Tax Pitfalls of Buying Property in Spain

Pitfall of Gift Tax on Low Purchase Price Properties

When a property is bought, the purchaser must pay tax as a percentage of the price (normally 6% or 7% plus 0.5%). However, these percentages are paid on the value of the property (which may not coincide with the price paid). The spanish Tax Authorities have statutory powers to review the value of any property and to request the appropriate additional payment of tax. The danger of declaring a low price is that regardless of whether or not the purchaser actually paid the amount declared, if the price as recorded in the title deed is more than 20% lower than the value of the property, as assessed by the Tax Authorities, the difference between the price and the actual value will be regarded as a gift. In which case, the purchaser will be liable to gift tax (at a variable, quite high percentage) and the vendor will aslo become liable for Capital Gains Tax at the rate of 35% on the difference between the price and the value as assessed by the Tax authorities. The Tax Authorities decision can be challenged but this may entail Court proceedings. Similar Law applies to properties inherited from a deceased and therefore, care should be taken when stating the value of the properties subject of the Spanish Deed of Acceptance and inheritance.