Gifts of assets and rights are one of the most frequent transactions in our country, especially in favour of descendants (children or grandchildren), and one of those that raise the most questions regarding their taxation.
Often, those involved in this type of transaction tend to think that only one tax is involved, gift tax; however, there are other taxes, which we will discuss in this article by Merac Legal & Tax Lawyers, law firm in Málaga, which also come into play and can make the transaction very costly, so it is key to carry out a prior analysis and plan the gift or inheritance/legacy of the assets from a tax perspective.
What taxes and persons are involved in a gift?
The donee, that is, the beneficiary of the gift who receives the assets or rights, is required to pay gift tax.
This tax is a state tax managed by the regions, so each Autonomous Community can regulate its own allowances, reductions and deductions on the tax liability, in addition to those established by state regulations. In the Autonomous Community of Andalusia, for example, there is a 99% allowance on the tax liability for gifts to spouses, ascendants and descendants.
It should be remembered that this tax only applies to gratuitous acquisitions of assets and rights by individuals, not by companies, and that in the case of inter vivos gratuitous transfers, gifts; the taxpayer is the donee (beneficiary of the donated goods and rights).
For their part, the donor who transfers their assets free of charge may be required to pay tax on the capital gain in Personal Income Tax (IRPF).
Likewise, if what is donated is a property or a right related to it, the Tax on the Increase in Value of Urban Land (IIVTNU), commonly known as municipal capital gains tax (plusvalía), also comes into play.
What types of assets or rights can be donated?
The regulations do not set out a list of assets; almost any type of asset may be donated (money, real estate, shares in companies, registrable rights over assets, etc.). If in doubt, or if you would like proper advice on the steps to follow, it is advisable to consult a gift lawyer in Málaga who can guide you on the legal and tax requirements applicable to your situation.
Gift of money.
This is normally the most frequent case of a gift of assets and rights
- Taxation of the donee-beneficiary
In this case, the donee is the taxpayer for gift tax. In this case, the transaction will be taxed under gift tax for the donee in the Autonomous Community where they are habitually resident, so it must be checked whether that Autonomous Community has approved any reduction or allowance for each specific case.
In any case, even if a 95% or 99% reduction or allowance has been approved for gifts to descendants, as many Communities have already regulated, the regional regulations often require the gift to be made by Public Deed, proving the legal origin of the money and within one month of the money being handed over, so it is important to obtain proper advice in order to benefit from these reductions.
But if the donee (beneficiary of the gift) is not resident in Spain, the regulations of the Autonomous Community where the asset was located for the greatest number of days in the five years immediately preceding must be applied, as we saw in our previous post. Normally, in this case, the bank branch where the donor's account was held will be considered.
- Taxation of the donor
For their part, the donor, as it is money, would not have to pay any tax in their income tax return.
Gift of real estate.
It is common for many people, on reaching a certain age, to consider donating a property to their children or grandchildren, although in this case the transaction must be reviewed from a tax perspective.
- Taxation of the donee-beneficiary
As in the previous case, the donee is the taxpayer for gift tax and may benefit from the reductions or allowances approved by the Autonomous Community where the property is located.
- Taxation of the donor
However, it is often forgotten that the donor, as transferor, is taxed on this transaction in their Personal Income Tax return. Thus, article 33 of the Personal Income Tax Law establishes that "Capital gains and losses are changes in the value of the taxpayer's assets that arise as a result of any change in their composition, unless they are classified as income by this Law."
And according to article 35 of the Personal Income Tax Law, the donor must pay tax on the capital gain for the difference between the acquisition value of the asset at the time and the real value given to the property for Gift Tax purposes at the time of the gift, which may not exceed the market value.
In this regard, it should be remembered that since 1 January 2022, Gift Tax regulations provide that the tax base for real estate will be "the reference value provided for in the regulations governing the real estate cadastre, at the date the tax accrues", so, in general terms, the capital gain for Personal Income Tax purposes will be calculated using the reference value (which approximates market value) of the property, which could mean a significant capital gain depending on when and at what price the donated property was acquired.
On the other hand, if the donee is not resident in Spain, the regulations of the Autonomous Community where the property is located will apply, as we discussed in our post.
- Gifts by people over 65
In this regard, it should be pointed out that Personal Income Tax regulations exempt from taxation as a capital gain the transfer of their main residence by people over 65 or by people in a situation of severe or high dependency.
This provision would cover both onerous and gratuitous transfers, according to, among others, Binding Ruling V0420-20 of 24 February 2020, so if the property donated were the main residence of a person over 65, they would not have to pay Personal Income Tax on it.
- Municipal capital gains tax (plusvalía)
Finally, in the case of real estate, we must also take into account the municipal capital gains tax.
It should be remembered that the Tax on the Increase in Value of Urban Land (IIVTNU) is a direct tax levied on the increase in value of such land, revealed as a result of the transfer of ownership of the land by any title or the creation or transfer of any real right of enjoyment limiting ownership over that land.
Therefore, a gift would fall within the taxable event of IIVTNU, although it should be remembered that, in accordance with article 106 of Royal Legislative Decree 2/2004, of 5 March, approving the consolidated text of the Local Finance Law, the taxpayer in the case of gratuitous transfers, such as gifts, is the donee who receives the asset.
For these purposes, it should be borne in mind that, since November 2021, the tax base may be determined by two different methods at the taxpayer's choice: the direct method or the objective method. In the case of the direct method, which quantifies the actual increase in value by comparing the acquisition value and the transfer value of the urban land, the regulation provides that if the acquisition or transfer of the land is gratuitous, the value declared for Inheritance and Gift Tax is taken as the value of that transaction.
Gift of shares in a family business.
The other most common case of gift is that of shares in family businesses, as part of the generational handover from parents to children when the latter succeed their parents in management positions and take control of the company when they retire.
- Taxation of the donee-beneficiary
Exactly as in the two previous cases, the donee is the taxpayer for gift tax and may apply the reductions or allowances approved by the donee's Autonomous Community of residence
However, in this case, even if the Autonomous Community has not approved any allowance, state regulations do provide for a 95% reduction in cases of inter vivos transfers, to the spouse, descendants or adopted children, of a sole proprietorship, a professional business or shares in entities of the donor to which the exemption in article 4.8 of the Wealth Tax Law applies, provided that a series of requirements are met, which will be analysed in future posts.
- Taxation of the donor
Although this reduction has often been forgotten and given less importance due to the existence of a generic allowance for gifts from parents to children, with no requirements other than kinship and the gift being made by public deed, it should be stressed that if the requirements of the state regulation are met, the gift may also be exempt from Personal Income Tax.
Article 33.1.c) of the Personal Income Tax Law establishes that there is no capital gain for Personal Income Tax purposes in "gratuitous transfers of businesses or shares referred to in article 20.6 of the Inheritance and Gift Tax Law". Otherwise, the gift of shares in a company will give rise to a capital gain for the donor, similar to what happens with gifts of real estate.
In this case, the acquisition value will be the amount actually contributed to the company (share capital, share premium, other shareholder contributions, etc.) and the transfer value will be the amount given to those shares for Inheritance and Gift Tax purposes, which must correspond to market value.
Therefore, it is crucially important to analyse the possible applicability of the state reduction provided for in the Gift Tax Law in order to minimise the tax implications of the transaction and avoid taxation of the capital gain under Personal Income Tax, which can be very costly depending on the current value of the company.
Gift of any other type of asset or right
As in the previous cases, the donee is the taxpayer for gift tax and may benefit from the reductions or allowances approved by the donee's Autonomous Community of residence.
For their part, the donor would have to determine whether a capital gain has arisen in their personal sphere by comparing the value of the asset when they acquired it with its value at the time of transfer. For example, in the case of a gift of a vehicle, there is often no capital gain for the donor because the car has usually lost value over the years of ownership and, at the time of the gift, is worth less than the price paid for it.
Conclusions
As can be seen, a gift transaction involves various taxes. That is why it is important to carry out prior tax analysis and planning before making any gift in order to avoid unnecessary surprises and, where appropriate, to seek other succession planning alternatives that would optimise the taxation of the intended transaction.
