What is municipal capital gains tax (plusvalía municipal in Spanish)? Do you want to know what your house is worth? How much you have to pay in the event of purchase, inheritance or if you want to gift it to your children? In this article we try to explain the most important concepts of this controversial and far from cheap municipal tax. Read on!
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What is municipal capital gains tax?
This tax, also known as Tax on the Increase in Value of Urban Land, is paid when a property is gifted, sold or inherited. The capital gains tax establishes how much the value of your house has changed in the time you have owned it. This tax falls under the responsibility of each City Council and contributes 2,000 million Euros to the Spanish city councils, according to data published by the Newspaper Cinco Días. As you can see, it is a highly effective tax.
Who pays capital gains tax?
- When a house is sold, the seller pays. Although there are cases where the buyer also pays if this is what has been agreed. If the person transferring the property lives outside Spain the buyer will be responsible for paying the capital gains tax.
- When a house is gifted or inherited, the person who inherits or receives the inherited goods pays this tax.
When does capital gains tax have to be paid?
It depends on the type of transaction:
In the case of inheritance you have 6 months from the date of death.
In the case of gift or sale you have 30 business days from the date of the transfer.
Remember that payment of this tax is made to the municipalities and can vary depending on the location.
Where do I pay capital gains tax?
Municipal capital gains tax depends on the town council. The administration will appoint the place and procedure to be followed.
Why is this tax so controversial?
Payment of capital gains tax has created much debate because it has been applied whether or not a gain has been made from the sale. For example, if a house has been sold at a lower price than its purchase price this notorious tax has still had to be paid.
In relation to this, Jesús Santidrián, a lawyer and Head of the Expansion of the Madrid area at Mediterráneo Property Management, explains that “the Constitutional Court recently ruled (Sentences of 31 of October, 2019 and 11 of May, 1 of March and 16 of February, 2017), that this tax should not be paid if the price of the property has not increased, understood to be the difference between the price at which it was sold and its original purchase price.” Based on this, people who sold their house at a lower or equal price were able to claim a refund of this tax.
In other words, since 2018 capital gains tax is only paid where there is a financial gain. You can see the ruling here.
So, if I have lost money by selling… do I have to submit a statement of municipal capital gains?
Yes. You are obliged to submit your tax return and prove that you incurred a loss in the transfer.
How is capital gains tax calculated?
This is important information to know if you are going to sell a property or are expecting an inheritance or gift so that you know how much capital gains tax you will have to pay.
Calculating this is complex as each town council uses its own coefficients, resulting in different results depending on where you live. But let’s talk in general terms taking Madrid and Barcelona as our reference.
The calculation of capital gains tax will take into account:
- The value of the land at the time of the transfer. This can be checked on the IBI (Property Ownership Tax) receipt. Be careful not to confuse this with the cadastral valueor building value.
- The number of years since the property was acquired. This will create a coefficient to be applied to the land value, which will depend on the Town Council of the area in which the land is located. The coefficients may not exceed the following limits: Period of between one and five years: 3.7. Period of up to 10 years: 3.5. Period of up to 15 years: 3.2. Period of up to 20 years: 3.
- The tax rate: will be set by each town council and may not exceed 30%.
The formula does not take into account whether the owner makes a profit or not.
Example: Property inheritance in Madrid
We inherit a property that was bought in 1999 in Madrid. We apply the formula, modifying the coefficients and the tax rate.
- Value of the land: €90,000
- Complete years since purchase:20 years
- Increment for years:60% after 20 years
- Taxable base:90,000 x 60% = €54,000
- Tax rate:29 %
- Capital gains tax:54,000 x 29% = €15,660
When does capital gains tax fall due?
At the time when you take possession of the property.
If you are selling a property or are thinking of selling it, at Mediterráneo Homes, we will help you with all the necessary formalities. Our property experts are at your service, so you can relax. Let’s talk?