Different forms of property valuation

When one sells a property, in the deed of sale and purchase the parties should declare the price of the property and this should coincide with its “real” or “market” value. However, especially in the current financial climate, a property’s market value will almost certainly be lower than its previous market value going back several years. Therefore, if one sells a property and declares its actual “market” value, will the Tax office be satisfied by this?

The same issue arises with regard to the granting of a mortgage as the bank does not have any influence over the price of the property declared by buyer and seller who make their own valuation of the property. We could come up with many more examples of this, the case of an inheritance for example, how does one value the assets inherited for example? Who establishes their value? How can the one calculate the said value? The reality is that the tax payer who wishes to do everything by the book is potentially faced with a host of questions and finds that he is defenceless with regard to all the above and without a clear idea of what to do.

Until the arrival of the financial crisis, banks and other credit entities were competing with each other to gain new clients and in some cases offered mortgages of up to 100% of a property’s valuation. However, who actually made this valuation? The value given to a property on the basis of a valuation was used by the banks to determine the amount of a mortgage loan.

Currently and with regard to situations such as those outlined above, Spanish banks have adopted a much more conservative attitude as the above cannot be done and as a consequence of this, the valuation of property tends to be much lower.

It is curious that when one reads a law it always seems that everything is regulated and that we are duly protected. The truth is that the drafters of the first law (the dating back to 2007) should be ashamed of the practical results of the mortgages granted by credit entities on the basis of the valuations given.

In the actual mortgage deed, a mention is made of different values, one of which is the value of the property and another which is the value of the property for the purposes of a potential judicial auction. In Spain, in the case of a default in the repayments of the mortgage, the bank cannot directly adjudicate the property in its favour in payment of the debt, and this could solely occur in certain circumstances and as a consequence of a public auction. The valuation of the property for the purposes of public auction is higher than the valuation of the property for the purposes of the mortgage as a loan, as the valuation for the purposes of public auction also includes the nominal costs and interest that as a consequence of the default in payment the debtor would be liable to pay. The said value serves as a guarantee for the bank and has an informative purpose with regard to third parties who would wish to ascertain the maximum liability that the property would have with regard to the bank as holder of a previous charge.

At the same time, article 57 of Law 58/2003 (the General Law of Taxation), determines a series of methods by which the price of assets can be revised by the public Administration and which are as follows:

■ a) Average market values. ■ b) Opening prices in national or foreign markets.

■ c) Valuation report emitted by experts who work for the Public Administration.

■ d) Values assigned to assets in insurance policy contracts.

■ e) Value assigned to mortgaged real estate in fulfilment of mortgage regulations.

■ f) Price or declared value corresponding to other transmissions of the property, taking into account the circumstances of these and within the term that is legally established. ■ g) Any other specific method of valuation established in the express regulations of each different tax.

To give our readers an idea of the situations that one could be faced with, and on the basis of previous experience, the following example could be given:

Suppose that one sells a property for 200.000€ and that the purchaser, for the finance of the purchase and payment of taxes and expenses has applied for a mortgage loan. In accordance with the valuation of the bank, the property is valued at 250.000€. At the same time, and supposing that the vendors are non-residents in Spain, a 3% retention is made against a hypothetical capital gains tax liability which eventually turns out to be nil. Accordingly, the vendor makes an application for the reimbursement of the 3% retention as in any normal and logical case.

Meanwhile, to everyone’s surprise, the Tax Office could say that despite the parties having declared the real market value of the property as the price of sale (i.e. 200.000€), the revised value of the property is 250.000€ as this was the valuation made by the bank for the purposes of the mortgage loan. As such, the revised increased price implies that the purchaser does effectively make a capital gain and that therefore no reimbursement of the 3% retention is due. Everyone can see that this system does not give a great deal of legal security and that the tax payer is put in a situation in which there is no immediate remedy but to accept the Tax office’s valuation without recurring to a time consuming and potentially expensive appeal against the valuation by means of a contradictory expert’s valuation.

Due to the above, we can only remind our readers that one should always declare the real value of property when it is sold or inherited and that the said value should be a realistic value for the property in those cases in which by self-assessment there is scope to determine the said value (i.e. in the case of a sale, the price is agreed between buyer and seller and is as such, but in the case of an inheritance one may unilaterally declare any value which can be determined taking into account the particular circumstances of the beneficiary and the property). What is clear is that one should always take advice from legal experts who although may not have a definitive answer to the problem can at least advise of the potential consequences of declaring one value or another, thus avoiding unpleasant future surprises.