Increase of previous years Council Tax (IBI) for undeclared constructions

When you own a property in Spain, it’s crucial to ensure that all constructions, including any extensions or modifications, are properly declared to the Cadastre (Catastro), the official register of property for tax purposes. Failing to do so can lead to unexpected tax adjustments and financial liabilities, particularly when you decide to sell the property. Let’s delve deeper into the process and implications of declaring undeclared constructions, and why it’s important to be aware of potential backdated Council Tax (IBI) adjustments.

Understanding the Cadastre and Council Tax (IBI)

The “Cadastre”(Catastro) is the official register where property details, including size, location, and use, are recorded for taxation purposes in Spain. The information in the Cadastre is used by local authorities to calculate the “Council Tax (Impuesto sobre Bienes Inmuebles – IBI)”, which is an annual tax paid by property owners.

The amount of IBI you pay is based on the cadastral value of the property, which reflects its size, type, and any other relevant characteristics.

Importance of Declaring Property Extensions

When you build an extension on your property, such as adding a new room, a garage, or any other significant modification, it is legally required to declare these changes to the Cadastre. This declaration ensures that the property’s cadastral value is updated to reflect the new construction, which will, in turn, adjust the IBI accordingly.

Potential Issues with Undeclared Constructions

If you fail to declare an extension or modification to the Cadastre, the IBI will continue to be calculated based on the outdated information (i.e., the property size and features before the extension). This underreporting can lead to several issues:

1. Backdated Tax Adjustments:

– When the undeclared construction is eventually discovered, whether during a sale or through a regularization process, the Cadastre will update the property’s records to reflect the actual size and features of the property.
– The local tax authorities may then reassess the IBI for the past few years, typically up to four years, and demand the difference in tax payments that should have been made based on the correct property size.

2. Example Scenario:

– Suppose you bought a house 10 years ago with an original size of 100 m², and you’ve been paying an annual IBI of €300 based on this size.
– Seven years ago, you added an extra 15 m² by building a new room, but you did not declare this to the Cadastre.
– If the Cadastre now updates the property records to 115 m², and the IBI for this size should have been €450 per year, the authorities could charge you the difference (€150 per year) for the past four years. This could result in an additional tax bill of €600 (€150 x 4 years).

3. Impact on Property Sales:

• If you decide to sell the property, this undeclared extension often comes to light when the buyer’s solicitor checks the property details against the Cadastre records.
• It’s common for sellers to leave the declaration of such extensions until they are about to sell the property. However, this can lead to complications, as the buyer may face an unexpected tax bill after the purchase due to the backdated IBI adjustments.
• To protect themselves, buyers should ensure that the seller has declared all extensions and paid any outstanding IBI before completing the sale. If there’s a risk that the property was not properly declared, the buyer might need to withhold a portion of the purchase price to cover any potential tax liabilities that may arise from the undeclared construction.

4. Legal and Financial Safeguards:

• Buyers should work closely with their solicitors to verify the property’s cadastral status and ensure there are no undeclared constructions. If there are, the solicitor should organize a retention (a holdback of a portion of the purchase price) to cover any future tax liabilities.
• Even if the seller provides a receipt showing the current year’s IBI is paid, buyers should still be cautious. If the property was recently updated in the Cadastre to include previously undeclared extensions, there might be an additional tax liability that hasn’t been invoiced yet by the authorities.

Conclusion: Importance of Due Diligence

When dealing with property transactions in Spain, both sellers and buyers need to be vigilant about the declaration of property extensions to the Cadastre. For sellers, it’s advisable to ensure all extensions are declared well before putting the property on the market to avoid last-minute complications. For buyers, it’s essential to conduct thorough due diligence, including verifying the property’s cadastral status, to avoid unexpected tax liabilities.

By taking these precautions, you can avoid financial surprises and ensure a smoother property transaction process. Always involve a qualified solicitor who can guide you through the complexities of Spanish property law and help you manage any potential risks related to undeclared constructions.

TLACORP SLP