How to Value an Inherited Property for Inheritance Tax

The Cadastral Reference Value as a Minimum Tax Base

Since 1 January 2022, the main reference for calculating Inheritance and Gift Tax is no longer the real value or the market value freely declared by the heirs, but the Cadastral Reference Value (Valor de Referencia del Catastro).

It is important to distinguish between three key concepts that frequently cause confusion among taxpayers:

• Valor Catastral (Cadastral Value): This is the figure set by the Cadastre that serves as the base for the annual collection of Property Tax (IBI). It has no direct relationship with current market value.
• Valor de Referencia del Catastro (Cadastral Reference Value): This is the figure determined annually by the Directorate-General for Cadastre based on notary-signed sales data. This value acts as the mandatory minimum tax base for calculating Inheritance and Gift Tax and Property Transfer Tax (ITPAJD).
• Valor de Mercado (Market Value): This is the actual price for which the property could be sold on the open market between independent parties at a given time.

If the inherited property has a Cadastral Reference Value assigned by the Directorate-General for Cadastre, this will act as the minimum tax floor. If the heir declares a figure below this value in the deed of acceptance and allocation of inheritance, the regional tax authority will automatically apply the corresponding regulations, requiring a tax adjustment along with late-payment interest.

Methods for Valuing an Inherited Property

To approach the process of valuing an inherited property with legal and tax guarantees, several routes exist depending on the type of property, its location, and the heir's medium- and long-term goals.

1. Direct enquiry on the Cadastre Electronic Office

For most residential urban properties, the first check consists of accessing the Cadastre Electronic Office using a digital certificate or the Cl@ve system. By entering the property's cadastral reference and the tax accrual date (which corresponds to the deceased person's date of death), the platform issues an official certificate indicating the property's Cadastral Reference Value for that financial year.

2. Official valuation approved by Banco de España

When the property does not have a Cadastral Reference Value (common in properties with special characteristics, unsolidified plots or unique planning situations) or when aiming to challenge the official figure, a formal valuation must be commissioned. This valuation must follow Order ECO/805/2003 and be conducted by a valuation company approved by and registered with Banco de España.

3. Expert report or real estate market study

If the heirs' intention is to agree on the division of the estate among several co-beneficiaries or prepare the property for immediate sale, an expert market study will provide the probable real transaction value. This document evaluates the property's state of repair, interior layout, floor height, orientation, presence of a lift, and recent comparable transactions in the same area.

Tax Strategy: Inheritance Tax versus Future Personal Income Tax (IRPF)

There is a misconception that declaring the lowest possible value when valuing an inherited property is always the most advantageous option. However, rigorous analysis demonstrates that the strategy depends directly on the regulations of the Autonomous Community where the property is located and the heirs' intention to sell.

In several autonomous communities, allowances of up to 99% exist on the Inheritance Tax payable for descendants, spouses and ancestors (Group I and Group II). Under these circumstances, assigning a market value higher than the Cadastral Reference Value in the deed (provided it is duly justified and supported) will not generate a significant tax cost at the time of inheritance.

Conversely, assigning too low a tax value will substantially increase the capital gain when selling the property in the future. Personal Income Tax (IRPF) taxes the difference between the transfer value (sale price) and the acquisition value (value stated in the inheritance deed plus expenses and taxes paid). Declaring an updated acquisition value drastically reduces the tax impact when selling the property.

Valuation of Subsidised Housing (VPO) in the Comunidad de Madrid

When the property being transferred is official protection housing (VPO) or public protection housing (VPPA, VPPB) located in the Comunidad de Madrid, its tax and market valuation is subject to specific legal conditions.

In the Comunidad de Madrid, properties under public protection regimes cannot be transferred or allocated for a value higher than the maximum legal sale price set by the official standard in force from the regional housing department. This maximum price acts as an unsurpassable limit, prevailing over open market estimates.

To determine the value of an inherited VPO in Madrid territory, it is essential to request the property's qualification and the corresponding maximum price certificate from the Housing Directorate-General of the Comunidad de Madrid. Attempting to enter a value higher than that established by regulation for protected housing can lead to administrative sanction proceedings, as well as complications when formalising public deeds.

What to Do When the Cadastral Reference Value Exceeds the Real Market Value

It is relatively common to find inherited properties in a poor state of repair, with structural issues or with unlawful occupants, that have a cadastral reference value manifestly higher than the real price for which they could be sold. Since the Cadastre algorithm applies generic area coefficients, it fails to detect interior deterioration of properties.

If the heirs consider that the Cadastral Reference Value does not reflect the property's real situation, tax legislation does not allow for challenging the cadastral valuation in isolation. The legal route requires following this procedure:

1. Option A (Prudent): Settle the Inheritance Tax applying the official Cadastral Reference Value to avoid immediate surcharges or penalties. Subsequently, submit a request for rectification of the self-assessment and refund of undue payments, accompanying an expert report proving the lower real value.
2. Option B (Risky): Declare the lower real value in the self-assessment (supported by an official ECO valuation or solid expert evidence). The tax authority will initiate a value verification procedure, after which an appeal for reversal or the relevant economic-administrative claim must be lodged.

Key Aspects for a Secure Inheritance Allocation

To guarantee appropriate asset management when valuing an inherited property, it is advisable to follow these recommended steps:

• Obtain the descriptive and graphic cadastral certificate to verify that the actual surface area matches registered records.
• Request a Land Registry extract (nota simple) to check for pending charges, easements or tax liabilities.
• Assess the state of the property through a technical inspection prior to signing the deed of partition.
• Analyse the applicable regional exemptions and allowances before finalising the allocation value at the notary.

Having a team with comprehensive knowledge in real estate and taxation is essential to optimise overall tax liability and avoid future disputes with tax authorities.

Sky Real Estate offers a comprehensive technical service backed by the expertise of the Sky Law legal department, awarded in the European Legal Awards 2023-2025, and with the regulatory accreditation of the entity as a Real Estate Credit Intermediary D-286 of Banco de España. To obtain an accurate study of your assets, we invite you to request a professional property valuation.