Tax reductions in gifts from parents to children

Published by gcla

12 June 2020

Very often, when planning the transfer of our estate to the next generation, it is tax efficiency what turns out to be decisive. Not many people are aware of the extremely beneficial possibility currently in force in the tax legal system in Andalucia, that allows for a 99% reduction of the tax when transferring assets from parents to children as a gift.

Nowadays, life expectancy is well over 80 years, which means that, if we wait to pass away to leave our assets to our children, very surely they will receive them when they are already in their fifties or sixties. This is useless, as by then, our sons and daughters will probably not need them. “I could have used this money or this property much earlier, when I was in my thirties building a family”, they will think.

Well, gifts are a way to transfer assets to the next generation. They used to be heavily taxed by the state legislation, but now an interesting window is open, and, rumour has it, it will be closed very soon. Due to the complex Spanish tax legal system, the Inheritance and Gifts Tax regulation is shared between the state and the regional governments, allowing these to create attractive tax reductions. Andalucia has used well this right and has given taxpayers the opportunity to reduce gift tax by 99% when transferring assets from parents to children. It is a very useful tool, and although other considerations need to be taken into account (Income Tax and Plusvalia Tax), it is worth to explore its possibilities.

At our firm we have successfully advised many clients now, designing transactions highly efficient taxwise. We will see it clearer with three examples:

Example nr. 1

A British couple, non-resident in Spain, owns a property in Costa del Sol worth €675,000. They are already in their sixties and they enjoy their apartment around three or four months a year. They have two sons in their thirties who also live in the UK. They know they want their place in the sun to pass to them, they have enjoyed beautiful holidays there. They would like to transfer the property to them as a gift. If the abovementioned tax reduction were not in force, their children would have to pay  €167,720. With the tax reduction, they would only pay €1,677.20. Tax saving: €166,042.80.

Example nr. 2

A Latvian consultant lives and works in Marbella, Spain. She would like to buy a property in Estepona and her father, who lives in Latvia, would like to give her the funds for it. With some advice from us, she receives the funds (€1,650,000) in their Spanish bank account, for which she would have to pay €518,000 as gift tax, but applying for the 99% tax reduction she ends up paying only €5,180. Tax saving: €512,820.

Example nr. 3

A Spanish couple, parents to three children in their forties, own a rustic olive tree piece of land. Their children do not want to continue in the agriculture business, they have jobs and children of their own to look after. With our advice, they sell their land, worth  €300,000, and design a transfer of €100,000 for each of their children. Without the tax reduction they would have to pay €12,400 each. With it, they only pay €124. Tax saving: €12,276.

The current situation under the pandemic of Covid-19, and the subsequent economic and financial crisis coming ahead, will very probably lead the government to eliminate the said tax reduction. It is uncertain when this will happen, but we are most certain it will eventually. With our advice, you can transfer wisely your assets to your children at a very efficient tax cost.

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