The new Donations or tax on Gifts in Andalusia… is it that good?
The Spanish Donations tax is regulated in the same Law as the Inheritance tax.
Both taxes have experimented notorious changes in Andalusia. The successions and inheritance tax are taxes that, despite being primarily regulated by a national law, they can be also regulated by laws passed by the autonomous communities of Spain (Andalucía, Catalonia, Balearics, Canary Islands, Madrid, etc).
Most of the Spanish autonomous communities, have expensive inheritance and donations tax but Andalusia has moved to make this tax affordable not only for locals but also for foreigners.
It was in December 2018 when the inheritance was reduced in a way so heirs must inherit assets valued above one million Euro (1.000.000,00 €) to pay inheritance tax. Note that we mean those cases where the heirs are direct relatives (wife, descendants or ascendants, not cousins, uncles or grandchildren as an example).
This is an incredibly good progress since most of the cases heirs inherit far more less. We can then conclude that the inheritance tax should not be a worry for most of the property owners in the future.
And how about the Donations or tax on gifts? Should a father wait for the better life to leave assets to direct relatives? In principle this option was very expensive.
Having said this, I can report that since May this year the Donations Gift could be a very good option since the tax to pay has been reduced a 99% when the beneficiaries of the gifts, same as happens in the inheritance tax, are direct relatives.
However, this could be a tricky matter. I will explain why. If you are planning to make a gift it will be worth to organize it in a smart way since the person making the gift could end paying a lot of tax.
The gift tax is a gift to be paid by the beneficiaries but the transfer of property through a donation can carry a heavy load of taxes for the person making the gift.
So, let’s go through the matter with an example and try to set up the donation in a cost and tax-efficient way.
What are the tax implications?
1.- PLUSVALIA TAX.
This one is unavoidable.
Every time a person transfer property may it be against a consideration (charging a price), in an inheritance process, under a divorce scenario or in any other way (there are exceptions, i.e. when the resale of the property happens when owned for less than year and only a few more cases) this tax become payable.
The amount of the tax depends on the number of years that the property has been owned so the longer it has been owned, the higher that the tax is.
I would say that the final decision to make the gift will or will not be taken because of this tax since usually is not that high.
2.- PERSONAL INCOME TAX
As said, donations in ANDALUSIA are almost tax free since May 2019. The tax has been reduced a 99% so finally what only a 1% of the tax that should be paid.
Lately there are many donations been done but the vast majority of the people ignore that could end paying an expensive tax: the capital gains tax (19%)
But why? Where is the gain subject to tax?
This may look like unreal but it is very real. When a person owns a property there is a latent increase of value as the time passes that the Government is expecting to tax any time in the future. The fact that the deed of Donation is not taxed it does not mean that the Government may forget about that latent property value increase whilst remaining in a person’s wealth.
This is when making numbers becomes necessary. Let’s go with the example.
Lets put the case of a father that wants to gift his Spanish property to a descendant. He purchased the property originally in 550.000,00 €
Now we have to consider how to draft the donations deed. There is an essential point in it: the value. By law, it is required to give a value to the gifted good so what value should we say? The market value? Use the original purchase value? Half of the acquisition value?
If the value is too low then the Government will send an extra bill of taxes since in Spain we have a minimum transfer value that is set out by the Law.
In Andalusia, this minimum transfer value can be calculated at this website from the regional government using the value at the IBI tax bill:
In Valencia and Alicante this value could be obtained at this website, using the SUMA bill:
If the value is high (or higher than the original acquisition price), the father will have a gain taxable as a capital gains tax based on the difference between the acquisition price and the value given at the donations deed to the gifted good.
So, what we have to do is to, in principle, use the minimum transfer value. Let’s say for argument sake that we do a search at the official website and it gives us a minimum value of 400.000,00 €
The success using the minimum transfer value in this case seems is clear: there won’t be any gain since the donation / gift value is lower than what the father paid for the property… But watch out!
In the other hand we have to consider that, if we use the cheapest / lowest possible value possible – additionally to be inspected if we use a value below the minimum transfer value – then the father will be leaving a tax issue for the future for his son since it is expectable that the property price grows in the future. So, if we use a very low value today then, when the descendant sells the property in the future, will end with a higher capital gains tax.
Conclusion: This is the most important part of the matter. Though there is no tax on the gift, as seen at the case it can end terribly bad with a very high tax bill for capital gains tax to pay. However, if it is correctly done, it could be very convenient and work tax efficiently for the family.
3.- DONATIONS TAX
We start from the assumption that the descendant hasn’t got any assets in Spain or having them, the total value is below 1.000.000,00 €.
Finally, it would be appropriate in this case to use as donation value the amount of 525.000,00 €. This value is still below the original acquisition value so no capital gains tax to pay but still high enough to help the descendant to reduce the future gain when selling.
Now, we calculate the tax according to the Laws of Andalusia. After doing the numbers the tax to pay would be 120.730,71 €.
As said before, this tax has been reduced a 99% (again, allowed by the local Laws of Andalusia since May this year only) so the final amount to pay would be 1.207,30 €…isn’t it good?
What are the total costs then? Well the total costs then will include Notary fees, Land register fees, legal fees and the plusvalia tax. We will be pleased to assist you if you are interested in a donation or gift making a calculation of all the associated expenses and taxes.