Sooner or later, in each family, it is time to carry out the transfer of assets between the children and/or other heirs. As might be expected, each asset legacy strategy carries a different tax burden. For this reason, this situation is frequently a reason for consultation. Always looking for the formula that minimizes tax expenses.
In this article, from Sky Marketing we will discuss the issue of which procedure may be more convenient when bequeathing a property: through inheritance or living donation.
What mechanisms can be used to transfer property to relatives?
Commonly, the transfer of real estate is carried out free of charge. In these cases, one of the parties assigns ownership of the property to the other, without receiving any consideration in exchange. This is the case of donation, which is an inter vivos act; and inheritance, which is an act of death.
However, there is a third less used option, for consideration, which is the sale. This option can be convenient in cases of wanting to distribute the same property among several siblings. In the event that only one of them is interested in keeping the property, he or she could acquire the property from their parents, paying what corresponds. This option can avoid complications and save time.
However, inheritance and donation in life are processes that are distinguished both in the form of execution and in the taxation they generate. In the first place, the donation must be made through a public document and before a notary public. The inheritance does not have this obligation, although it is highly recommended.
What is better, the donation in life or by inheritance to obtain tax savings?
The first thing to keep in mind is that the tax burdens associated with each procedure cannot be estimated in a general way. This is due to the local character of the tributes. In Spain, the Autonomous Communities have the competence to manage the collection and establish the regulations of local taxes that concern inheritances and donations. This means that both the rates and the reductions vary according to each Autonomous Community.
Due to this fact, it can be understood that in some Community the tax quota is subsidized -in some cases up to 99% -; while in another it is not so. The discrepancy of criteria between communities may result that for properties with a similar valuation, the tax burden is very different when following different regulations.
What is the tax base on which the tax calculation is made?
The tax base is estimated as the difference between the value of the property at the time of its acquisition and its value at the time of inheritance or donation. All properties have a value. You cannot donate a property “for free”, nor can you sell one for a nominal value. Those who receive property in inheritance or donation in life, by not paying consideration, may doubt what value to assign to it. If it is excessively low, there is a risk of being subject to a check by the Treasury and possible sanctions.
Both in donations and inheritances, the tax base must be reviewed. This becomes the real value of the property, from which the charges and deductible expenses (debts and funeral expenses) must be subtracted. Taxes are calculated by applying reductions, fees, deductions, and bonuses. Each case must be thoroughly reviewed, to apply as many reductions as possible.
What are the taxes to be paid in each case?
We must begin by remembering that there are two parties to donation transmissions: the donor and the done. Each of the parties acquires the obligation to pay various taxes.
Whoever donates must pay the donation of the property in their income tax return (IRTF), just as if they had sold it. The donor has the obligation to add a capital gain that he has not received. It is important to bear in mind that, in the event that a donor is a person over 65 years of age, and the donated property is his or her habitual residence, such capital gain would be exempt from taxation. In both inheritances and donations, the age of the heirs and the degree of kinship is usually very important when determining taxes.
The done, the subject who receives the donation, will be the one who pays the Donations and Inheritance Tax before the Local Treasury, in the form of donations. You must also pay the municipal capital gain. The heir, who receives l inheritance, also must pay the tax on gifts and inheritance, in the mode of inheritance and municipal surplus.
Inheritance tax and donations
As previously mentioned, this tribute is assigned to the Autonomous Communities. It is clear that the autonomous communities have legislated in this regard very unevenly. In this sense, the settlement of this tax varies between different Autonomous Communities.
The municipal capital gain or IVTNU
This tax applies only if the property is located on urban land. If the number of years of ownership of the property is high, and it has gained substantial value at the time of transmission, this tax can be onerous.
What tax advantages can the location of the property have?
To choose whether the inheritance or the living donation is better, it must be considered that there is a difference between the inheritance and the donation in terms of how the location of the property and the residence of the owners are private.
When donating a property, its location is very important. In these cases, the tax is settled in accordance with the Autonomous Community in which it is located. It is necessary to keep this aspect in mind, as it is possible that in the CCAA. in which the owner of the property resides, a tempting bonus to the ISD is contemplated, but that is not attractive in the CCAA. where the property is located, which is the one that applies.
In the case of an inheritance, the inheritance tax will be settled in the CCAA in which the deceased resided. This is regardless of the location of the property, or where the heirs live. In this case, the deceased’s habitual residence is the one in which he/she lived the longest in the last five years prior to the time of death.
How does the degree of kinship influence taxation in the case of inheritance?
Another aspect to take into account when assessing whether the inheritance or the donation in life is better is the degree of kinship of the beneficiaries. State law contemplates reductions in taxes that vary according to the degree of kinship, so it applies to the entire national territory. In addition, the CCAA can add additional bonuses to those established by the state, the most advantageous being those that apply in cases between parents and children or spouses. Again, although Group I is the most benefited by bonuses, it must be taken into account that this benefit also varies enormously between different Autonomous Communities.
The degrees of kinship have been classified into four groups. Thus, Group I includes direct descendants, be they by consanguinity or adoption, under 21 years of age. Group I is awarded the highest kinship bonuses. In Group II are included the ascendants, either the parents by consanguinity or adoption and the spouses. In Group III are included the relatives in the second degree and third degree, that is, brothers or uncles and nephews. Finally, group IV includes cousins and distant relatives.
When answering what is better between inheritance or living donation, we must bear in mind the value of the property. It is necessary to consider a list of additional factors such as the age of the heirs, or the degree of relationship, among others. It also counts if it is going to be used as a habitual and permanent home. Special consideration is given to people with physical, mental or sensory disabilities, who will enjoy the highest reductions by state law.
As you can see, deciding between inheritance or living donation requires expert advice. At Sky Marketing we will help you assess all the circumstances that count in your specific case. Contact us!