When is it beneficial to donate your property in Andalusia?
Consider whether it might be more beneficial to anticipate a possible change in tax legislation by donating your property in Spain. Can I save money by passing on my property to my loved ones in Spain? In this article we will give you a brief introduction to lifetime donations in the autonomous community of Andalusia.
Buying a property in Spain is not only a significant investment, but also the creation of a legacy for your loved ones. When the question of how to pass on a property arises, the donation emerges as an attractive option, especially in the context of estate planning. However, it is essential to carefully consider the legal and tax implications that may affect your beneficiaries.
It is essential to bear in mind that the gift may entail tax obligations, which vary depending on the autonomous community of Spain and the circumstances of each individual. In Andalusia, for example, reductions and bonifications are applied, but it is not correct to assume that they are totally tax exempt. It is important to underline that these bonifications, currently a considerable tax saving measure in most cases, can be eliminated from one year to the next, so it is advisable to take advantage of them while they are still in force.
Inter vivos donations in Spain
When considering the lifetime donation or “inter vivos” gift of real estate in Spain, it is important to understand that there are different types of donations, each with its own legal and tax implications. At Cumbre Villas, in addition to being leaders in luxury real estate brokerage, we have a team of experts offering estate and tax legal advisory services to help you identify the most suitable option. In this article, we present the two most common types of donations, which are usually the most advantageous for our clients.
1. Donation of the full domain of a property
A gift of the full domain of a property implies the complete and absolute transfer of ownership of an asset to another person, without any reservations or limitations. In this type of donation, the donor transfers to the donee both the bare ownership and the usufruct, granting him or her all the rights over the property. This means that the donee is free not only to use and exploit the property, but also to dispose of it as he or she wishes. This includes the right to sell of or even modify the asset, without requiring authorization from the donor or any third party.
Advantages
Full transfer: The donee obtains full ownership of the asset, allowing him or her to use, modify or sell it without restrictions.
Simplicity: This type of donation is easy to understand and manage, as there are no rights reserved by the donor.
Avoids future disputes: By transferring full ownership, the chances of disputes over the use or enjoyment of the asset are reduced.
Savings on inheritance: Making the donation while alive may allow heirs to avoid certain taxes or expenses that they would face should the law be less fiscally beneficial to them at the time of the donor’s death.
Flexibility in estate planning: The gift allows the donor to reorganize his/her assets during his lifetime, distributing his estate according to his/her wishes without having to wait for an inheritance transfer.
Disadvantages
Tax burden: A gift of the full domain may result in a significant tax burden for the donor, depending on the value of the asset and the value for which it was acquired. In such cases, the donor may have to pay a high Capital Gains Tax. This is especially the case when the value of the property has increased significantly since it was acquired. It sounds strange that someone who donates an asset for free has to pay Capital Gains Tax, but unfortunately this is the case. This tax is only avoided in inheritances.
Loss of control: Once the gift has been made, the donor loses all rights to the property, which can be problematic if his or her personal or financial situation changes in the future.
Taxation in Andalusia
Although it might initially be thought that by donating the full domain of a property, the donor could benefit from a 99% reduction in the payment of Inheritance and Gift Tax in Andalusia (if certain conditions are met), the reality is that Capital Gains Tax is still applicable. This is because, for tax purposes, the donation of a property is considered a transfer of assets and is counted as if there had been a sale with a financial gain.
For example, if the donor acquired the property for a value of €300,000 and the current reference value is €600,000, the tax authorities will consider that there has been a capital gain equal to the difference between the acquisition value and the current reference value, i.e., €300,000—even if the donation is for free. From this amount, the acquisition cost, the cost of the donation itself, and certain invoices for improvements can be deducted. This capital gain will then be taxed, requiring the donor to pay the corresponding tax as if there had been a sale with a gain.
This is an important aspect to consider when planning a donation, as Capital Gains Tax can be a significant cost that is often overlooked when assessing the tax benefits of a gift. In such cases, it may be more appropriate to sell the property to secure the funds needed to pay the Capital Gains Tax, or to wait for the acquisition by inheritance (thus avoiding Capital Gains Tax), bearing in mind the uncertainty of the Inheritance Tax applicable at that time.
2. Donation of the bare ownership with reservation of usufruct
The gift of the bare ownership of the property with reservation of usufruct allows the donor to retain the right to use and enjoy the property for as long as he or she lives. In this case, the donor transfers the bare ownership (i.e., the ownership of the property without the right to enjoy it) to the donee, but retains the right of usufruct.
Advantages
Preservation of use: The donor can continue to enjoy the asset, receiving income or benefiting from its use, while the legal ownership is transferred to the donee.
Fiscal optimisation: This modality can be fiscally advantageous, as the donation of the bare ownership can have a lower tax impact than the donation of the full domain in terms of Capital Gains Tax, while the donor also maintains the current expenses of the property and the obligation to pay taxes.
Wealth protection: Allows the donor to secure the use of the asset during his or her lifetime, preventing it from being diverted to other hands.
Facilitates the complete transfer of the property: In the event that the donor wishes the donee to have full ownership of the property, it is sufficient to renounce his or her right of usufruct, which is a simple and quick procedure that facilitates the complete transfer of the property when the donor deems it appropriate. This renunciation constitutes a taxable donation, it is considered as a donation from the usufructuary to the bare owner.
Disadvantages
Limitations in the event of a sale: The sale of the property cannot take place without the consent of both the donor and the donee, as both have rights to the property. In case the sale is agreed, each party (donor and donee) would receive a proportion of the total value of the transaction corresponding to his or her right. The usufructuary (in this case, the donor) would receive a percentage of the value of the sale, calculated according to his or her age, and this percentage would never be less than 10% of the total, thus ensuring participation in the profits of the sale.
Limitations in the case of improvements: The donor, as usufructuary, is obliged to maintain the property in the same state in which he received it. This implies that any significant modifications to the property must have the explicit consent of the bare owner (donee), which may limit the freedom of the usufructuary to make significant changes without the approval of the bare owner.
Taxation in Andalusia
In this type of donation, when the usufruct is extinguished due to death, Gift Tax is paid on the remaining value of the usufruct, with a minimum value of 10%, applying the bonification in force at the time of the donation—which is currently 99% in Andalusia (for most cases). Although the same allowance is currently applied to inheritances, there is no certainty that it will be in force in a few years’ time. Therefore, if the idea is to keep the property in the family and avoid paying more taxes in the future, donating the bare ownership may be the most prudent option at this time.
Taxation framework of donations in Andalusia
When considering a property donation in Andalusia, it is essential to understand the tax implications of the process. Donations are subject to Inheritance and Gift Tax, the calculation of which is based on the actual value of the donated property. However, Andalusia offers a favourable framework that includes various reductions and bonifications that can significantly alleviate the tax burden.
Taxable base: The value of the taxable base is determined by the real value of the property (the minimum value to be declared is set by the reference value), taking into account the expenses and charges that may affect the property. This aspect is crucial as it directly affects the amount of the Gift Tax.
Reductions: Andalusia stands out for its attractive reductions in the taxable basis for donations between immediate family members, such as children, parents and spouses. These reductions can be substantial, helping to considerably reduce the amount on which the tax is levied.
Bonifications: In some cases, the tax relief can be as high as 99%, especially in the case of gifts to descendants or spouses. This relief offers a valuable opportunity to optimize the family assets; however, as noted earlier, it may be subject to legislative changes, so there is no guarantee that it will remain in force in future years.
At Cumbre Villas, we have a legal team with years of experience in the area, who can advise you on the different donation options and their suitability depending on your personal and estate objectives. Our commitment is to ensure proper and efficient planning, adapted to the current regulations in Andalusia and focused on optimizing the tax benefits for your family. We can also arrange your will for your Spanish assets. If you are not a tax resident in Spain, we can work with your tax advisors in your home country to find the most beneficial solution for your situation.