Is there really a legal way of avoiding inheritance tax by passing your property onto your children while you’re still alive? Some lawyers in Spain claim so.
Inheritance tax can cost a lot, depending on where you live in Spain, so many people often try and find ways around it, particularly when it comes to property.
If you research online, there are many different tips and tricks that you’ll find to do this, but are they really legal, do they work and do you actually end up paying less tax in the end?
READ ALSO: Should you Spanish pass your property to your children or sell it to them?
One of the most common ways you may have heard of is to sign your property over to your children before you pass away or even selling it to them in advance in order to avoid inheritance tax.
Two legal terms of passing your property onto your children before you die are what are known as nuda propiedad and usufructo vitalicio in Spanish.
“There is a legal trick that makes the tax authorities stand by and watch while you inherit without paying a single cent: nuda propriedad with life usufruct,” explains the lawyer, Pablo Ródenas explains on his TikTok channel.
According to consulting firm Afiris, Nuda propiedad is when someone else (ie. your children) become the registered owners of the property, but they cannot use it. Usufructo vitalicio is very similar. It means that the parents retain the right to live in the house for as long as they live.
When the parents die, the usufructo disappears and the children can use the property as they wish. No notary is needed at the time and crucially no inheritance tax is paid as the property is already in your child’s name.
READ ALSO – ‘Nuda propiedad’: The pros and cons of selling your home in Spain while still living in it
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Unfortunately, this doesn’t mean that you won’t pay any other taxes during the process.
Even if you as parents retain the right to live in the house, the Spanish Tax Agency considers this is to be the transference of an asset and according to Afiris, this means you are subject to certain taxes. These are:
Capital gains tax
This means you will be subject to capital gains tax. The amount is calculated based on the acquisition value and the current value. If the property has appreciated significantly, this could result in a substantial tax burden for you.
If you are over 65 and donate your primary residence to your children, they may be exempt from paying capital gains.
Gift tax
On top of this, your children will have to pay gift tax on the value of the property if it’s simply given to them.
The amount of gift tax they pay largely depends on where in your children live or where the property is located. If they live abroad you will need to contact in a professional in that country to find out the rules there too.
For example, Madrid, Andalusia, Murcia and Aragón have very favourable gift tax rates that are highly subsidised, but in other areas your children could end up paying a lot.
The amount paid also depends on your relationship to the recipient. Children, spouses, and parents typically receive significant reductions in the tax rates.
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Municipal gains tax
On top of these two taxes, you may have to pay municipal gains tax on the increase in value of urban land to the City Council where the property is located.
The rates typically range between 20 and 30 percent.
Conclusion
So as you see, you may be avoiding inheritance tax by doing this, but there are still three other taxes that must be paid by you or your children.
It’s important to get proper financial advice from a lawyer if you’re considering putting your property into your children’s names because the implications and the amount can vary a lot, depending on age, situation and location.
There is no one simple solution that will work for everyone, so you have to find the one that works for you. You may not be able to get away with not paying any tax, but a professional may be able to help you reduce the financial burden.
The Local Spain’s journalists are not legal experts and this article is only aimed at providing preliminary information. Please enlist the help of a lawyer in Spain for more professional advice.
