Donation of real estate in Spain. Legal and tax aspects
Those who want to transmit their property in Spain e.g. to their children as part of succession planning, can fall back on various legal options. First, the property can be sold directly. On the other hand, a will can be drawn up. Another alternative is to donate the property. We would like to introduce you to the legal and tax consequences of this type of transfer in detail below.
II. APLICABLE LAW
The clients often ask whether the substantive law of their country can be applied to a donation of real estate in Spain because they are more familiar with it. This question can be answered by the fact that a donation among the living constitutes a contractual obligation under most European legal systems and therefore the parties are free to choose the applicable substantive law in accordance with Rome I Regulation. However, experience shows that, with a few exceptions, this theoretical classification has practically no meaning. If a Spanish notary or land registry is to apply foreign law, the interested party must provide the comprehensive legal consultancy of its validity and application in the specific case. Such a consultancy alone can cost several hundred euros. Therefore, it is usually of the interest to make a donation directly under Spanish law. If no choice of law is made, which is usually the case, according to the Regulation Rome I the law of the state in which the immovable property is located is applicable, i.e. Spanish substantive law.
If you want to reserve the right of usufruct to the property, the Spanish Civil Code also provides for the possibility of granting it in favor of the donor or, under certain restrictions, also in favor of third parties. The donor can also set certain conditions and even reversal clauses. Such would be e.g. that the recipient sells or charges the property without the donors written consent, that the recipient dies before the donor or that insolvency proceedings are opened against the recipient's assets. A revocation due to gross ingratitude of the recipient is also planned by the Spanish Civil Code.
Because donations during lifetime are also relevant to inheritance law and Spanish law recognizes compulsory portion rights, there are also regulations for their protection. According to Spanish law, a donation can in principle be counted towards the compulsory portion, unless it has been expressly ordered that it should not be the case.
b) Tax law
In any case, it should be borne in mind that regardless of the substantive law, Spanish tax law applies to the donation, namely that of the respective autonomous region in which the donated property is located. In order to make a profit from tax benefits, the promise of donation and acceptance must be recorded in a notarial deed. The allowances and other benefits differ from region to region, sometimes very seriously.
III. VALUATION OF THE PROPERTY
Before calculating the applicable taxes, the property value must be determined. The current market value of the property must be declared, otherwise you risk an inspection by the tax office and additional payments.
The so-called minimum tax value of the property serves as a minimum limit, below which the declared donation value should never be. To find it out, each autonomous community annually determines the percentage coefficients, which are multiplied by the current cadastral value of the property. It can lead to cases in which the market value is below the minimum tax value. In such a situation, it is recommended to obtain an appraisal report, which could justify the declared value in the event of a possible review by the tax authorities.
IV. TAXES INCURRED
A classic mandate request in this area is as follows: „I am German and have in Denia [or in Mallorca or in Málaga] a holiday home that I bought in the 90s. Because of my advanced age , I may not come to Spain anymore and have considered transferring the house to my son while I am still alive.“ As an experiences lawyer with previous tax knowledge working in Spain, this one sentence can be used to get various information and to give to the client in the first consultation an idea of the tax side of the case in addition to legal aspects. First of all, it can be seen that the donor is not resident in Spain for tax purposes. The acquisition date appears to be about 30 years ago and the purchase value will most likely have been much lower than the current market value of the property. It is also known that due to the location of the property, the tax laws of the Valencian Community [or the Balearic Islands or Andalusia] are applicable. And, last but not least, the relationship between the donor and the recipient is clear. However, it is only clear when the exact calculation is made which tax burden the individual case entails.
a) Donation tax
In the case of donations among the living, this applies to the recipient. As already mentioned, the laws of the respective autonomous community are applicable. The amount of the donation tax is lower, the closer the relationship to the donor. The family allowance, as in our example between father and son, would be EUR 100,000 within the Valencian Community. In principle, the same allowance applies to every donor and recipient. The full amount can also be used between grandparents and grandchildren if the relevant parent has previously died. In order to be able to benefit from the tax-free amount in the Valencian Community, the recipient must not have used it in the 10 years prior to the current gift. In addition, the donation recipient's prior assets may not exceed EUR 600,000.
If the established market value in the example above is around EUR 190,000, the son would have to pay a donation tax of EUR 10,900 in the Valencian Community, deducting the allowance of EUR 100,000. If the son had received the property from both parents, who each own one ideal half, he would not have had to pay any donation tax because of the tax-free allowances per donor.
For example, if the house were located in Marbella (Andalusia), where there is a 99% discount on donation tax for donations from parents to children, the son would only have to pay around EUR 300 for a donation value of EUR 300,000.
If the property is located in Andratx (Mallorca, Balearic Islands) and the donation value is EUR 500,000, the tax rate on the father's donation to the son would be 7% of the donation value, applying the corresponding advantages, so that the son would have to pay EUR 35,000 of donation tax.
b) Municipal property gains tax
In addition, the so-called Plusvalía is incurred for every property transfer. It is a municipal tax on the increase in land value. The tax debtor is the recipient. The decisive factor for the calculation is the cadastral value of the land on which the property is located and the number of years that the donor owned the property (up to a maximum of 20). Each municipality uses its own coefficients for the calculation.
Assuming in the example above, the property was bought on January 1st, 1990 and the current cadastral land value is EUR 35,000. The calculation would show that the recipient would have to pay EUR 4,312 to the municipality of Denia at the present time. In major cities in Spain such as Madrid, Barcelona and Valencia, the Plusvalía would be under the same conditions: EUR 6,070 in Madrid, EUR 5,880 in Barcelona and EUR 6,029 in Valencia.
c) Income tax (of non-resident) on the capital gain
In the case of donations, income tax (non-residents) also applies to the capital gain. The difference between the acquisition and the donation value is taxed at a fixed rate of 19% for non-residents. The deductible acquisition and selling costs can be taken into account in the calculation to reduce tax. Such are e.g. the expenses incurred directly upon acquisition, such as notary fees, land registry fees and real estate transfer tax. Investments (value-enhancing measures) in the property are also deductible. However, if you have not kept the invoices over the years, you are out of luck: Information without a corresponding invoice, which shows the VAT, will not be accepted by the Spanish tax authorities.
In the example above, if the acquisition value of the property in Denia in 1990 was EUR 90,000 and the donation value is EUR 190,000 today, the tax base on capital gains tax without deductible expenses would be EUR 100,000. There are certain benefits that reduce the tax base for purchases made before 1994. In the example above, the donor would have had to pay approximately EUR 13,420 to the Spanish tax authorities, taking into account the respective benefit. Would the acquisition date e.g. in 1999, the donor could not claim any benefits and would have to pay approximately EUR 19,000 in capital gains tax.
Assuming that the donor was 75 years old and had given away the property he had bought at a price of EUR 300,000 in 2010 while retaining the lifelong right of use at a value of EUR 450,000, he would have to pay EUR 28,500 in capital gains tax. If, on the other hand, he gave away full property, he would pay EUR 24,510.
If the property, the object of the donation, is demonstrably the donor's permanent residence and the donor is older than 65, he is exempt from paying the capital gains tax.
Before you implement your altruistic gift proposal in Spain and possibly fall into a tax trap, it is advisable to seek comprehensive legal and tax advice. A tax comparative report can make the decision easier for preliminary considerations. In individual cases, post mortem transmission may be a cheaper alternative to donation.