Spanish gift tax

Introduction

It would be nice to think that we can just give our friends and family what we like without any tax consequences. After all everything we own has been purchased with income that has been taxed once already so we should be free to do what we want with it. But that's not the reality unfortunately and Spain and the UK both tax any substantial gifts we make. This article looks at the basics of the Spanish system for taxing gifts.

Spanish Inheritance and Gift Tax

Spain has a tax system which covers transfers of assets arising on death (e.g. through a will) or during a lifetime (gifts). The Spanish name for this tax is "el impuesto sobre sucesiones y donaciones", or ISD for short, and we are looking here at "donaciones" (gifts) rather than inheritance which has its own Advoco page - Spanish Wills questions answered. Transfers of this kind are also known as "inter vivos" or between the living in Spain.

What constitutes a gift?

As well as what we would think of as gifts (e.g. transferring property or money to family members) gifts also includes things like transfers of property into companies and the forgiveness of debts.

Also being granted use of an asset can count as a gift, e.g. being allowed to live in a house, but with a reduced value depending on how long the right to use the asset is granted.

This law also covers life insurance payouts where the policy was paid for by someone else, such as an employer.

All your transfers of Spanish assets fall under ISD rules even if you or the beneficiaries are not Spain resident.

Valuing a gift

The basic rule is that market value must be applied. To prevent low valuations for property being used there is a minimum valuation (based on a multiple of the catastral or rateable value of the property) that will be accepted.

If the asset is subject to a charge (e.g. a mortgage on a house) and that charge is being passed on with the asset thus reducing its value then the gift value for tax purposes is also reduced.

Deductions

There are various deductions allowable under national law for agricultural assets like land and heritage assets. More commonly family businesses (or shares in them) can get a 95% deduction in certain circumstances.

In addition each autonomous region can apply its deductions on top of this and many do. Madrid for example has very generous 99% deductions within families. Andalucia's deductions (see link) amount to an allowance for gifts to children to enable them to buy their first home (up to 1200.000‚ā¨).

Calculation of the tax

Note: gifts made to the same person within three years are treated as one cumulative gift and treated differently for tax calculation purposes.

The tax on a gift is done is two stages: calculation of the base amount payable and then application of a factor to increase the tax for distant relationships or large gifts.

1. Base tax calculation

Tax is calculated according to this table. Take your net gift value and identify the tax band or line immediately before you get to the line that exceeds it. The base tax is equal to the amount in the Tax column plus the relevant Tax % on that line applied to the excess of your gift value over the value for that line. EG if your gift is 42.000‚ā¨ the line you need is 39.943,26 and the tax is 3.734,59 plus 11,9% of 2.056,74 (the amount by which 42.000 exceeds the gift value for that line) to give a total of 3.979‚ā¨

Gift Value                     Tax                Band             Tax %

0,00 - 7.993,46                                                    7.65%

7.993,46                    611,50         7.987,45          8.50%

15.980,91               1.290,43         7.987,45          9.35%

23.968,36               2.037,26         7.987,45        10.20%

31.955,81               2.851,98         7.987,45        11.05%

39.943,26               3.734,59         7.987,46        11.90%

47.930,72               4.685,10         7.987,45        12.75%

55.918,17               5.703,50         7.987,45        13.60%

63.905,62               6.789,79         7.987,45        14.45%

71.893,07               7.943,98         7.987,45        15.30%

79.880,52               9.166,06       39.877,15        16.15%

119.757,67            15.606,22      39.877,16        18.70%

159.634,83            23.063,25      79.754,30        21.25%

239.389,13            40.011,04      159.388,41      25.50%

398.777,54            80.655,08      398.777,54      29.75%

797.555,08          199.291,40 and up                  34.00%

2. Factor to apply to base tax to calculate tax payable

Base tax - Relationship - I and II III IV

0-402.678 1 1,588 2

402.678 -2.007.380 1,05  1,6676 2,1

2.007.380-4.020.770 1,1   1,7471 2,2

more than 4.020.770 1,2  1,9059 2,4

(I and II means descendants, parents and spouses, III means brothers, aunts etc, IV distant family and friends)

EG you give your niece a house worth ‚ā¨1.000.000. She pays base of 268.122 (being 199.291 plus 34% of the excess of 1.000.000 over 797.555) factored up 1.5882 (she is a Group III relative and the tax is in the lower band).

The receiver of the gift is liable to the tax. The value of the asset in his or her hands for capital gains tax purposes when they come to dispose of it, is the gift value for tax purposes (not the original purchase price paid by the giver).

Tax is to be declared using a Modelo 651. See Agencia Tributaria site for instructions on completing Modelo 651.

Gift tax avoidance

Aside from attempting to make the transfer a secret and not declaring it (obviously risky with any trace of cash or property changing hands), the most common alternatives to paying gift tax are to either arrange a sale to the recipient or setting up a company.

The sale technique is difficult in practice because the sale must be evidenced. For example if you want to give your son a house and plan to do it as a sale then the sale must be at the Notary who will require evidence of the purchase being paid for by the son (e.g. a bank draft). The sale will also trigger a capital gain for the giver and there will be property transfer tax of 7% payable (and, for non resident sellers, a 3% withholding tax).

A lot of non-Spanish resident property owners set up companies, normally in their country of residence like the UK, which then take ownership of the Spanish property. They can then give (or bequeath) shares in the company to their heirs or other beneficiaries and Spanish gift (or inheritance) tax does not apply because it is a foreign asset being transferred (the shares of the company owning the property rather than the property itself).

Giving a Spanish property to a company carries a transfer tax of 1%. If a Spanish resident gives a property to a company, whichever country it is located in, this counts as a disposal for capital gains tax purposes and they may have to pay a tax on top of the 1%.

There are some complex issues here and this information is therefore for guidance only. Advoco cannot advise on complex scenarios in this specialist area.