Inheritance or gift: which is more tax beneficial? What are the advantages and disadvantages of each option? Legal advice

Inheritance or gift: Everything you need to know. Legal advice.

A recent report by the General Council of Notaries leaves no room for doubt. Over the last few years, the number of inheritances processed in Spain has increased by more than 20%. The same happens with donations or gifts, that experienced an increase of nearly 31% last year. Also noteworthy are the renunciations to inherit, that reached an all-time high in 2021. The pandemic, the fear of future tax increases and the climate of uncertainty, the main causes. In this situation, many people ask themselves: What is more convenient? Donating during my lifetime to my children? Waiting for them to inherit? In today’s article we analyse the main advantages and disadvantages of choosing between inheritance or  gift (donation).

Inheritance or gift (donation). Definition and main differences between the two.

The main difference between inheritance and donation is the moment at which each occurs. While in donations the donor passes on the assets and rights during his lifetime, an inheritance takes place after his or her death. What other differences are there between the two? On the one hand, the tax consequences. Without being able to generalise, inheriting is usually cheaper than receiving a donation. However, there are exceptions. On the other hand, it should not be forgotten that in inheritances, not only assets and rights are passed on, but also the debts of the deceased can be acquired.

Advantages of donating during your lifetime.

The deadlines for processing a donation are much shorter than those required for an inheritance. Since it is not necessary to compile the abundant documentation that is involved in a death. The donor can also impose conditions on the delivery of the assets, or reserve certain rights. For example, the donor may retain the usufruct of a house for as long as he or she lives. Gift also makes it possible to help family members immediately, without having to wait until death. 

Advantages of waiting to inherit the assets. 

Perhaps the biggest advantage of passing on assets through inheritance is the (generally more beneficial) tax regime. Let the following example illustrate this. A property that the deceased acquired years ago for €150,000 is inherited. At the time of inheritance, its value is €290,000. Since it’s an inheritance, the capital gain generated (acquisition price – transfer price) of €140,000 will not be taxed in the income tax (Art 33.3.b of the Personal Income Tax Law). This is known as ‘capital gain of the dead’. However, if the property was acquired through a donation, the donor would have to pay a total of €31,080 for this capital gain. 

Which option is more advisable from a tax point of view?

It is almost impossible to give a generic answer. It is essential to study each individual case. An inheritance in which assets and rights worth €700,000 are passed on is not the same as an inheritance worth €200,000. It is also key to know the number of heirs, as this will affect taxation. The more heirs there are, the less each one will receive, and therefore, the amount owed to tax authorities will be lower.

On the other hand, the applicable tax reductions and bonus vary in each autonomous community. For example, in the Valencian Community, there is a reduction for gifts between kinship which ranges from €100,000 to €156,000 (depending on the age of the beneficiary). This means that any donation of a property which price is lower than this figure would be exempt from paying the tax. The inheritance tax also has numerous reductions or bonuses. For example, the reduction in the tax base of 95% in the case of acquiring the habitual residence (with a limit of €150,000). Or the tax bonus of between 50% and 75% (depending on age and degree of kinship), etc.

If you want to plan your inheritance, to minimise taxes, do not hesitate to contact us. We will study your specific case, number of assets to be transferred, heirs, applicable autonomous community regulations, etc, and we will offer you expert advice on which option is best in your case: inheritance or gift.

The information provided in this article is not intended to be legal advice, but merely conveys information related to legal issues.

Carlos Baos (Lawyer)

White & Baos.

Tel: +34 966 426 185

E-mail: info@white-baos.com

White & Baos 2022 – All Rights Reserved.

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