As discussed in previous articles, inheriting is usually more tax beneficial than receiving a gift. However, this is not always the case, and we often find the exact opposite. Parents who make several gifts during their lifetime to their descendants, so that their children pay less Inheritance Tax in the future. Although this is certainly possible, it is necessary to carry out a detailed analysis to avoid problems and surprises with the tax authorities. In today’s article, we analyse two issues that should always be considered in these cases: the accumulation of gifts’ between them and the accumulation/addition of gifts to the inheritance.
Inheritance and Gift Tax in Spain: progressive scale rate and fraud.
In Spain, Inheritance and Gift Tax have a progressive scale rate. In other words, the higher the value of the assets gifted or inherited, the more it is paid. As explained on other occasions, in Spain, taxpayers can take advantage of different reductions. For instance, in the Valencian Community, gifts of less than €100,000 from parents to their children won’t pay taxes.
What is the purpose of the accumulation mechanism?.
Basically, to avoid fraud and tax evasion. Let’s look at an example. A father wants to gift €300,000 to his son. If he makes a single gift, his son will pay Gift Tax of approximately €16,000. On the other hand, if he makes three separate gifts/donations of €100,000, his son would not pay gift tax.
Limitations such as the accumulation of donations, among others, are intended to prevent this from happening.
Accumulation of gifts between them. How does it work?.
The accumulation of gifts operates as follows: all gifts made between the same donor and the same beneficiary, within a given period of time, will be accumulated and taxed as a single gift. In other words, even if there are two separate gifts, for tax purposes, they will be considered as a single one.
How much time has to pass between one gift and the other?. State and Valencian Law.
It will depend on the applicable law.
In the Valencian Region (art. 10 bis of Law 13/1997) there is accumulation when the two gifts are made before 5 years have elapsed between them. On the other hand, if the State Law is applicable (Art. 30.1 of Law 29/1987) this period is reduced to 3 years.
Accumulation of donations to the inheritance. State Law and Valencian Regional Law.
The accumulation of donations to the inheritance works in a similar way. When calculating the inheritance tax to be paid by the heirs, it is necessary to check whether any of the heirs had received a gift from the deceased previously. Depending on how much time has passed between the gift and the date of death of the donor, the gift may accumulate to the inheritance. The timeframe foreseen in the State law and the Valencian Regional Law is the same: 4 years. Therefore, if a son receives a gift from his father and, 2 years later, his father dies, when calculating the IHT payable by his son, the value of the gift must be added to the total value of the assets inherited.
Calculation of the applicable Tax Liability.
The method to calculate the tax liability in cases of accumulation is somewhat complex, and is established in the following articles:
30.1 of Law 29/1987: “In order to determine the tax liability, to the value of the assets and rights currently transferred, the average rate that would correspond to the value of the totality of those accumulated shall be applied.”
46 b) of Royal Decree 1629/1991: “The effective average rate shall be that resulting from dividing the tax liability by the taxable base, multiplying the result by 100. The average rate shall be expressed to two decimal places.”
If you are worried about the Gift Tax and Inheritance Tax that you or your children will have to pay, do not hesitate to contact us. At White Baos Lawyers we are experts in Gift and Inheritance Law, Inheritance Planning and Tax Advice. We will study your case in detail and offer you expert legal advice.
The information provided in this article is not intended to be legal advice, but merely conveys information relating to legal issues.
Carlos Baos (Lawyer)
White & Baos.
Tel: +34 966 426 185
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