Article by Federico González Aledo, published in Diario de Avisos on 09/21/14.
The Spanish market is awakening, after a long and tortuous passage through the economic crisis, to investment. The Ibex has recovered 2010 levels, sovereign debt is trading at historic lows and housing is once again presented as an investment opportunity after a profound price adjustment. But in addition to the financial attractiveness of the moment, the investor must also take into account the new fiscal framework represented by the reform presented recently by the Ministry of Finance, which will come into force in 2015 and which brings important modifications in the taxation of capital gains. Making investment decisions in the coming months therefore also involves studying the new taxation.
In this sense, two of the, in my opinion, greatest tax benefits established for individuals in Spain will disappear on January 1, 2015 with the entry into force of the aforementioned reform of the personal income tax regulations proposed by the Government.
These are the update coefficients and the reduction coefficients, both applicable to capital gains arising from the sale of certain properties (that are not subject to economic exploitation) by natural persons.
The first were originally designed to avoid the high inflation rates that occurred in Spain for many years, resulting in lower real estate investment in our country. With these coefficients, it was possible to pay taxes only on the real revaluation of the property and not on the total increase in price, due to inflation.
The latter reduce the amount taxed at the time of sale, but they were intended, above all, as a tax initiative aimed at stimulating long-term savings, not only in housing, but in any other asset.
The reduction coefficients are eliminated starting in 2006 for new capital gains, but a transitional regime is maintained that allows the reduction of those generated until January 20, 2006, for those assets that already existed in the taxpayer's assets before December 31, 1994. In the case of a home, the reduction would be 11.1% for each year that the asset was in the taxpayer's assets, provided that period exceeds two years. Example: if it lasted three years, the reduction would be 11.1%, if it lasted four, 22.2%, and so on progressively.
Well, as we have mentioned previously, what was given is over and starting next year 100% of the gain will be taxed regardless of the date of acquisition of the transferred property.
Since January 1, 2015, the Treasury puts an end to a transitional regime that has lasted two decades and thanks to which taxation decreases for the profit generated from the moment of purchase - which must be prior to 1995 - until January 20, 2006, as established by the Personal Income Tax Law that came into force in 2007. Thus, until now the profit obtained during that period and which is subject to payment of taxes is progressively lower as the goes back in time since 1994. For shares acquired that year, 88.89% of the capital gain is subject to tax, a percentage that falls to 22.23% if they were purchased, for example, in 1988. That is, the other 77.77% is not taxed. And for assets acquired before 1986 – whether real estate or shares – these reduction coefficients leave the entire gain accumulated until January 20, 2006 tax-free.
Its elimination will be a hard blow if, for example, a house purchased in the 70s or a stock portfolio inherited is sold today. It will also affect the provision of a handful of Spanish pension plans, with products that are up to 24 years old in the Spanish market. In the case of the sale of real estate, there is additional damage since, as we have mentioned, the update coefficients also disappear, which serve to correct the monetary depreciation – updating the acquisition value – and which until now apply only to the accumulated profit until 2007.
An example of what this legislative change will mean: suppose the acquisition of a property in the year 70 for 400,000 pesetas and its sale on January 1, 2015 for €200,000. Taxation from January 1, 2015 will be very simple: €200,000 – €2,400 (400,000 pesetas) x tax rates (between 20 and 24% in 2015) = €46,300.
If instead of selling on January 1, 2015, the taxpayer sells on December 31, 2014, that is, before the entry into force of the tax reform, they could apply updating coefficients and abatement coefficients so that, after carrying out the mandatory calculations applying the coefficients mentioned above, the conclusion will be reached that the bill to be paid to the treasury for this operation will be €8,500 (less than a fifth).
The conclusion of everything discussed is that this measure has little impact on people who are preparing to sell a property acquired after January 1, 1995, so you should only worry if this is not the case.
On the contrary, if you own a home purchased before 1994 and you intend to sell it, do so before 2015 or the Treasury will make you pay dearly. The difference will be, as we have seen, in the taxable capital gain that you will have to pay to the Treasury, from doing it in 2014 to doing it in 2015, it can mean thousands of euros more.
Therefore, our recommendation in this regard is very clear. Sell the properties you own that are older than 20 years during the remainder of 2014 or if you do so after January 1, 2015, the Treasury will bite your pocket considerably.
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