It is a common occurrence that someone sells a property and a few months later receives a large bill for this tax. Sometimes, the amount of this tax is retained by the buyers and withheld for them to make the payment later, especially in those cases where the seller is a non-resident of Spain. Now, a recent Supreme Court ruling 1689/2020 of 9 December has declared this municipal tax null and void when the tax due wholly matches the increase in value of the land.
It’s a good idea to bear this recent ruling in mind before selling your property, to analyse with due legal diligence whether the calculation of this tax provided by the town hall is in accordance with the law or could be considered abusive or null according to the criteria established by the Supreme Court and the Constitutional Court of Spain.
In order to analyse whether the tax is calculated correctly or is actually null or non-existent, the vendor must be asked for a copy of their Escritura (property deeds) and the IBI (rates) before signing at notary to be able to check if there really is an increase in the value of the land since if there has not been one providing a real benefit to the vendor, this tax can be declared null and void and there is therefore no obligation to pay it.
According to the Supreme Court, six cases provide the legal basis for annulling Plusvalía:
- The sale must have resulted in a real increase in the value of the land, otherwise there is no gain to be passed on to the taxpayer (vendor).
- The Constitutional Court ruling STC 126/2019, of 31 October, declares unconstitutional Article 107.4 of Royal Legislative Decree 2/2004, of 5 March, which approved the revised text of the Law Regulating Local Finance (Ley Reguladora de las Haciendas Locales), (law regulating Plusvalía) for violating the principle of economic capacity and the prohibition on confiscation, both embodied in Article. 31.1 of the Spanish Constitution, and this is especially evident in those cases in which the tax payable is even greater than the increase in assets or profit obtained by the taxpayer when selling his property.
- The Third Chamber of the Supreme Court considers it “essential to remember” that the principle of economic capacity must be respected for all taxes. This may be actual or potential, but never non-existent, as would be the case where the transfer of ownership of the land in question does not entail any increase in value.
- In respect of the prohibition on confiscation, after referring to the jurisprudence of the European Court of Human Rights and the Constitutional Court on the subject, the recent ruling warns that it should be interpreted as an impossibility for the fiscal system to deplete taxpayers’ resources since “what is prohibited is not confiscation but rather that the tax has confiscatory proportionality.
- Such a tax places an “excessive”, “exaggerated” and “disproportionate” burden on the economic capacity of a taxpayer by requiring the “allocation for payment of the whole or majority of the actual or potential resources imposed by such a tax”.
- The Supreme Court considers that the assessment to this tax when there is no benefit or increase in the value of the land is “contrary to law – since it implies a clear confiscatory scope – an assessment of the Tax on the Increase in Value of Urban Land which, applying the corresponding articles of the Law on Local Tax Authorities, establishes a tax liability that coincides with the increase in value shown as a result of the transfer of the land, that is, that it covers all the taxable assets”.
