The Courts of Justice Challenge the current value verification process for real property undertaken by the authorities

1.Introduction.

Recent Court of Justice rulings have challenged the legality of the current value verification process undertaken by the authorities, following the purchase of property, after considering that the property’s value cannot be determined by means of an automatic application of the rateable value and the municipality’s corresponding update coefficient, but rather that an expert’s individual property assessment is necessary.

2. What is value verification and when does it take place?

Given the current situation of the property market in Spain, it is quite common for the purchase of a property to be made at a price, which is lower than the real property value stated by the authorities, thus affecting the total Tax on the Transfer of Assets to be applied to the purchase.

With regards to the real value of the property, the authorities maintain that the value applied is the rateable value, updated according to the update coefficient of the municipality where the property is located. Therefore, should the purchase price of a property be higher than the real value, no problems arise regarding the taxation on the purchase, seen as the tax base used to calculate the tax is determined by the price established in the property deed. Problems arise when the purchase price is lower than the real value stated by the authorities, which leads to the authorities possibly initiating administrative procedures concerning the verification of the property’s market value. This procedure usually ends in an additional tax settlement for the buyer, thus increasing the amount of tax, which the buyer had originally intended to pay upon purchase of the property.

The value verification procedures mentioned above, have been pacifically interpreted by several rulings handed down by the Courts of Justice, having given rise to legal disputes between individuals and the authorities, especially regarding the absence or lack of statement of reason for the procedures. The final aim of these procedures is to determine the market value of the purchased property in order to calculate the tax applicable to the purchase.

The value verification procedure initiated by the authorities is based on their own experts’ opinion or report in order to calculate the property’s market value. However, these experts tend to use generalised and standard criteria, which make it difficult for individuals to contest. In addition, they are protected by the authorities due to the legal presumption of veracity and legality, which usually entails the rejection of proceedings or actions taken against the authorities.

Nevertheless, it is worth mentioning that there has been a recent turn of events in terms of the criteria maintained by the courts of justice regarding the value verification procedures undertaken by local authorities. The compliance of requirements and pre-requisites, which have been legally established in order to declare the authorities’ verification as valid, has become stricter.

3.Experts must visit the property in order to conclude an assessment.

The Contentious-Administrative Division of the Supreme Court, in a recently handed down sentence dating 29 March 2012 (appeal in the High Court 34/2010), demands that that the experts employed by the local authorities physically visit the property in order to complete the report or assessment, should they wish to make reference to the property’s conservation state or construction quality. If they fail to do so, the assessment would be considered to be lacking statement of reason or justification. Most experts do not visit the property, and this new criteria therefore leads to a new reason for which to contest the authorities’ verification with some chance of success.

4. An individual assessment of the property is necessary, as an automatic application of updated rateable values is not valid.

In addition to the recent criteria established by the Supreme Court, there is a recent and so far minority doctrine in the Courts of Justice, which takes a step further regarding the requirements on reason and justification for the experts’ reports or assessments on the value verification and subsequent additional tax payment. This can be found in the recent sentence handed down by the Contentious-Administrative Division of the Supreme Court of the Autonomous Community of Valencia dating 1 October 2013 (JUR 2013/323641).

Following this judgment, the Supreme Court of Valencia has added a new twist to the value verification procedures undertaken by the authorities, as it expressively demands that experts perform an individualised assessment of the property in order to determine its market value, and that they can no longer apply generalised and standard criteria that stem from information found in official registers, such as the Land Registry Office, which is what usually happens when the updated rateable value is automatically applied, making it difficult for individuals to contest.

According to this Division, there is a difference between the Property Tax or the Tax on Increase in Urban Land Value, where the tax base used for the calculation of both taxes is determined by means of collective administrative management (the official table of property rateable values), and the tax on property purchases (Tax on the Transfer of Assets and the Inheritance and Gift Tax), which requires an expert’s individual and specific assessment of the property in question in order to determine the market value.

5. Conclusion.

We insist that this is so far a recent and minority doctrine. Nonetheless, it is clear that the courts of justice are gradually taking on board the problems that arise as a result of the existing discrepancy between the purchased property price, given the current situation of the property market, and the standard property value established by the authorities by means of the automatic application of updated rateable values. This practice is clearly harmful to the buyers’ economic interests, as they find themselves having to pay tax on a larger amount than they had foreseen and calculated according to what they had actually paid for their property.

Estepona, 14 January 2014

Francisco Leyton Jiménez
Pérez de Vargas Abogados.