If you gift Spanish property to your children, there are various things that one needs to think about.
As non tax resident of Spain , regardless of whether you sell or gift your property, you will need to account for 19% Spanish Capital Gains tax (known in Spain as IIP). A capital gain is calculated by taking the sale price and deducting the purchase price and related fees and costs.
In addition to the 19% IIP, one needs to pay plusvalía. Plusvalía is essentially a municipal transfer tax charged when a property changes hands and there is a gain in value.
If you gift your property during your lifetime, you will also need to account for gift tax in Spain, often referred to as a ‘donación’ in Spanish. This is generally very low in Andalusia if the gift is from parent to child as there is a 99% exemption when gifting to children.
If you are not a Spanish tax resident, you should also take into account the affect that the gifting may have in the country of your residence.
For example , in the case of clients resident in the United Kingdom, they need to consider their potential obligations and tax liabilities in the UK.
UK Capital Gains Tax (CGT) is ordinarily charged at either 18% or 28% on second residential property, depending on whether the person is a basic or a higher rate income tax payer. An individual will normally be given credit for the Capital Gains tax paid in Spain to avoid double taxation.
There is no gift tax in the UK and a lifetime gift is know in the UK as a PET – a Potentially Exempt Transfer. Provided that you live for seven years after the gift, it would not fall into your estate for the purposes of calculating UK IHT so wont be taxed.
With property values continuing to rise, there are an increasing number of people who need to think about IHT.
If a UK tax resident, if you gift a property , you can no longer treat it as your own, you cannot continue to stay in it, even for holidays without paying a rent at full market value to the person to whom the property was gifted, and they must declare that rent for income tax.
Although there can be a capital gains tax in Spain or the UK (or both !) if you gift the property, currently inheritances are exempt from capital gains tax in both jurisdictions.
To summarise, there is no easy answer to whether you should or should not gift the property. Generally it doesn’t change the inheritance tax situation here in Andalucia , but it can cause a tax on the increase in value. In the UK, sometimes it can reduce your inheritance tax burden if you outlive the gift by seven years and do not use the property after it was gifted.
We are always happy to liaise with the lawyers you have in your own jurisdiction to make sure your advice is complete and comprehensive. For more information and a consultation contact Jon Sutton, Solicitor and Spanish Abogado on [email protected] or call on +34 951 315 161. For our Tenerife office call on + 34 922 719 520 to speak to our Partner, Vera Liprandi, dual qualified Spanish and Italian lawyer.