Is it sensible to donate property?
By Armin Gutschick & Anja Sämann-Gutschick
This is a question we are often asked by property owners in Ibiza. To find the right answer we must look at the fiscal consequences (taxes) of a donation compared with those of an inheritance.
The same law regulates both inheritance taxes and donation taxes, and for official residents of Ibiza the regional tax rates apply. In 2014 the justice courts established that non-residents can also choose to pay the regional tax rates. Since inheritance tax in the Balearic Islands is lower than the equivalent state taxes, non-residents will do well to opt for the local regulations. Applicable rates will depend on the relationship ties between the testator or donor, and the heir or recipient.
For non-residents the inheritance tax is only applied to transferred properties that are located in Spain. The market value of the property is considered as the taxable base, which can be calculated from basic data (surface area, cadastral value and location) that is found on the webpage of the of the Balearic Tax Agency (ATIB):
When it comes to Inheritance Tax, first degree heirs (children, parents) get an exemption on the first 25,000 €, and the tax rate on the first 700,000 € of an inheritance is only 1%. As of 2016 inheritance values over 700,000 € are taxed at a progressive tax rate: from 700,000 to one million euros is taxed at 8%, from one to two million at 11%, from two to three million at 15%, and anything more than three million euros is taxed at 20%.
Unlike donations, inheritances are not taxed on the increase in value that the property has experienced from the time of its purchase to the death of the testator. This is one of the biggest advantages of inheritances. Thus it is advisable to indicate in the Inheritance Tax Declaration a value that could reasonably be attained if the property were sold in the near future. If a sale were to occur after the inheritance, the heir would only have to pay a capital gains tax on the amount received that was over the fixed value of the property when it was inherited.
In the case of donations however, there are no amounts that are exempt from taxation, and the tax rate for first degree heirs is 7%, to be paid by the recipient. Another considerable disadvantage of donations is that the donor is obliged to pay capital gains tax as if it were a purchase transaction – which is 19% for non-residents and up to 23% for residents.In summary, if you receive an inheritance you do not need to pay taxes on capital gains, and the value that is assigned for inheritance tax also becomes your cost basis for any future sale.
Conversely, in the case of donations the donor will be taxed on the increase of the value of the property from the time that it was purchased to the moment it is donated - exactly the same as if it were a sale transaction. Also, s/he will have to pay a tax on the increase in urban land value (Plusvalía Municipal), whereas when calculating this increase in the case of inheritances the municipal legislations usually offer a 95% subsidy (“bonificación“).
Before deciding to donate a property, you must also bear in mind that this type of operation involves immediate costs, while the costs of an inheritance are usually not paid for a few years. Looking at this objectively, it rarely makes sense to choose making a donation.
Not only will you be paying the full capital gains tax, but the lower tax rate (1% for up to 700,000 €) is only applicable for inheritances and agreements as to succession (“pacto sucesorio“).