Reference Value

year ago, on 1st January 2022, the reform introduced by Spanish Law 11/2021 on the prevention and fight against fraud included a surprise, the new reference value.

After its entry into force, in any transfer of real estate, the “market value” is the reference value, which sometimes leads to changes in the taxable base for Spanish Property Transfer Tax (ITP) and Spanish Inheritance and Gift Tax (Impuesto de Sucesiones y Donaciones).

From 1st January 2022, the rules of the tax game have changed and under this new artifice, the reference value is presumed to be the market value - the value of the purchase and sale - and is therefore the taxable base for the payment of Property Transfer Tax (7% in Andalusia) and Inheritance and Gift Tax. However, the deed value shall prevail if it is higher than the reference value.

This new system, which is clearly intended to collect tax, gives rise to three different situations:

If you acquire a property whose real price - the one you pay - has a higher assigned reference value, you must pay 7% tax on the reference value regardless of whether the price you have actually paid for the property is lower. In the event of failure to do so, the tax authorities may initiate a limited control or data verification procedure to regularise the taxpayer’s situation and force them to pay tax at the Cadastre reference value and even initiate a sanctioning procedure.

If the property purchased has a reference value that is lower than the price you paid and which is recorded in the title deeds, the tax authorities shall consider it perfect and shall allow you to pay tax at the price you have actually paid and which is stated in the title deeds. If you fail to do so and pay tax at the reference value, the tax authorities shall also initiate a limited verification procedure and force you to pay tax at the value shown in the title deeds.

And if the property has not been assigned a reference value, you must pay tax on the market value, so you shall opt to pay tax on the deed value - transaction price - and if the tax authorities do not agree with the declared value, it must prove that the deed value does not correspond to the market value.

Spain is in the process of adapting to this absurd situation. However, I believe that if we were aware of the absurdities that the rule can imply, we would not do so. It is certainly difficult for foreign citizens who decide to invest in Spain to understand. These investors are astonished when we explain that the price they pay for the property and its market value are different, and that this is nowadays called the reference value of the Cadastre, which is fixed by the tax authorities regardless of the price of the property.

This is an anomaly, no matter how you look at it, because the price stated in the deed and which should be the market value (the price at which a property is bought and sold) shall only be considered the market value if it matches the reference value set by the authorities, regardless of the price of the property, or even if it is higher.

What should you do in this new situation when the reference value is higher than the actual purchase price?

The laws regulating Property Transfer Tax and Inheritance and Gift Tax have reworded two ways in which you can challenge the reference value of the Cadastre.

The first would be to pay tax according to the reference value of the Cadastre and then initiate the procedure to correct the self-assessment filed, requesting a refund for the excess. In other words, pay and then appeal. The second would involve paying tax at the deed value (the real price), which is lower than the Cadastre reference value, and then waiting for the authorities to notify you of the co- rresponding settlement (with interest for late payment and possibly a penalty) in order to appeal it later.

In both cases you must appeal and also prove that the reference value of the Cadastre is not the market value and that the purchase price (what you have actually paid) should prevail.

At this point you must use “any means of proof admitted in law”. You can use bank valuations if the purchase is made with mortgage financing, valuations commissioned ad hoc if you are not financing the operation, photographic reports verified by a Notary to substantiate the situation of the property and its current state, town planning reports when its own town planning situation conditions the price of the property and, in short, a variety of possible evidence, all of them more or less expensive, which shall prevent the appeal in those cases in which the payment of a relatively low tax debt is demanded.

As is now becoming the norm in this tax aggressiveness introduced by the authorities in all areas, a new legal battle is once again beginning, which shall be resolved years later, while we have all been swelling the authorities’ coffers in the meantime.

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