Property in Spain: Tax loophole warning

Estate agents are warning people thinking of buying a second home in Spain to be wary of ancient tax loopholes that could leave them out of pocket.

Spanish residents have a tradition of misquoting property prices to avoid high tax payments, according to the National Association of Estate Agents (NAEA).

This means that on Spanish land registry documents the value of a home can be well below its market value, to ensure less tax is paid.

But if the local authority or a developer wants to purchase the land, as in the Valencia land grab, second homeowners can have difficulty in proving how much it is worth.

"Historically, people have been reluctant to put in the full price on their documents because that would force them to pay more tax than the gain they had made on the property," explained Ian Tonge, who chairs the NAEA international working group.

"If their property is then needed for road widening purposes, for example, they will only receive the government’s recorded value on it, and will be unable to prove that they are owed more. Purchasers in Spain must be careful to declare the true value of their property to protect themselves."

The Valencia land grab law, passed in 1994, allows developers to compulsorily purchase land from property owners at prices often below market value.

While this only applies to the state of Valencia, other Spanish regions are reportedly considering implementing similar laws.

The NAEA is urging purchasers considering investing in Spain to ensure that the price of their property is correct on all their documentation to help them obtain a fair price should it be subject to compulsory purchase.

The Valencia land grab law, which applies areas such as the Costa Blanca and the Costa del Azahar, is designed to speed up urban development by ensuring all developments are built with facilities such as sanitation and roads.

It allows developers to ask for land to be reclassified from rural to urban without seeking the landowners' permission; and once reclassification has occurred compulsory purchase can take place.

Residents only have 15 days to object following the publication of a notice of intent to urbanise an area, which causes severe problems for absentee landowners who may not find out about it until it is too late.

Thousands of British owners of second homes in Spain have been caught out by the law and lost money as a result.

Law firm Irwin Mitchell is taking on cases of landowners who think they may have been adversely affected by the Valencia land grab, and registering them with the European Court of Human Rights.

See www.irwinmitchell.com for more information.

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