Plusvalia (Capital Gains Tax): Two options and you can choose the most favourable one

by Deborah Cater
capital gains tax on property
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Following the Constitutional Court’s nullification of the plusvalia* (capital gains tax), the Ministry of Finance has adjusted the calculation.

The Ministry of Finance already has a new capital gains tax ready after last week the Constitutional Court declared null the method used to calculate the tax base. The department headed by María Jesús Montero will adapt the tribute to fluctuations in housing prices to recognise the real profit and the reality of the real estate market, as demanded by the court.

It will create new coefficients to apply to the cadastral value and that it will update every year to collect the true market situation. In addition, it will offer taxpayers two alternatives to calculate the tax and will allow them to apply the most beneficial one.

Value of Urban Land

The tax on the increase in the value of urban land (IIVTNU), better known as the municipal capital gains tax, is a direct tax that depends on the municipalities. A person pays the tax when they sell, donate or inherit a home. This tax figure actually taxes the revaluation suffered by the urban land on which a house stands from the moment of purchase until transfer.

The new rule improves the calculation of the tax base to guarantee that taxpayers who do not obtain a profit from the sale of the property are exempt from paying the tax, according to ministerial sources. The Treasury will establish two options to determine the tax quota, allowing citizens to choose the one they consider most beneficial.

On the one hand, it can be calculated using the cadastral value at the time of the transfer, with new coefficients that the ministry will set and that will reflect the real estate reality. The other option will be to assess the difference between the purchase value and the sale value.

In most cases it will be more favorable for citizens to take the second option. In any case, the Treasury will update the coefficients every year to take into account fluctuations in the value of real estate.

The regulations will give the City Councils margin so that they can correct the cadastral value of the land by up to 15% negatively depending on the situation of their real estate market only for this tax. This will allow adaptation of the tax to the true situation of each municipality.

Penalise speculation

A coefficient will also be set to tax the capital gains generated in less than one year. In other words, those that occur when less than a year has elapsed between the acquisition and transfer date.  

Until now, to calculate the tax, the cadastral value of the land had to be multiplied by the number of years that the property had been owned. An annual coefficient was applied to this figure, depending on the years, which did not usually exceed 3.5%. And the resulting amount was applied the tax rate, which could not exceed 30%. As the cadastral value was the fundamental parameter of the tax and the coefficients did not vary either, the Constitutional Court considers this objective method of determining the tax base null, since it presupposed that there is always an increase in value regardless of the evolution of the market.

Replacing annual percentages

For this reason, the Treasury replaces the applicable annual percentages on the cadastral value with maximum coefficients set based on the number of years that have elapsed since the acquisition. And it will update these multipliers every year.

The royal decree-law emphasises that the method to calculate the tax will be optional. The taxpayer will have the choice of the most favourable method. The choices: tax based on the real capital gain obtained when transferring the property — the difference between the sale price and the purchase price — or by the cadastral value and the new coefficients. If the taxpayer demonstrates the real capital gain is less than the calculation with the cadastral value, they can apply the first method. The rule will allow the City Councils to check these calculations to avoid errors or fraud.

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The tax reform was necessary so as not to strangle municipal finances. This fiscal figure is the second that contributes the most to local coffers, behind the IBI. The Spanish municipalities received more than 1,700 million for this tax in 2020. In 2019, before the pandemic affected collection, it amounted to 2,519 million for local coffers.

Various sentences

It was not the first judicial setback for capital gains, since two other judgments of 2017 and 2019 had questioned some aspects of the tax. The finance reform now tries to solve them all at once.

The recent ruling noted that the tax was “oblivious to the realities of the housing market,” which had become particularly palpable when home prices plummeted during the Great Recession. In those years, it was common that even selling a house at a loss (that is, for less than what it had cost) would have to pay the tax. The Constitutional Court questioned this in 2017.

Last Wednesday, during the debate on the draft State Budget Law for 2022, Minister Montero said the modification her department was preparing would provide “tranquility and security” for both taxpayers and municipalities. These, who have not been able to collect the tax for 10 days, will have six months to adapt their regulations to the new legal framework. What they have stopped entering since October 26 will not be able to recover.

Time to appeal calculation

Although the ministry had already studied formulas for this, the decree will not be retroactive. But at the same time, the consistories will not face an avalanche of claims because the Constitutional ruling established a shield against that possibility.

When paid through a self-assessment (as is the case in most large municipalities), the taxpayer has a theoretical term of four years to request a review of the amount paid. The court ruling, however, determined it will not be possible to claim amounts not already appealed before the sentence.

The new rule will not be retroactive

The royal decree with the new regulations on capital gains tax that the Council of Ministers plans to approve on Monday will not be retroactive. That will leave a kind of legal vacuum from the moment of the Constitutional Court ruling, October 26, until the decree enters into force.

On Wednesday, the high court published the sentence and full text on its website. Another important date is that of its publication in the BOE, because some legal sources indicate that there are doubts about whether some effects of the ruling take effect from that moment.

In any case, it seems clear the municipalities will face a period in which they could not demand the payment of the tribute. If October 26 is the reference point, and taking into account the decree enters into force on Tuesday, that period would be 15 days.

Translated into collection on the basis of 2019, when the tax contributed 2,519 million to the municipal coffers, that means a loss of just over 100 million. Last year, the pandemic caused a reduction in the collection of capital gains tax of 32% – around €800 million.

*Plusvalia relates only to property and the capital gained from owning a property. It does not include capital gains from other streams.

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