The Spanish Constitutional Court dealt a severe blow to one of the municipalities' main sources of income on Tuesday.
In a ruling that has sounded the alarms in town halls throughout Spain, the Court declared unconstitutional the calculation method used by municipalities to tax property sales.
The decision of the Constitutional Court puts at risk the budgets of thousands of cities and towns throughout Spain.
Spanish city councils collected 2,354 million euros in 2018 through the so-called capital gains tax on property sales, also known as plusvalia tax and whose full name is tax on the Increase in Value of Urban Land (impuesto sobre el Incremento de Valor de los Terrenos de Naturaleza Urbana).
The judicial ruling was adopted by a majority of the Constitutional judges. The full text of the ruling has not yet been made public, but legal sources explained that it will mean the complete annulment of the tax.
The scare has been so serious for the municipalities that the Ministry of the Treasury (Ministerio de Hacienda) reacted immediately and announced a legal reform "that will guarantee the constitutionality of the tax" and that will offer legal security to municipalities and taxpayers.
How plusvalia tax on property sales works
The plusvalia tax on property sales is levied on the increase in value of urban real estate from the moment someone buys it until it is transferred, either by sale, donation or inheritance.
In the case of a sale, it is the seller who must pay the tax. In an inheritance or donation, it is the recipient who must pay it.
The problem is that the law assumes that, simply due to the passage of time, real estate always increases in value between the moment of acquisition and the moment of transmission. And that's something that maybe was true years ago, but it doesn't always happen anymore.
Thus, some taxpayers have been forced to pay municipal capital gains tax despite the fact that their properties had not increased in value, or even when they had decreased in value from the time of acquisition to the transfer.
That is where the problem lies: municipalities collect the tax regardless of whether or not there is a benefit for the owner who sells or inherits. For its calculation, the cadastral value is taken as a reference.
Municipalities will not return money
This is especially the case for those who bought their properties in the years of the so-called 'real estate bubble', between 2000 and 2008, when house prices skyrocketed in Spain. In many areas of the country, current prices are still lower than then.
The Constitutional Court had already ruled against this tax in May 2017 and October 2019. And its collection was declared unconstitutional when the sale did not bring any profit.
Now it is the entire calculation scheme of this tax that has been ruled unconstitutional.
Tuesday's ruling will not have retroactive effects, therefore, the municipalities will not have to return the money already paid in the sale of houses prior to the ruling.
Home sellers have to wait for the legal reform announced by the Ministry of the Treasury to know how the amount to be paid for capital gains tax in the future is calculated.