How is the Municipal Capital Gains Tax now calculated?

The tax on the Increase in Value of Urban Land, known as plusvalía municipal, is a tax on the increase in value of the land from its acquisition to its sale, and is paid by the seller of the property at the time of its sale.

On 26 October the Constitutional Court declared unconstitutional articles 107.1, 107.2.a) and 107.4 of Royal Legislative Decree 2/2004, of 5 March, approving the revised text of the Law regulating local finances, which refer to the method of calculating the Tax on the Increase in Value of Urban Land, known as the municipal capital gains tax (ruling 182/2021) for possible violation of art. 31.1 of the Spanish Constitution, which states:

“Everyone shall contribute to the support of public expenditure in accordance with their economic capacity by means of a fair tax system inspired by the principles of equality and progressiveness which, in no case, shall have confiscatory scope”.

According to this ruling, the application of Articles 107.1, 107.2 a) and 107.4 TRLHL can lead to a taxpayer being required to pay an excessive tax burden, in violation of the prohibition of confiscation in Article 31.1 EC.

The articles declared unconstitutional

The articles declared unconstitutional are as follows:

1.- Article 107.1 TRLHLHL:

“The taxable base of this tax is constituted by the increase in the value of the land revealed at the time of accrual and experienced over a maximum period of twenty years, and shall be determined, without prejudice to the provisions of paragraph 5 of this article, by multiplying the value of the land at the time of accrual calculated in accordance with the provisions of paragraphs 2 and 3 thereof, by the coefficient corresponding to the period of generation in accordance with the provisions of paragraph 4 thereof”.

2.- Article 107.2 a) TRLHL:

“The value of the land at the time of accrual will result from the following rules:

a) In transfers of land, the value of the land at the time of accrual shall be that determined at that time for Real Estate Tax purposes.

However, when this value is the result of a valuation report that does not reflect planning modifications approved after the approval of the aforementioned report, this tax may be provisionally settled in accordance with that value. In these cases, the definitive settlement will apply the value of the land once it has been obtained in accordance with the collective valuation procedures that are carried out, referring to the date of accrual. When this date does not coincide with the effective date of the new cadastral values, these will be corrected by applying the corresponding updating coefficients established for this purpose in the general State budget laws.

When the land, although urban in nature or forming part of a property with special characteristics, at the time of accrual of the tax, does not have a determined cadastral value at that time, the local council may carry out the settlement when the said cadastral value is determined, referring this value to the time of accrual of the tax.

The local councils may establish in the tax byelaw a reduction coefficient on the value indicated in the previous paragraphs that takes into account the degree of updating, with a maximum of 15 percent.

3.- Art 107.4 TRLHL:

“The period of generation of the increase in value will be the number of years over which the increase in value has become apparent.

In cases of non-taxation, unless otherwise indicated by law, for the calculation of the period of generation of the increase in value revealed in a subsequent transfer of the land, the date of acquisition, for the purposes of the provisions of the previous paragraph, shall be taken as the date on which the previous accrual of the tax took place.

In calculating the number of years elapsed, full years shall be taken, i.e. fractions of a year shall not be taken into account. In the event that the generation period is less than one year, the annual coefficient shall be pro-rated taking into account the number of full months, i.e. without taking into account fractions of a month.

The coefficient to be applied to the value of the land at the time of accrual, calculated in accordance with the provisions of the previous sections, will be that which corresponds to those approved by the town council according to the period of generation of the increase in value, without exceeding the following limits:

These maximum coefficients will be updated annually by means of a regulation with legal rank, and this update may be carried out by means of the general State budget laws.

If, as a result of the updating referred to in the previous paragraph, any of the coefficients approved by the current tax byelaw should prove to be higher than the corresponding new legal maximum, this will be applied directly until the new tax byelaw comes into force that corrects this excess”.

What happens after the unconstitutionality?

Following this ruling, the government has urgently approved RD 26-2021 of 8 November 2021, which introduces new measures to regulate this tax, the characteristics of which are as follows:

• It will only be taxed when there has been a gain

• Tax will be levied on purchases and sales made in the period equal to or less than one year from their acquisition.

• Two calculation methods are established:

Objective method

The objective method will determine a different coefficient depending on the number of years the property has been owned.

This coefficient will be set by each of the local councils, which will establish the maximum limits and which may not exceed that established in 107.4 of the revised text of the Ley Reguladora de las Haciendas Locales (Law Regulating Local Treasuries. 

Once this coefficient has been determined, it will be multiplied by the cadastral value of the land, which will give the taxable base of the tax.

Real method

This method tries to investigate the real profit obtained in the sale and purchase operation.

In this method 2 aspects are taken into account:

– The difference between the purchase price and the sale price.
– How much is the cadastral value of the land in reference to the total value of the property.

To the figure obtained by the difference between the purchase price and the sale price, the percentage obtained from the cadastral value of the land will be applied, resulting in the taxable base of the tax.

To the taxable base in each method, the tax rates of each municipality will be applied according to the number of years of permanence.

The taxpayer may choose between the two methods of calculation.

What happens with sales and purchases made between the declaration of unconstitutionality and the Royal Decree?

One issue to take into account is the situation generated by sales and purchases made between the declaration of unconstitutionality and the publication of the Royal Decree.

All these operations are in legal limbo and it will be necessary to see what measures are taken in this respect. A great deal of litigation is expected in this respect, as the calculation rate applicable to these operations and even the obligatory nature of the payment of the same will be highly contentious.

If you need advice when selling a property, please contact us.