The new municipal capital gains tax. A brief guide to the new Royal Decree and the main updates
Last week we shared with you some thoughts about the Constitutional Court Ruling and the tax on the Increase in the Value of Urban Land, commonly known as municipal capital gains tax. We wanted to write about that Ruling once it was published, but the government has not given us a break, as yesterday the Royal Decree Law 26/2021 was published in the BOE which modifies this tax, and which comes into force today, without any respite.
It should be noted that these Judgments have established a doctrine on three important aspects, namely:
- Municipal capital gains tax is not applicable when there has been no increase in the value of the land, that is, when the taxable event does not exist at all, something obvious to anyone except the Tax Agency (STC 59/2017 of 11 May).
- One cannot be taxed on an amount that exceeds the actual capital gain obtained by the taxpayer. Simply put, if there is an increase of 10, do not make me pay 20 because I end up paying more than I have earned (STC 126/2019).
- Finally, according to the latest and famous Judgment, ways must be sought to determine the amount to be paid by the taxpayer that reflects the reality of the real estate market, without disregarding the economic capacity of the taxpayer (STC 182/2021).
Taking these principles into account, the present Royal Decree has been drafted, from which, at JLA Notarios, we want to briefly summarise the innovations it entails, in order to provide some clarity about capital gains and the changes they are undergoing.
1.- The liability to the municipal capital gains tax (modification of article 104.5).
The first novelty, which reflects the constitutional doctrine of 2017, is the non-subjection to tax of those transfers in which there is no increase between the acquisition value and the transfer value. However, it is the taxpayer who must prove the absence of such increase by presenting the acquisition and transfer titles.
But what rules should I consider to prove that I have not obtained any profit? In these cases, only the value of the land should be taken into account (the value of the construction is not considered), and this value cannot be increased by including expenses (for example, notary or registry fees) nor acquisition taxes, as happens with the capital gains tax in income tax. Taking this into account, the following criteria should be applied:
- When it comes to the transfer of real estate where there is both land and construction, the difference between the transfer price and the acquisition price of the land will be obtained by applying the proportion that the cadastral value of the land represents over the total cadastral value at the time of accrual. For example, if the value of the land represents 20% of the total cadastral value at the time of the transfer, this percentage will be applied to the value of the previous acquisition and to the current transfer.
- In each case, the value, whether of transfer or acquisition, will be the higher of the one stated in the title documenting the operation or the one verified, if applicable, by the Tax Administration.
2.- System for calculating the taxable base (amendment of article 107).
The second major modification is the establishment of a new calculation system more closely aligned with the real estate reality, as required by the 2021 Judgment that has generated much discussion in recent days. This reform sets out two mechanisms for calculating the taxable base: the objective estimation and the direct estimation, but it should be understood that these are not two possible calculations at the choice of the interested party, as has been stated by some media, but rather that the objective estimation is the ordinary method, while the direct estimation will be applied subsidiarily. Once the taxable base has been determined according to these parameters, the rate set by each City Council will be applied to it, in accordance with article 108.
A.- Objective estimation.
This method is similar, in terms of its calculation, to the one that has been applied. Taking into account the value that the land has at the time of accrual, that is, when the transfer takes place, multiplied by the coefficient indicated for the period during which the transferor has been the owner of the land, with a maximum period of 20 years. These coefficients will be set by the town councils, without exceeding those indicated by the Royal Decree, which are as follows:
This table of maximum coefficients will be updated annually, but it is the municipalities that are responsible for setting the specific percentage for each period, provided that it does not exceed the limit set by the state for each year, with a deadline of six months from today for the municipalities to amend their tax regulations. However, the possibility is established for municipalities to reduce up to 15% of the cadastral value of the land.
B.- Direct estimation.
This last system will be applied subsidiarily in those cases where, applying the objective estimation system, the taxable base resulting from this last system is higher than the increase in land value obtained by the taxpayer. For example, if using the objective estimation results in a taxable base of €1,000 when the difference in land value between acquisition and transfer is €800.
For the calculation of this real increase obtained between the acquisition and transfer value, the rules previously indicated will be applied, when we dealt with the modification of article 104.5.
3.- Transfers made within periods of less than one year.
Unlike the previous system, now those transfers are subject where the transfer takes place in less than one year from the date of acquisition. In this case, the applicable coefficient will be 0.14 (higher than the applicable one if one year passes, which is 0.13), being proratable according to the number of months the property has been owned.
In this way, the government intends to "penalise" these operations for considering them speculative, which is quite questionable. Firstly, because this purchase and sale can be carried out for investment purposes and improvement of the housing stock, and not so much for a purely speculative function. Let us think, for example, of companies or individuals who acquire a property to renovate it and sell it, which is not only a completely legitimate way of operating but also a way to improve properties, buildings and neighbourhoods. And secondly, because if the taxable event of this tax is the increase in the value of the land, it is most likely that in such a short time there is no real increase in it.
4.- Retroactivity of the rule.
It has been questioned whether the new regulation is applicable to transfers made before the publication of this regulation. The sole article of the Royal Decree itself states that “with effect from the entry into force of this royal decree-law, the following amendments are introduced in the consolidated text of the Law Regulating Local Authorities, approved by Royal Legislative Decree 2/2004, of 5 March”. While the third final provision states that “This royal decree-law shall enter into force the day after its publication in the Official State Gazette”.
Therefore, it cannot be affirmed that it has retroactive effects on operations carried out before the entry into force of said Royal Decree, although we consider that they should indeed be submitted for settlement before the competent public administration.
We hope these lines can help those who read them, especially those interested in selling any property, and to see how this new reform turns out and whether it is not amended again by the courts. We remain at your entire disposal.
