Gains Tax when selling their Spanish Properties.
In broad terms, the capital gains to be taxed consist of the difference between the acquisition value and the sale value of the property. The tax rate applicable to the gains is 18% (it has been considerably reduced from 35%).
The value of the sale will consist on the consideration received less any disbursements and taxes inherent to the transaction which have been paid by the vendor (Plusvalia tax, Estate Agent’s fees, Notary’s fees, etc.)
Acquisition Value for Spanish CGT purposes
The concept "Acquisition Value" is not straight forward. It takes into account the consideration appearing in the Deed of purchase plus those taxes and disbursements which are inherent to the purchase. These would include VAT/Transfer Tax/Stamp Duty/Inheritance tax, Notary's fees, Land Registry fees, etc.
Depending on the year of acquisition, the acquisition value is also updated by applying an actualisation coefficient which is reviewed every year in the Government's Budget.
Coefficients updating the value of acquisition
In particular for the year 2007, the following coefficients apply:
Coefficients updating the value of acquisition | Year of acquisition | Coefficient |
| 1994 and previous | 1,2162 |
| 1995 | 1,2849 |
| 1996 | 1,2410 |
| 1997 | 1,2162 |
| 1998 | 1,1926 |
| 1999 | 1,1712 |
| 2000 | 1,1486 |
| 2001 | 1,1261 |
| 2002 | 1,1040 |
| 2003 | 1,0824 |
| 2004 | 1,0612 |
| 2005 | 1,0404 |
| 2006 | 1,0200 |
| 2007 | 1,0000 |
The abatement coefficient
Those property owners who purchased before the 31st of December 1994 are entitled to apply a further “abatement coefficient”.
This is done by computing the number of years between the date of acquisition and the 31st of December 1996 and applying a reduction percentage (equivalent to 11,11%) for each year of ownership (exceeding two years of ownership). If the period of ownership is more than 10 years (from the 31st of December 1996) then the transfer is exempted from payment of Capital Gains Tax.
However from the 1st of January 2006 (when the Capital Gains are made from the 20th of January 2006) the abatement coefficient is applied prorata only up to the 20th of January 2007.
Post-completion works
Some of works in a property that are carried out after the acquisition can also be considered by the Inland Revenue as part of the value of acquisition and added to the value described. This increases the total value of the acquisition minimising the capital gains, and thus the tax liability. The value of those works is also updated by the abovementioned actualisation coefficient taking the date of finalization of the works as a tax point.
However not all the works in a property qualify as value of acquisition for the purposes of reducing the capital gain (irrespective of the fact that in reality they may have an impact in the value of the property in the open market).
The current tax legislation does not provide an exhaustive list of the works which qualify as part of acquisition value and cases are assessed on an individual basis by the tax office.
Section 54 of the Income Tax Regulations Royal Decree 1775/2004 (which refers to Resident's Income Tax) merely establishes that "Constructions works will be considered as "acquisition of the dwelling" (for capital gains tax purposes) under the following conditions: 1 Extension of the property, when there is an increase in the habitable areas of the property by means of enclosures of outdoor areas or by any other means for year round use.2 Construction, when the taxpayer pays directly the costs of the execution of the building works or pays amounts on account to the developer, if the works are completed with a four-year period.
Conversely the following are not considered as part of the acquisition value of the dwelling
a) Conservation or repair costs as per section 12 (which refers to disbursements for the maintenance of the normal use of the assets such as paint, repair, and fixing costs, costs of replacement of elements such a heating devices, glass elements , lifts, security doors etc, cost of repair of damaged caused by break-ins, insurance premiums, etc.
b) Enhancement works
c) Acquisition of parking spaces, gardens, swimming pools and in general annexes which are not the dwelling itself when these are acquired independently from the dwelling.
The application of the above criteria is not at all clear. As an example, consultation number V1934-05 of 28 of September the taxpayer carried out the following works:
"First repair and later on, replacement of boundary walls; construction of a passage-porch lading to the garage; constructions of a path from the street to the dwelling of 30m2 approx (driveway)"; The inland Revenue authorities decided that although the works were improvements and increased the external extension of the dwelling the would not qualify as costs of acquisition for CGT purposes.
Improvements such as heating for swimming pool, landscaping irrigation system installation of gates and grills, Jacuzzi, security system electric pool covers would not qualify as value of acquisition for GCT purposes.
Consultation to the Inland Revenue
Apart from the lack of a clearer and more specific regulation it is also essential to note that the criteria applied by the different (local) tax officers is not uniform and unfortunately there is some subjective element in the appraisals which cannot be predicted.
In order to seek further clarification,, the tax payer has the option of submitting a consultation before the Inland Revenue prior to the sale.
There are two types of consultations, binding and non-binding. In a non- binding consultation the tax officer only provides some general guidelines that apply to the particular case based on previous decisions. Conversely, in the binding consultation each element is individually assessed and the reply provided binds the tax officer when liquidating the CGT tax.
The disadvantage of the binding consultation is that it takes quite a long time before the authorities provide a reply.
Proof of the costs of the works which amount to acquisition for CGT purposes
The costs and date of the works must be duly documented by invoices which would include, date of issue, serial number, full name or denomination (in the case of a company) and full address of the issuer and payer, description of the works price and VAT.
Percentage withheld by the purchaser
When buying from a non-resident, the purchaser has the legal obligation to withhold and pay to the Inland Revenue a percentage of the purchase price on account of the vendor's CGT liability. This percentage has been reduced from 5% to 3% from January 2007.
If the purchaser does not comply with this legal obligation the property becomes charged with the payment of either the amount de to be withheld or the final no resident Income tax liability (whichever is the lesser).
Form 212
In the case of financial loss (proven by the taxpayer and confirmed by the tax authorities) or when the withheld amount is higher that the actual tax liability, the seller is entitled to receive the excess tax paid back by submitting form 212 before the local tax officer where the property is located. If the property is owned by a married couple being both spouses non residents only one form would be necessary.
The term for submitting form 212 is three moths from the buyer's deadline of payment of the withheld amount to the Inland Revenue (which is one month from the purchase/sale).
The excess will be returned directly to the seller's bank account. The tax authorities have the obligation to proceed with payment with in the 6 months following the deadline for submitting form 212. Should repayment not take place within this term penalty interest will be payable.
Conclusion
There are many grey areas when determining the works that qualify as acquisition value for capital Gains Tax purposes. This is due to a lack of a clear and specific regulation and uniform criteria amongst the different (local) tax offices
If a decision as to whether or not to proceed with the sale of a Spanish property depends on the total Spanish tax liability, submitting a binding consultation to the tax authorities in Spain would be the safest option.
Susana de las Cuevas
Irwin Mitchell Solicitors
spbiz@irwinmitchell.co.uk
020 7421 3970