Until quite recently, under-declaring the real sale price of a property was a national sport in Spain and was particularly popular in Tenerife. Essentially, a lower price was declared on the official paperwork and the balance typically changed hands in cash. The buyer would then only pay the 6.5% stamp duty purchase tax on the lower amount and the seller would evade Capital Gains Tax liability on part or all of his profit margin upon sale. Typical reductions on the declared price were between 10% and 25%, but in some cases, people were under-declaring by anything up to 50%. Needless to say, the practice was, and still is, illegal.
By and large, the practice has died out, or at least substantially reduced, for two reasons. Firstly, since property prices plummeted after 2007, fewer sellers had such a large profit on their properties that required reducing or hiding from Capital Gains Tax. Secondly, the tax office now actively monitors declared sale prices and compares them against typical open market values. Where they consider that the sale is at a price below the market norm, they now issue notifications to buyers asserting an under-declaration and imposing their own suggested market valuation (together with a tax demand for the resultant unpaid tax). The onus is then on the buyer to satisfy the tax office that the declared price is genuine (e.g. by disclosing estate agent advertisements, correspondence, bank records etc etc.) Even if your declared purchase price was genuine, proving it can be a messy, expensive and time-consuming process with no guarantee of success.
As a result, most reputable lawyers and advisers now recommend that clients give some thought to whether the stated purchase price is likely to be deemed ‘at an undervalue’ by the tax office. The only official way to establish this is to request an ‘official valuation’ from the taxman.
The advantage is that if the parties then declare that stated price (which could even be below the actual sum changing hands) then there is no way the tax office can later challenge their own figure.
However, the downside is that the valuation could be higher than the proposed sum to change hands. Where an official valuation has been obtained, the taxman will almost certainly consult that valuation when reviewing the purchase deed. Plus, obtaining the valuation will obviously incur additional fees, not to mention a typical turnaround time of around 8 weeks. Hence, if buyers wish to obtain an official valuation, it is recommended to request this the moment a deposit is paid for the purchase. Shrewd buyers may also insist on a clause in the contract giving them some leeway or indemnity from the seller in case the official valuation comes back substantially above the agreed price.