When planning an estate that includes real estate, it is common to consider reserving certain rights of use for each descendant and donating certain assets to their descendants as an alternative method of inheritance, By contributing a specific amount in some cases, this is a way to prevent the estate from causing conflicts among the heirs, while also reducing the impact of inheritance taxes.
INHERITANCE OR GIFT OF A HOME
Although both transactions are subject to the Inheritance and Gift Tax, the applicable rates differ in each case; since this tax is administered by the autonomous communities, there are significant tax differences between the various regions of Spain.
The tax owed on inheriting a home depends on its value and the degree of kinship with the deceased. Generally, the inheritance tax will increase significantly the higher the value of the home and the closer the relationship between the heir and the deceased.
Generally, the key factor in determining whether a gift is better than inheriting a property is the transfer tax. In the case of estates, inheritance tax is assessed in the autonomous community where the deceased lived, and a real estate gift is taxed in the autonomous community where the property is located.
However, it should be noted that when inheriting property, only inheritance tax is paid. But in the case of a gift, in addition to gift tax, The donor of the home must also report the transfer of the property on their income tax return for the tax year in which the gift is made, and must specify the value of the home, its value at the time of the gift, and its value at the time the recipient received the gift. If the difference is positive, the donor must pay individual income tax based on the taxable income (19% to 23%).
However, if the donated property has been owned for more than 25 years or is the donor’s primary residence, the impact of the donation on the donor’s personal income tax may be significantly reduced.
Let’s not overlook the «urban land value-added tax» (also known as «municipal capital gains tax»), which is calculated based on the property’s assessed value—a tax that is often costly and not without controversy. When real estate is transferred through inheritance, tax breaks are usually applied; however, in the case of a gift, not only is the transfer always subject to tax, but the recipient must also pay this tax.
In addition to these general provisions, there is an alternative method for distributing inheritance rights among children without having to make a lifetime gift. This involves a succession agreement, which includes a contract between the testator and the final heir, the purpose of which is to distribute the property among the heirs in accordance with the provisions of Articles 1271.2 and 1056.1 of the Civil Code.
The division of the estate agreed upon with the heir in the public contract is irrevocable by the heir and is fully binding on him or her. Upon the heir’s death, the transfer of the real property may be registered directly in the property registry without the need for a new division of the estate. In addition to these advantages, this type of division will have a beneficial effect on the economic order, will strictly adhere to the testator’s wishes, and will prevent future disputes, thereby sparing the community of heirs from common problems.
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