Tax rises in the Balearics for 2016
By Armin Gutschick y Anja Sämann-Gutschick
As from the 1st of January, the Balearic Government has raised some taxes, affecting the Property Transfer Tax that has to be paid when buying a property, the Inheritance Tax and the Property Tax, amongst others.
The Property Transfer Tax (ITP in Spanish) is a state tax but it is collected by the Administration of each Autonomous Community (in our case, the Balearic Islands). It is the buyer who must pay it and it is calculated based upon the real value of the property. The minimum rate is still 8%, but from now on it will increase progressively up to 11%.
Up to 400,000 € will be taxed at 8%,
from 400,000 to 600,000 €, at 9%,
from 600,000 to 1,000,000 €, at 10%,
and from 1,000,000 €, at 11%.
For example, if you buy a property that has a real value of 720,000 €, you will have to pay 62,000 € for ITP, since the first 400,000 will be taxed at 8% (32,000 €), the next 200,000 at 9% (18,000 €) and the remaining 120,000 at 10% (12,000 €).
Taxes for new builds, however, have not changed. If you buy a new home directly from the builder, instead of the ITP a 10% VAT will be applied. In this case, we must add a 1.2% Documented Legal ActsTax, so when someone is buying a new property directly from the builder the total tax to be paid will be 11.2%. A tip: in some circumstances, you can alternatively transfer the property by dissoluting the joint ownership, thus avoiding paying ITP and only paying for the Documented Legal Acts Tax, which is to say 1.2% of the real value.
Inheritance Tax goes up in 2016 for those inheritances whose value is above 700,000 €. Up to now, first-order heirs (children, parents) who are EU citizens generally paid 1% tax for their inheritance. The amount of 25,000 € that is exempt for first-order heirs has not changed. From 2016, however, tax rates will be different according to the amount of the inheritance.
Up to 700,000 € will still be taxed at 1%
From 700,000 € to 1,000,000 € will be taxed at 8%
From 1,000,000 € will be taxed at 11%
From 2,000,000 €, at 15%
From 3,000,000 €, at 20%
A tip: there is the alternative of passing property on to direct relatives (children, parents) by means of a donation while the owner is still alive, which is taxed at 7%. It is not clear whether the inheritance agreement for Ibiza is valid only for Spanish residents who reside in Ibiza, or whether, based on the new European inheritance regulations, it is also applicable to non-resident EU citizens (except those from the UK, Ireland and Denmark). In our opinion, it should be, and therefore, if there is an inheritance agreement between first-order relatives, in Ibiza the inheritance would be taxed only at 1%. Compared to the donation alternative, this means a tax savings of 6%. However, in order for this to apply, it is required that the legal form that is an “inheritance agreement” be legally regulated in the country of origin of both parties.
The Property Tax is also maintained during 2016, but the amount that is exempt is reduced from 800,000 € to 700,000 €. Non-residents will only have to pay tax for their properties if their value exceeds that amount. It is a progressive tax whose rate goes from 0.2% up to 2.5%. For real estate, the Property Tax is determined by taking the highest of the following values: the sale price that appears on the deed, the cadastral value or the value that the tax office reports.
A tip: one useful alternative in order not to go over the exempt amount of 700,000 € may be to buy the property between various buyers. And if the purchase is financed with a mortgage, it can be deducted.