Spain is still recovering from the brutal economic recession that has affected its economy for the last 10 years. One of the main consequences of the recession was the collapse of the property market where properties went down in value consistently, reaching lower values that left many property owners in negative equity as their properties were worth less than their mortgages.

In certain areas of Spain, like the coast and seaside resorts, the value of properties went down 30% to 40%. These properties are now being purchased by savvy foreign purchasers who have identified the chance to buy a property in a sunny place for very affordable prices. What many purchasers do not know is that we are facing some cases where the property is purchased below its tax value. As this may sound gibberish to those who are not familiar with Spanish law, let me explain what this means in layman terms and with an example.

Imagine that Joe Bloggs wants to buy a property in Fuengirola and the property is for sale for 100.000 Euro. Joe then makes an offer of 90.000 Euro and the seller, another British, let´s call him John Smith, accepts the offer because he wants to move back to the UK to be closer to his parents who are getting old and need some care. Joe Bloggs is delighted to have found a bargain and decides to buy the property for 90.000 Euro. However, Joe may not know that properties in Spain have a minimum tax value. This is the minimum value assigned by the Tax office to each property and the minimum value which the Tax expects the property to be sold. Joe did not instruct a lawyer to advise him in the purchase and decided to buy with the help of an estate agent. The latter did not check the tax value of the property and did not advise Joe that, actually, the property had a minimum value of 125.000 Euro.

The transfer tax or stamp duty in Fuengirola, Andalucia, for a property of that value is 8%. Joe, after completion, pays 8% of the purchase price (7,200 Euro) to the Tax Man in Spain and then forgets about this matter.

6 months letter he receives a letter from the Tax Office saying that he has bought under value and that the tax paid should have been 10,000 Euro (8% on 125,000 Euro). The letter states that Joe needs to pay the shortfall of 2,800 Euro plus another 25% penalty charge. Joe can choose between a) paying the shortfall and the fine or b) appealing the decision. However, option b will probably involve legal fees in the region of 1000 Euro and a valuation fee of around 500 Euro. Furthermore, there is no guarantee that Joe will succeed with the appeal. In a case like this one, Joe might be better paying the shortfall and the fine.

All the above could have been avoided if Joe, his lawyer or his estate agent had checked the minimum tax value of the property before committing to purchase the property. It could well be the case that Joe, after getting this information, would have still bought the property as it was a bargain but this fact is an important fact that Joe and any potential purchaser should know and consider before buying property in Spain. The minimum tax value should be considered to avoid surprises. Unfortunately, the only way someone like Joe would have learnt about this would have been if he had used a diligent independent lawyer. Food for thought.