A few hours after the Constitutional Court of Spain annulled the calculation of the so-called Impuesto de plusvalía*, the Ministry of Finance announced it wanted to revise this plus valia (capital gains) tax rule because otherwise, municipalities would lose too much income.
This is a tax home sellers in Spain must pay on the difference between the property purchase and sale price. In other words, the change in value of the home since the owner bought it himself. This rule generated a total of €2.5 billion annually for the Spanish municipalities.
Controversial tax rule
The plus valia tax is not only borne by home sellers, but also by anyone who inherits a home or receives it in some other way. The fact that this is a controversial tax rule is apparent from the fact that a court decision has already been made for the third time in four years.
The first change was made in 2017. This was when the rule that tax also had to be paid on the loss of value of the home ended. Then, in 2019, another adjustment followed. This time, the tax was abolished in cases where the levy was greater than the increased value of the home.
The recent annulment of the plus valia calculation method applies to all sales contracts concluded now or currently under negotiation. The court’s decision, therefore, does not apply retroactively. Until a new law is passed, municipalities in Spain will have to do without this additional source of income.
Tax not based on actual value difference
The Constitutional Court has annulled the calculation method. Because it is based on fixed parameters, it does not always correspond to the actual increased property value. In addition, the judge finds that the capital gains tax is contrary to the principle of ‘according to economic capacity’ that is laid down in Article 31 of the constitution. This states that everyone should contribute to public expenditure.
In order to calculate the capital gain, which has now been declared null and void, the land registry value of the house must be multiplied by the number of years that the house has been owned. An annual percentage is applied to this that generally does not exceed 3.5%. The amount that comes out of this is the basis that is taxed with a maximum of 30%.
Here is an example assuming someone bought an apartment in 2012 and is now planning to sell it. Currently, the apartment has a land registry value of €150,000. Furthermore, the percentage the relevant municipality has set for the change in value is 3.5%. Therefore 3.5 times the nine years the apartment has been owned comes to 31.5%.
In this case, the seller must pay a 30% capital gains tax on €47,250. This equates to 31.5% of the current land registry value of €150,00, which amounts to €14,175. This calculation example shows the actual change in value between the time of purchase and sale of the home does not necessarily have to be equal to the amount on which tax is paid. In addition, this calculation method does not take into account whether a home has increased or decreased in the period in which it has been owned.
*Plusvalia relates only to property and the capital gained from owning a property. It does not include capital gains from other streams.