Inheritance and gift tax

Every owner of a vacation property in Spain is at some point faced with the dilemma of whether to sell it to a third party or to leave (part of) his property to his relatives. If one decides to keep the property in the family, one can fall back on different legal possibilities: in case of inheritance, it can be determined by a will who will become the owner of the property after our death. The alternative is to transfer all or part of the property as a gift during our lifetime. Good planning optimizes the tax burden associated with the transfer of ownership and simplifies the process.

Content overview

• Which value is relevant for tax purposes?
• What taxes are due?
• What is the best way to transfer ownership of a property?

Which value is relevant for tax purposes?

Since 2021, there is a so-called tax "reference value" for real estate in Spain. This is an official value determined by the cadastral office. For inheritance and gift tax purposes, real estate is always taxed on the basis of the reference value and, if this is not available, on the basis of the market value. Otherwise, one risks an audit by the tax office and considerable demands for additional payments. The authorities have four years to verify the reported values.

What taxes are due?

a) Gift tax

In the case of gifts of Spanish real estate inter vivos, Spanish gift tax is payable by the donee. The laws of each Spanish Autonomous Community are applicable, depending on where the property is located. There are great regional differences. Although in some Autonomous Communities the gift tax has been practically abolished (e.g. in Madrid), in the rest of the countries the fees to be paid can be very high, especially if there is no or only a distant relationship between the donor and the donee.

For example, if a property worth €1,000,000 belonging equally to a married couple is given as a gift to the two children residing outside Spain, the gift tax payable is:

• Mallorca (and all Balearic Islands):                                                      70.000,00 EUR
• Denia (Costa Blanca and the rest of the Comunidad Valenciana):      85.574,59 EUR
• Málaga (and all of Andalusia):                                                               1.704,80 EUR
• Barcelona (and the rest of Catalonia):                                                 54.000,00 EUR

Sometimes it is a good idea to give the property to the next generation by dividing the ownership into usufruct (use and enjoyment), which remains with the parents for life, and bare ownership (so-called naked ownership), which is given to the descendants, so that the latter become full owners only upon the death of the parents.

b) Inheritance tax

If the property is transferred by inheritance, inheritance tax is due. Also in this case, the tax differences between the Autonomous Communities can be very high, which requires planning even before the acquisition of the property. After acquiring the real estate and deciding on the transfer by inheritance, it is necessary to consider, in particular, the transfer alternatives (appointment of heirs, bequest) and the possibilities of optimizing the tax burden of the heirs.

In our example above, these are the taxes that apply depending on the location of the property:

• Mallorca (and all Balearic Islands):                                                      31.000,00 EUR
• Denia (Costa Blanca and rest of the Comunidad Valenciana):            45.643,11 EUR
• Málaga (and all of Andalusia):                                                                     0,00 EUR
• Barcelona (and the rest of Catalonia):                                                 27.877,56 EUR

c) Municipal Land Value Added Tax

In addition, any transfer of real estate during life or by death is subject to the municipal land value increment tax. The so-called plusvalía is a municipal tax on the increase in land value over a maximum period of 20 years. The person liable for the tax is the donee or the heir. The cadastral value of the land on which the property is located is decisive for the calculation. Each municipality applies its own coefficients for the calculation, which are multiplied by the cadastral value of the real estate and the number of years the real estate was owned by the donor or the testator.

d) Income tax (non-resident) on the capital gain

In the case of gifts of real estate, income tax (non-resident) also accrues on the transferor's capital gain. However, in the case of transfers upon death, this tax does not apply. Tax is payable on the difference between the acquisition value and the gift value, with a tax rate of 19% for non-residents living in the EU (24% for non-EU donors). All costs related to the acquisition and sale of the real estate (notary and land registry fees, land transfer tax, broker's commission, etc.) can be taken into account in a tax-reducing manner when determining the taxable profit. The same applies to investments made (value-enhancing measures, such as the construction of a pool), always if these can be proven by means of a corresponding invoice with a VAT statement.

What is the best way to transfer ownership of a property?

The answer is not always the same. The most important thing is to take into account the preferences of the owners, both financially and, above all, in terms of the use of the property: it is important to remember that the property was purchased as a vacation home, but also that it is a capital investment. In cases where there is a large increase in value (especially if the transfer is made after 15 years or more), the gift may involve a high tax burden due to the taxation of the accumulated increase in value. However, the gift during life has the advantage of avoiding the uncertainty of inheritance, also from a financial point of view, since current taxes may change from time to time.

Lozano Schindhelm, after analyzing the tax aspects, will advise you on the different possibilities of transferring your property in Spain and will take care of the preparation of the notarial deeds and the filing of the corresponding tax returns. In your language. With a multidisciplinary, legal and tax approach. And with the guarantee of a solid track record that distinguishes us as a reference firm for international legal and tax advice in Spain.