As we well know, over time it is common for the value of land to increase due to the improvements made by local governments in residential areas, such as improving access or opening supermarkets, among other things. From this situation arises the Municipal Plusvalía Tax, which taxes the increase in the value of the land with each transfer.
What is the plusvalia property tax?
The Municipal Plusvalía Tax is a tax applied to the increase in the value of urban land. It is important to note that this tax is applied to the value of the land, and not to the property itself, when these lands are transferred, whether through sale, inheritance, or donation.
The taxpayer responsible for paying this tax is the transferor, except in cases of inheritance, where the heirs become the taxpayers.
It is crucial to consider that this tax is exclusively applied to properties located on urban land. Therefore, if the property is located in a rural area, the transfer of it will not be subject to this tax. Jose María Oliva, a lawyer at Tejada Solicitors Law Firm, warns that there are situations that can be misleading. Specifically, he refers to cases of houses built on rural land where the land registry classifies the portion of the plot occupied by the house as urban. In such situations, these properties would be subject to the Municipal Plusvalía Tax.
The old plusvalia Tax
Until November 2021, the Municipal Plusvalía tax was calculated using coefficients applied to the cadastral value of the land without actually considering whether there was an increase in value or not. The tax could vary depending on the regulations of each municipality since it was directly dependent on each local government.
This system was declared unconstitutional because the municipal plusvalía tax was imposed on any transfer, even when there was no increase in value from the date of acquisition to the date of transfer. This situation changed after several rulings by the Constitutional Court, which led to changes in the application of this tax, ultimately resulting in the current system.
In the year 2017, the Constitutional Court issued several rulings deeming it illegal for transfers that resulted in losses to be subject to the Plusvalía Tax.
The Ruling of the Constitutional Court (STC 26/2017) dated February 16, 2017 rejected the question of unconstitutionality related to Articles 107 and 110.4 ofshield Legislative Royal Decree 2/2004, but declared certain articles of Regional Regulation 16/1989 on the tax on the increase in the value of lands in Gipuzkoa as unconstitutional and void.
The Ruling of the Constitutional Court (STC 37/2017) dated March 1, 2017 rejected the question of unconstitutionality regarding Articles 107 and 110.4 of Legislative Royal Decree 2/2004, but declared certain articles of Regional Regulation 46/1989 on the tax on the increase in the value of lands in Álava as unconstitutional and void.
The Ruling of the Constitutional Court (STC 59/2017) dated May 11, 2017 declared unconstitutional and void Articles 107.1, 107.2(a), and 110.4 of Legislative Royal Decree 2/2004 to the extent that they impose taxes in situations where there is no increase in value.
The Ruling of the Constitutional Court (STC 72/2017) dated June 5, 2017 declared unconstitutional and void certain articles of Regional Law 2/1995 on local finances in Navarra to the extent that they impose taxes in situations where there is no increase in value.
In 2019, the Constitutional Court issued Ruling (STC 126/2019) on October 31, establishing that the amount to be paid as municipal plusvalía tax cannot exceed the actual profit obtained. In this ruling, Article 107.4 of Royal Legislative Decree 2/2004 was declared unconstitutional.
In 2021, the most significant ruling took place, which questioned the system used to calculate the plusvalía tax, considering it abusive. As a result of this situation, Royal Decree 26/2021 was approved.
How is the new plusvalia tax calculated?
As previously mentioned, after several court rulings declaring the calculation method of this tax to be illegal, Royal Decree 26/2021 was approved on November 8, 2021, introducing significant changes to the calculation of this tax.
Among the novelties of this Royal Decree, two different calculation methods are established:
Objective method: The taxable base of the tax is obtained by multiplying the value of the land at the time the tax becomes due by coefficients published in the Royal Decree. These coefficients vary depending on the time elapsed between the date of transfer and the date of acquisition of the property. The resulting taxable base is then subject to the tax rate set by each municipality, which cannot exceed 30%.
Real estimation method: The taxable base of the tax is determined by the actual increase in the value of the land, i.e., the difference between the value of the land at the date of transfer and the date of acquisition. Once the taxable base is determined, it is subject to the tax rate set by each municipality.
According to the Real Decreto 26/2021, municipalities will calculate the municipal plusvalía tax using the objective method. However, the taxpayer can request that the real estimation method be applied if they consider it more favourable for them.
Who pays the plusvalia property tax in Spain?
To determine who should pay the Municipal Plusvalía tax, it is important to consider the type of property transfer. In the case of a sale, the seller is responsible for the payment. However, when it comes to a transfer between non-residents, the responsibility falls on the buyer.
In situations involving free transfers, such as inheritances or donations, the recipient of the property will be the one obligated to pay the tax.
Plusvalia tax for non residents in Spain
In the case of a sale where the seller is a non-resident, even though the payment obligation lies with the seller, the responsibility for paying the municipal plusvalía tax falls on the buyer.
To fulfill this responsibility, prior to completing the transaction, the buyer will withhold a portion of the purchase price from the non-resident seller to cover the payment of said tax.
Plusvalia tax on non-urban properties
The Municipal Plusvalía tax is regulated by the Local Tax Law (Ley de Haciendas Locales). According to Article 104 of this law, it is a direct tax that is applied to the increase in value that urban lands experience at the time of their sale. It is important to note that rustic lands are not subject to the Municipal Plusvalía.
However, as a general rule, the plot on which the buildings are located will be subject to the tax since the land registry often designates the portion of the plot occupied by the dwelling as urban. We recommend that in both cases of rustic land and scattered dwellings, you submit a tax assessment request to the municipality.
Calculator of plusvalia property tax
As we have detailed in the previous point, the recent Royal Decree 26/2021 establishes two calculation methods to determine the taxable base of the Municipal Plusvalía Tax. On this taxable base, the corresponding tax rate will be applied according to the regulations of each municipality, determining the amount to be paid for this tax.
Generally, municipalities will use the objective estimation method. However, if the taxpayer considers that the real estimation method is more favourable in their particular case, they must explicitly communicate this in order for the method to be applied.
Real Estimation Method
Taxable Base = Transmitted value (sale price) – Acquisition value (purchase price or declared value in inheritance tax) X Cadastral Value of the Land
Objective Estimation Method
Taxable Base = Cadastral Value of the Land at the time of the sale multiplied by a coefficient determined by each municipality, which depends on the duration of ownership of the property.
Example of plusvalia tax
If we sell a property in 2023 for 200,000 euros, which was acquired in 2018 for 170,000 euros, we will have a profit of 30,000 euros, subject to the Municipal Plusvalía tax. However, it’s important to note that we will only pay tax on the value of the land, not the construction.
In this case, if the total cadastral value at the time of sale is 100,000 euros, with 70,000 euros representing the cadastral value of the land and 30,000 euros representing the cadastral value of the construction, the increase in real value attributed to the taxpayer will be 70% of 30,000 euros, which is 21,000 euros. This would be the taxable base if we apply the real estimation method.
On the other hand, if we apply the new objective method, we would multiply the cadastral value of the land (70,000 euros) by the coefficient corresponding to the number of years elapsed between acquisition and transfer, which in this case is 0.17, representing the 5 years that have passed. Therefore, we would have a taxable base of 11,900 euros.
|Calculation Method||Taxable Base||Tax Rate||Tax to Pay|
|Real plusvalía||21,000 euros||30%||6,300 euros|
|Objective estimation||11,900 euros||30%||3,570 euros|
If the property was acquired in 2016 for 200,000 euros and sold in 2023 for 190,000 euros, generating a profit of 10,000 euros, with a total cadastral value at the time of sale of 100,000 euros, where 30,000 euros is the value of the land and 70,000 euros is the value of the construction.
Using the real estimation calculation method, the taxable base would be 30% of 10,000 euros, which is 3,000 euros, considering only the value of the land. With the new objective method, we would multiply the value of the land, 30,000 euros, by the coefficient of 0.12, as we apply the coefficient corresponding to the 7 years that have passed, resulting in a taxable base of 3,600 euros.
|Calculation Method||Taxable Base||Tax Rate||Tax to Pay|
|Real plusvalía||3,000 euros||30 %||900,00 euros|
|Objective estimation||3,600 euros||30 %||1.080,00 euros|
Jose María Oliva Solicitors at Tejada Solicitors Law Firm always advises performing the calculation of the municipal plusvalía tax using both the Real Estimation Method and the Objective Estimation Method. This way, we can help our clients save taxes on the cost of selling a property in Spain. It’s important to note that in addition to the municipal plusvalía tax, when transferring property in Spain, both tax residents and non-residents must also settle the Capital Gains Tax. To learn more about the settlement of the capital gains tax, please click here.
When and how does has this tax to be paid?
The management of the Municipal Plusvalía Tax will be the responsibility of each municipality. Therefore, the taxpayer is obligated to request a tax assessment from the corresponding municipality where the property is located, once the transfer is formalized. This must be done within a maximum period of 30 business days for inter vivos transfers and 6 months for inheritances. Once the corresponding payment notice is obtained, it must be paid within the timeframe established by the municipality.
How to avoid paying the plusvalia tax
To address the question of how to avoid paying this tax, we need to consider two key concepts.
Firstly, we must understand that this tax applies to urban properties. Therefore, if the land on which the property subject to the transfer is classified as rustic according to the Land Registry or the urban planning regulations of the municipality in question, the transfer will be exempt from payment.
Secondly, the Plusvalía Tax is levied on the profit obtained in a transfer. Therefore, if there are losses in the transaction, it will be exempt from Plusvalía.
Lastly, in the case of an inheritance transfer, if the heir is the spouse of the deceased and they are married under a community property regime, they will be exempt from paying the municipal plusvalía tax. However, it’s important to note that this exemption does not apply to other heirs.
Whenever there is a transfer, whether through sale, donation, or inheritance, there will always be an obligation to file the Municipal Plusvalía Tax. However, it is exempt from payment when there is no increase in value at the time of the transfer or when the transfer involves rural land.
When a transfer occurs and the plusvalía is not declared within the deadlines established by law, the corresponding municipality will demand not only the tax amount but also late payment interest and a penalty ranging from 50% to 150% of the corresponding tax amount. Ultimately, the municipality can take enforcement action, including the risk of freezing bank accounts, seizing real estate, etc., to recover these amounts.
The surcharges for late payment vary depending on the time elapsed. They include a 5% surcharge if the tax is filed within the three months following the deadline, a 10% surcharge if filed between three and six months, a 15% surcharge if more than six months but less than 12 months have passed, and a 20% surcharge if a year or more has elapsed. Additionally, late payment interest will also be applied.
The prescription period for the Municipal Plusvalía is 4 years, after which the administration will lose the right to demand payment of the tax. It’s important to note that this period will only apply if there is no action taken by the administration. If any action is taken by the administration, the calculation of the prescription period will be interrupted.
Just like a transfer by sale, when a transfer occurs through inheritance, it is also subject to the Municipal Plusvalía Tax if there is an increase in the value of the real estate asset and not losses.