Transmission tax on property transactions

Adjustment of the transmission tax due on property transactions by use of mortgage valuations.

Legal and Tax advice from Fernando Aliaga

As many of our readers may already know, the Spanish General Tax Statute ( Ley General Tributaria) contains a regulation of possible methods by which the Tax Office may revise values declared for tax purposes on the basis of self- assessment.

The most common use of this revaluation procedure can be found in the case of property transactions when the local tax office challenges the price declared by the parties in the deed of sale and considers that the “real or market value of the property”, which constitutes the tax base of the Transmission Tax, is higher than the said declared value. As a result of this the tax office considers that the amount of transmission tax due should be based on the higher valuation which leads to a claim for the difference between what has been paid and the tax that should be paid on the basis of the said higher revaluation.

The General Tax Statute lists the methods by which the revision of a declared value can be carried out and establishes that a valuation done for the purposes of a mortgage loan to finance the purchase of the property is a valid method of valuation ( article 57.1. G).

This has lead to many new additional tax bills being issued to buyers of property who paid their transmission tax on a property price that was less than the mortgage valuation commissioned by the bank that gave them a loan to finance the purchase of the property.

However a 2019 judgement issued by the Valencian Regional High Court has given tax payers the basis to challenge these complementary tax bills issued on the basis of a mortgage valuations.

The judgement questions the suitability of a mortgage valuation to determine the real or market value of a property which is what the transmission tax statute considers that the transmission tax should be based on with independence of the price paid.

Normally official mortgage valuations that are attached to the mortgage deed registered in Land Registry are issued on the basis of Order ECO/ 805/ 2003 which contains rules on the valuation of real estate.

Article 4 of the said Order differentiates between what is called the mortgage value of property and the market value of property and defines the concept of the mortgage value of property as “the value of a property determined by a prudent valuation of the future possibility to market the property taking into account long term aspects, normal and local market conditions, its use at the time of its valuation and the possible alternative uses.”

On the basis of the rules and concepts contained in the Order that regulates mortgage valuations, the Valencian Regional High Court is of the opinion that one cannot confuse mortgage value with market value which is considered to be the price for which the property could be sold between a buyer and a seller in normal conditions of being offered for sale in the open market and on the basis of this principle, it considers that the revaluation of property carried out for the purposes of the payment of additional transmission tax based on mortgage valuations are not admissible as they do not reflect the true market value of property.

At the moment, this is an opinion that is maintained by the Regional Valencian High Court only and as such, complementary tax bills issued by local tax offices in the said region may be challenged by using this precedent. However, in all probability and as a result of this precedent being used in other cases outside of the Valencian Community, an appeal will be filed in Spain’s High Court to “unify” criteria all over Spain and as such there will be in all probability an eventual decision from the central High Court about the Regional Valencian High Court’s opinion regarding the validity of this method of valuation.