Personal Income Tax Reform: what you need to do before the 31st December 2014
This is the time when you need to think about how to pay less tax when submitting your next Income Tax Return. Enjoy tax benefits which will disappear from the law, from our memory and, what is worse, from our pocket.
In one month and a half, the 2014 tax year will have finished and also the opportunity to exploit to the full the advantages offered by what it will then become the old Personal Income Tax Law on the 1st of January 2015.
It is the time to think about how to pay less tax on your next Personal Income Return. Please bear in mind that to deduct the contributions that you make to a pension plan, to sell or to give a property, to sell a flat or to benefit from a dividends concession, it will no longer be the same from next year onwards.
You should know that although it is true that the Personal Income Tax will generally imply for most of tax payers a lower taxation, some new elements may also increase the amount of tax that you may end up paying. We advise that within the last months of 2014 you adapt yourself to these changes, in order to avoid paying more tax and to reduce the impact that the suppression of deductions and exemptions may have in your annual return. Below you will find some hints:
- To sell or to give property
If you have planned to sell a property, it is better in tax terms that you do it within 2014, since the new law that the Spanish Inland Revenue has drafted pursues to put an end in one go, from the 1st January 2015, to the two instruments that have traditionally been used to reduce the tax burden on any capital gains obtained from the increase in value of property at the time of sale: the abatement coefficient and the inflation adjustment factor.
The Government’s law reform bill relating to Personal Income Tax includes a change in the taxation of capital gains, which in practical terms will involve tougher tax measures for those selling a property. So the older the property is, the higher the tax burden will be.
In order to illustrate the situation we provide the following example, which might be real if you do not do anything about it:
With the law that is currently in force, if for example you bought a property in 1998 for €120,000, upon having taken into account inflation for personal tax income purposes, the price of that property would be €156,492. So if the property is sold in 2014 for €180,000 you would pay tax on the difference between €180,000 and €156,492, that is to say, on €23,508.
If, from the 1st of January 2015 the inflation adjustment factor disappears (which is determined on an annual basis pursuant to certain coefficients that the Spanish State Budget Law provides), tax may be applied on the difference between the sale price (180,000) and the purchase price (120,000), i.e. €60,000.
We will look strictly to the numbers, which is what matters in these cases, if the property is sold before the 31st December, you, as tax payer, will have to pay €5,171 euros for Personal Income Tax. But if it is sold after the 1st January, you will pay €13,056. That is to say €7,885 euros more, even though the tax rate has decreased.
But the Government reform goes further, since it does not only eliminate the inflation factors, but it also abolishes other elements that are also used to reduce capital gains tax for owners of property (shares and other types of assets) purchased before 1994: the abatement coefficients.
Until now, in order to calculate the profit obtained from the sale of a property, a reduction coefficient used to be applied (the abatement coefficient) in order to adjust any changes in the price. Now, these coefficients will disappear and it will be calculated on the difference between the sale price and the purchase price. So anyone selling after the 1st of January a property that was purchased at least 20 years before, that is to say before 1985, will have to pay up to 55% more for this, unless they complete the sale before the 31st of December 2014.
Let’s see another example: As a result from this reform, a property that was purchased in 1980 for €12,000 euros and that will be sold next year for €220,000 euros will be taxed on the total amount considered for capital gains purposes (the €208,000 difference between the purchase and the sale price), which means that €45,260 will be paid as tax.
But, if the property is sold before the end of 2014 it will be taxed on a lower capital gains amount, since the abatement coefficients until 1996 and the inflation adjustment factor apply.
Not withstanding the aforementioned and taking into account that in 2015 the rates applicable to savings are reduced (20, 22 and 24% as compared to the present 21, 25 and 27%), as a rule of thumb it will be more convenient to sell any property that has been purchased after 2004 in 2015.
But, such tax toughening will not affect properties used as habitual homes. In that case any capital gains obtained will continue being tax free, provided that they are reinvested by the tax payer in a new habitual home.