Minimum base for calculating the payment of taxes associated with the purchase of residential or undeveloped rustic properties has changed Author: E. Sanz

Source: El Confidencial

If you’re buying a house, remember these three words: reference value. Since January 2022, the tax authorities, through the General Directorate of Cadastre, have established a new value, aside from the cadastral value, called the cadastral reference value. Since early last year, this has become the taxable base for calculating various taxes related to the purchase, inheritance, or donation of a property.

In other words, as of January 1 of last year, the minimum base for calculating these taxes has changed. This change only affects residential properties or undeveloped rustic land, so it can impact both companies transferring these types of properties—primarily investment funds—and thousands of people who buy, inherit, or receive a home as a gift each year. For now, commercial properties, industries, hotels, offices, and other assets do not have a reference value.

What is the reference value?

“It is a value determined objectively for each property based on the data available in the Cadastre, and it corresponds to the most probable price at which the property could be sold between independent parties free of encumbrances,” explains Rocío García Ramírez, Technical Director of Real Estate Taxation at the consulting firm Euro-Funding. In other words, it is an estimate of the sale price of a property under normal market conditions, but it will never exceed the market value.

Since January 1, 2022, the reference value has been the minimum taxable base for the inheritance and gift tax (ISD) as well as for the tax on property transfers and documented legal acts (ITP and AJD).

According to García Ramírez, “the reference value was defined following the approval of Law 11/2021 of July 9, which included measures to prevent and combat tax fraud. This law modified the Cadastre Law to adapt its regulations and added that the reference value cannot exceed the market value. A reduction factor will be applied in its determination.”

She clarifies that “what changes is the minimum base. The base, in the end, will be the highest of the values among the market value, the declared or agreed value, or the reference value (for ITP). For inheritance tax, it will be the taxable base,” she explains.

Who is affected?

It affects those who are buying a second-hand house—the new build is not subject to ITP, but the buyer must pay the AJD of the purchase—as well as those who have received a house through inheritance or donation.

However, it does not affect the property tax (IBI) or the tax on the increase in the value of urban land (IIVTNU), commonly known as municipal capital gains.

“On the other hand, it is important to emphasize that in the case of wealth tax, this reference value will affect properties acquired from 2022 onwards but will not affect pre-existing wealth, nor will it modify the IBI or municipal capital gains,” this expert points out, noting some confusion in the first year of application of the new value.

Which taxes?

According to Miguel Madrid Rodríguez-Acosta, a tax lawyer at MA Abogados, three taxes have had their regulations modified to adapt to the reference value:

1. Tax on Property Transfers (ITP): To determine the taxable base in transactions involving real estate, the reference value must be declared, unless a higher amount is declared or the price or consideration is higher.

2. Inheritance and Gift Tax (ISD): Similar to ITP, the reference value must be declared at a minimum, unless the taxpayer opts to declare a higher value.

3. Wealth Tax: According to its regulations, properties must be declared at the highest of the following values: (i) cadastral value, (ii) value determined or verified by the Administration for other taxes, or (iii) the price, consideration, or acquisition value. According to this, the value verified by the Administration is understood to include the reference value.

Chaos and Uncertainty

Only a year and a month have passed since the application of the reference value, and experts speak of chaos, lack of information, and uncertainty, not only among individuals and companies but also among real estate professionals. Many experts discuss a hidden tax increase with more questions than answers.

“As cadastral experts, we observe significant ignorance among the affected sectors,” admits Rocío García Ramírez. “The tax authorities haven’t widely disseminated this, but it’s a very relevant issue, as if this value contains errors, it is best to complain and request a review before paying the tax. The regulations literally state that with the reference value, the value verification procedure is no longer applicable. In other words, the rules of the game have changed, but they must obviously provide some way to appeal. What happens is that we are facing a mechanism different from what we had,” explains the Euro-Funding expert, who has been aware of “operations falling through on the same day as signing before a notary.”

“The tax authorities have determined that these taxes—ITP, AJD, inheritance, and donations—should be settled based on the reference value to prevent tax fraud and because cadastral values, apart from being outdated, allowed manipulation with black money. Now, the reference value is more aligned with market reality. However, the problem with the reference value is that it is not always optimized. For example, if a property has squatters, it depreciates. In these cases, the reference value should not exist. But how does the tax authority know that the property has squatters?” highlights García Ramírez, who still values the fact that these reference values are not as outdated as cadastral values, “whose calculation is very costly for the Administration and is done with much delay compared to market studies, making them outdated.” But this doesn’t mean they don’t contain errors.

In her opinion, the advantage for the tax authorities is that this law “costs the public coffers less, as verification procedures cannot be used, which eliminates supplementary settlements as happened before. And this is huge. In fact, in this year and a half, litigation with the tax authorities has decreased. In this sense, what we recommend in case of disagreement is to challenge the reference value before the transfer to properly calculate the tax. We have managed to optimize the reference value before the operation, resulting in a saving of 200,000 euros for our client in inheritance and donation tax.”

Miguel Madrid Rodríguez-Acosta, for his part, refers to some controversial situations. “It seems that in the development and regulation of the reference value, only typical real estate transactions between individuals under normal market conditions were considered. But what about transmissions where the price is not negotiated by the buyer and seller but set by a judge or insolvency administrator within a liquidation plan, or when it’s a public protection housing with a capped selling price? Or what value is used in ITP in cases of auctions (judicial, notarial, or administrative) where the auction result is lower than the reference value?” he questions.

The General Directorate of Taxes has already addressed these issues, and for now, the guidance is consistent: it must be taxed based on the reference value.

How to Verify the Reference Value?

Anyone can access the reference value through the Cadastre website. “Imagine you are selling a house. You commission an appraisal and find that the reference value is completely discrepant. I would recommend going to the Cadastre management and requesting a correction of the value. Hence, it’s crucial to check this reference value in advance because if not, you have to pay first and then claim. Additionally, it’s important to note that challenging the reference value can only occur when it has fiscal effects, i.e., when the property is transferred. We challenge the cadastral description and the correct application of the regulations to ensure the reference value is correct. Let’s say it’s an indirect appeal of the reference value through existing procedures in the Cadastre,” explains García Ramírez.

Their experience supports this. “We are confirming this through binding consultations with the TEAC. In cases where the resolution has been contested, the TEAC responds that the resolution adheres to European regulations. There are almost fifty binding consultations, and they all respond in the same manner. With the reference value, this is the minimum taxable base.”

“It is also advisable to review it if you know you are going to receive an inheritance or a lifetime donation. You should review the reference value, and if you find a significant difference from the market value, it is advisable to seek advice to review it and avoid surprises when settling the taxes,” recommends Rocío García Ramírez, who insists that “the reference value is part of the cadastral description of properties, and as such, the cadastral holder can request its adjustment to physical reality at any time before the transfer.”

How to Optimize This Value?

Euro-Funding asserts that, like the cadastral value, the reference value can also be optimized. “For calculating the reference value, the descriptive data of each urban property to consider will be those appearing in the Cadastre, which will have the presumption of accuracy established in the regulations. This calculation will be based on the constructive characteristics and location at the end of each fiscal year. Any minor error by the administration between the physical reality and the allocation of constructive characteristics or the assignment of the homogeneous valuation territory according to the uses defined by the Cadastre will result in the reference value not matching the real estate reality of your property and could lead to considerable increases in tax settlements. Hence the importance of expert help to optimize this and other resources.”

“We therefore recommend that if a transfer is planned, do not wait until the notarization moment. With some planning