The Supreme Court and the Constitutional Court played a leading role in the main changes of municipal capital gains tax, property tax and personal income tax in 2019
All transactions are taxed and even more so if they involve real estate. This year there have been several new developments related to taxes in Spain, specifically those regarding municipal capital gains, property and personal income. We will tell you what the main changes are and which courts have made them.
Municipal Capital Gains Tax (Plusvalía Municipal)
The Tax on the Increase in Value of Urban Land (IIVTNU), also known as the municipal capital gains tax (plusvalía municipal), has provided many surprises for taxpayers this year. In a ruling last November, the Supreme Court for the first time condemned the Spanish State to compensate a taxpayer for having issued a regulation on municipal capital gains that has been declared unconstitutional by the Constitutional Court. This ruling opens the door to recovering what was most unduly paid: this is either because losses were made on the transfer of a property, or because of the confiscation of this tax.
In other words, the Constitutional Court has already declared that the municipal capital gains tax is unconstitutional when the taxpayer transfers a property with losses and when the money to be paid by the citizen exceeds the amount obtained with the sale of the house, that is, when it is considered to be confiscatory.
The sentence of the Constitutional Court made in December 2019, which was presented by Judge Pedro González Trevijano, argues that when there is a gain from the transfer (in the case of the sale or donation of a property) and the fee that is paid for the municipal capital gain is greater than the increase actually obtained by the citizen, it would be taxed on a non-existent, virtual or fictitious income. This produces an excess of taxation contrary to the constitutional principles of economic capacity and non-confiscatory nature (found in article 31.1 of the Spanish Constitution).
But these are not the only changes regarding this tax. At the beginning of this month idealista/news reported a sentence from last September where the Supreme Court was seen to be caught in a tug of war with the Constitutional Court. The latter court considers that the costs of buying and selling a home (notary fees, registration, taxes paid or cancellation of a mortgage) do not count when getting out of paying the municipal capital gains tax. This is criteria which is seen to be favorable for City Councils, but less so for taxpayers due to the fact that until now the Constitutional Court has considered that these expenses could be included to reduce the profit obtained from the sale of the property.
Property Transfer Tax (ITP)
Property Transfer Tax (ITP) is a tax that must be paid by the buyer of a second-hand property and varies according to each Autonomous Community in Spain. In early December, the Supreme Court handed down a landmark ruling stating that transfer tax must also be paid by the buyer who acquires a second-hand property when the seller is a private individual. This means that anyone who buys gold from a private individual, or even clothing or other second-hand goods, must pay a transfer tax.
Until now, the criteria were that the purchase of gold (and by extension, other movable property) by entrepreneurs from private individuals did not require the payment of tax. Therefore, property transfer tax is no longer paid only for the purchase of a used home or for renting it. However, tax rates vary depending on whether the property is immovable or movable and on each Autonomous Region.
Now, buyers will have to assume the payment of the transfer tax for each of the gold purchases they make from a private individual and the tax rates which, depending on each Autonomous Community, vary from 4% to 6%. These tax rates are lower than those applied to the purchase of a second-hand property, as they vary from 4% to 10%.
For example, in Madrid buying gold from a private individual will be taxed at 4%, while buying a house will be taxed at 6% in terms of transfer tax. In the region of Valencia however, buying used goods will be taxed at 6%, while acquiring a property will be taxed at 10%.
There have also been great changes in terms of property transfer tax. The Valencian Community has been the first to stop applying the method of mortgage valuation to check that the taxpayer has paid the transfer tax when buying or inheritance tax when inheriting a home. More specifically, it has not appealed for the reversal of the ruling of the High Court of Justice of the Community of Valencia which annulled the method of verification of "mortgage valuation" values.
The Valencian “Generalitat” Government has not appeared before the Supreme Court in the estimated time, so the appeal has been declared void. The Treasury of the Community of Valencia also complies with the criteria of the ruling of the Supreme Court of Justice, which is now final, and annuls the mortgage valuation method. Furthermore, it opens the door for other autonomous communities to declare this method of checking values in the purchase, inheritance or donation of a home null and void.
Property Tax (IBI)
The Supreme Court has closed the door on requests for the return of urban property tax (IBI urbano) that was paid for pieces of non-building land plots during 2014 and previous years. In 2014, it was declared that the land which could be developed but had nothing built on it should not pay urban property tax, but rather rural property tax. For this reason, many taxpayers with land for which they paid urban property tax began to pay taxes for non-building plots. They also requested for the nullity of the property tax liquidations paid in previous years. However, the High Court has just closed this avenue for the respite of the city councils.
In order to understand this case, it is necessary to remember that the criteria upheld in the famous 2014 ruling was included in Law 13/2015. Land for development that did not have an approved programme for its urban development was to be considered rustic or non-building. "However, the initiative to carry out such reclassification was left to the Administration. Furthermore, the effects of the change in cadastral classification could never be prior to the year 2015," says José María Salcedo, partner of the Ático Jurídico law firm.
Personal Income Tax (IRPF)
2019 left us with yet another change in terms of personal income tax: the Economic-Administrative Court (TEAR) in Valencia has declared that taxpayers who lose money by donating a home can compensate for that loss in personal income tax with the profits obtained that year and in the following four years. These new criteria contrast with the ones maintained until now by Inland Revenue (Hacienda), which has denied the existence of a loss in assets in the case of free transfers. Now taxpayers will see the possibility of benefiting from significant tax savings.
The Valencian court considers that it is possible to declare a capital loss in terms of income tax (IRPF) in the event that a property is given away for less than its purchase value, in order to compensate such losses with profits. This interpretation clashes with that held by the Directorate General for Taxation, which denies the existence of a capital loss, based on Article 33.5.c) of the Personal Income Tax Act (la Ley del IRPF).