Avoid having to pay interest and penalties on your purchase of a property in Spain by following these recommendations.

Reference value. Dirección General del Catastro. For the layman, not versed in Spanish property law, these terms sound as alien and as complicated as quantum physics. Let´s try to explain it in simple terms.

The Dirección General del Catastro, commonly known as Catastro, is a public registry of real estate properties where information about land, houses, flats and commercial premises is recorded. It should not be confused with the Land Registry. The former primarily records the physical and characteristics of a plot or a property whereas the latter records ownership, description, charges, easements and other rights. In my next article I will get deeper into the differences of both registries but right now I would like to give some guidance as to what should be done when buying a property in Spain for a market value that is below the reference value.

And what is the reference value the reader would ask?

Most properties in Spain have a reference value set up by the Catastro. This is the minimum tax value that the Spanish Tax Office (Agencia Tributaria) would accept for a specific property. You can still buy the property below the reference value but the Spanish Tax Office would expect you to pay transfer tax on the reference value.

Let´s imagine that Joe Bloggs buys a property in a small town in Alicante for a very good price (€100,000) The seller is desperate to sell and Joe, clever chap as he is, has pushed him to agree to a sale for a price that is lower than the reference value (€136.000). This is exactly what happened to me today in a completion. Well, my client was not called Joe Bloggs as you can imagine but you know what I mean. Client confidentially, names that cause a statement by themselves etc, etc.

Technically, Joe should pay transfer tax 9% over the price he has paid i.e. €9000. However, the Spanish Tax Office would still expect him to pay 9% on €136,000. We all know basic arithmetics or have a calculator by hand and we know that the tax should have been €12,240. This means that there is a shortfall of €3,240. If no action is taken and we only pay €9,000 transfer tax, the Spanish Tax Office will issue a tax investigation at some point (just so you know, it has 5 years to look back at property transactions. Yes, the Tax Man always wins) and will claim the said shortfall plus interest and penalties.

What is the best approach? Pay the correct transfer tax now. By doing this you save yourself a very likely tax investigation and no further action would be taken against you or the property.

But what happens when there is no reference value at all? Well, that´s trickier.

In general terms, the reference value is very often lower than the market value so if the purchase price is in accordance to market, the chances of a tax inspection are very slim. However, there is no way to have 100% reassurance and my obligation as a lawyer is to inform the client who buys a property with no reference value that a tax inspection, albeit unlikely, may take place. If it comes to the worst and an inspection was to happen, the client/buyer would have to choose between paying the shortfall plus interest or appealing the tax decision before the relevant Courts. Now, appealing a decision is not an easy process and involves lawyers and surveyor´s fees. Bear in mind that the property needs to be valued to show the Tax Man that it was not bought under value. In light of this, careful consideration should be applied to each case as in some circumstances paying the shortfall and the interest plus penatlies may prove more economic than appealing the decision.

In my own experience it is very rare that a client who buys a property in Spain faces a tax inspection unless (i) the value of reference has not been checked or (ii) in those cases where there is no value of reference, the property has been purchased below market value. However, as with quantum physics, there is limits on what can be known. Just when you thought that you had established a certainty, another variable enters and affects the equation (or costs you a fortune!)

Q&A

How can I check the reference value of a property? By going on the website www.sedecatastro.gob.es

What shall I do if the property price I am paying is below the reference value? Pay the transfer tax based on the reference value, rather than the purchase value and save yourself from a tax inspection