Spanish Capital Gains Tax
Non-residents are liable for payment of Spanish Capital Gains Tax in Mallorca when selling their Spanish Properties.
In broad terms, the capital gains to be taxed consist of the difference between the acquisition value and the sale value of the property. The tax rate applicable to the gains is 18% (it has been considerably reduced from 35%).
The value of the sale will consist on the consideration received less any disbursements and taxes inherent to the transaction which have been paid by the vendor (Plusvalia tax, Estate Agent’s fees, Notary’s fees, etc.)
Acquisition Value for Spanish CGT purposes
The concept “Acquisition Value” is not straight forward. It takes into account the consideration appearing in the Deed of purchase plus those taxes and disbursements which are inherent to the purchase. These would include VAT/Transfer Tax/Stamp Duty/Inheritance tax, Notary’s fees, Land Registry fees, etc.
Depending on the year of acquisition, the acquisition value is also updated by applying an actualisation coefficient which is reviewed every year in the Government’s Budget.
Coefficients updating the value of acquisition
In particular for the year 2007, the following coefficients apply
Coefficients updating the value of acquisition
Year of acquisition Coefficient
1994 and previous 1,2162
1995 1,2849
1996 1,2410
1997 1,2162
1998 1,1926
1999 1,1712
2000 1,1486
2001 1,1261
2002 1,1040
2003 1,0824
2004 1,0612
2005 1,0404
2006 1,0200
2007 1,0000
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The abatement coefficient
Those property owners who purchased before the 31st of December 1994 are entitled to apply a further “abatement coefficient”.
This is done by computing the number of years between the date of acquisition and the 31st of December 1996 and applying a reduction percentage (equivalent to 11,11%) for each year of ownership (exceeding two years of ownership). If the period of ownership is more than 10 years (from the 31st of December 1996) then the transfer is exempted from payment of Capital Gains Tax.
However from the 1st of January 2006 (when the Capital Gains are made from the 20th of January 2006) the abatement coefficient is applied prorata only up to the 20th of January 2007.
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Post-completion works
Some of works in a property that are carried out after the acquisition can also be considered by the Inland Revenue as part of the value of acquisition and added to the value described. This increases the total value of the acquisition minimising the capital gains, and thus the tax liability. The value of those works is also updated by the abovementioned actualisation coefficient taking the date of finalization of the works as a tax point.
However not all the works in a property qualify as value of acquisition for the purposes of reducing the capital gain (irrespective of the fact that in reality they may have an impact in the value of the property in the open market).
The current tax legislation does not provide an exhaustive list of the works which qualify as part of acquisition value and cases are assessed on an individual basis by the tax office.
Section 54 of the Income Tax Regulations Royal Decree 1775/2004 (which refers to Resident’s Income Tax) merely establishes that “Constructions works will be considered as “acquisition of the dwelling” (for capital gains tax purposes) under the following conditions: 1 Extension of the property, when there is an increase in the habitable areas of the property by means of enclosures of outdoor areas or by any other means for year round use.2 Construction, when the taxpayer pays directly the costs of the execution of the building works or pays amounts on account to the developer, if the works are completed with a four-year period.
Conversely the following are not considered as part of the acquisition value of the dwelling
a) Conservation or repair costs as per section 12 (which refers to disbursements for the maintenance of the normal use of the assets such as paint, repair, and fixing costs, costs of replacement of elements such a heating devices, glass elements , lifts, security doors etc, cost of repair of damaged caused by break-ins, insurance premiums, etc.
b) Enhancement works
c) Acquisition of parking spaces, gardens, swimming pools and in general annexes which are not the dwelling itself when these are acquired independently from the dwelling.
The application of the above criteria is not at all clear. As an example, consultation number V1934-05 of 28 of September the taxpayer carried out the following works:
“First repair and later on, replacement of boundary walls; construction of a passage-porch lading to the garage; constructions of a path from the street to the dwelling of 30m2 approx (driveway)”; The inland Revenue authorities decided that although the works were improvements and increased the external extension of the dwelling the would not qualify as costs of acquisition for CGT purposes.
Improvements such as heating for swimming pool, landscaping irrigation system installation of gates and grills, Jacuzzi, security system electric pool covers would not qualify as value of acquisition for GCT purposes.
