Spain's Law 26/2014 removed inflation adjustment from municipal capital gains tax

Law 26/2014, passed in November 2014, abolished the reduction coefficients that adjusted Spain's municipal capital gains tax for inflation, meaning that since 2015 tax is charged on the nominal increase in land value rather than the real one.

**Law 26/2014**, of 27 November, changed the way the Tax on the Increase in Value of Urban Land, commonly known as the municipal capital gains tax (plusvalía municipal), is calculated. Until it came into force, the calculation applied reduction coefficients that adjusted the increase in land value according to the number of years since the purchase. In practice, those coefficients served to correct the effect of inflation. The law removed them.

## What exactly changed in the calculation

Before 2015, the increase was calculated by multiplying the cadastral value of the land by a percentage that grew with the years of ownership. That percentage already included an implicit correction. The law removed that correction and left a system of fixed annual percentages. The result: the tax applies to the nominal increase in the land's value, without deducting the inflation accumulated during the years the owner held the property.

In a period of high inflation, the difference between nominal and real gains can be enormous. A flat bought for **100,000 euros** and sold years later for **150,000** may have gained little or nothing in real terms, but the municipal capital gains tax is still calculated on the increase in the cadastral value of the land, which need not reflect the sale price.

## Who pays and why it is disputed

The tax is paid by the seller. It is calculated on the cadastral value of the land, not on the price of the property. That means two flats sold at the same price can be taxed very different amounts depending on the cadastral value of the land of each one. In municipalities with high cadastral values, the bill skyrockets.

The law was passed by the government of **Mariano Rajoy**, with **Cristóbal Montoro** as Finance Minister. The law was part of the 2014 tax reform. Since then, the tax has become one of the recurring complaints of property sellers, especially in periods of high inflation such as the one that trinc 2021.

## The effect on property investment

The municipal capital gains tax is only a local tax. To it is added the national capital gains tax under personal income tax (IRPF), which is also calculated on the capital gain. Together, selling a flat with a modest nominal gain can end up generating a tax bill that eats up much of the profit. This happens above all when inflation has eroded the purchasing power of that gain.

The perception that property investment in Spain is a fiscal ruin has its basis in this design. The tax is not confiscatory in all cases, but it can be in specific transactions where the nominal increase is high and the real increase is low or zero. The law does not distinguish between the two.

If you are thinking of selling a property, it is advisable to calculate the municipal capital gains tax before setting the price. Consult a tax adviser.