Municipal capital gains tax banished by courts

The Constitutional Court (TC) has annulled the municipal tax on capital gains, which in theory taxes the revaluation of real estate when the assets are sold but in practice is always paid, even the assets have lost value.

This means that the municipal tax levied upon the sale of properties will have to be reformed. The Impuesto sobre el Incremento del Valor de los Terrenos de Naturaleza Urbana (Tax on the Increase of Value of Urban Land) is an important source of income for municipalities.

The resolution states that «in no case can the legislator establish a tax by taking into consideration acts or facts that are not exponents of actual or potential wealth.»

The magistrates ruled that it is not legal to impose a tax when there has been no economic gain.

The disputed law establishes a tax on the surplus value of urban land, a tax that is earned at the time of sale of the property and which is calculated objectively from its cadastral value and the years (between a minimum of one and a maximum of twenty) during which the owner has been the owner of it. It is calculated so that it does not take into account whether the property has gained value or not, which generates a fiction of economic increase that, in addition, prevents the owner from presenting any evidence to the contrary.

In simpler terms, the tax assumes your urban real estate asset has gained in value based upon average values, and fails to take into account the true declared sale and purchase value

The TC says that taxes levied upon theoretical economic gains are unconstitutional. In other words, it is up to the Authorities to prove that an economic gain has been made before a tax can be levied – and the tax must be levied upon the real purchase and sale values declared, not the theoretical values used up to now.

The ruling of the Constitutional Court, unanimously adopted, has partially estimated the issue of unconstitutionality raised by the Administrative Court No. 3 of Donostia, in relation to several Articles of Regional Regulation 16/1989, of July 5, of the Tax On the Increase of Value of Urban Land of the Historical Territory of Gipuzkoa.

However, the ruling is valid for the whole of Spain.

It remains to be seen how this will affect future sales of homes, or whether past payments of this tax can be adjusted.

Maria Luisa

María Luisa Cervantes is a chartered accountant who graduated from the University of Granada in 2002. Founder of Cervantes Alarcón Consulting, she is an experienced accountant and financial advisor who is a member of the Almería guild of economists. With more than 15 years of experience in business administration and international trade, she is also a subject matter expert in the UK - Spanish bilateral agreements which cover the rights of expats to live, work and retire in Spain.