Gift or inheritance?

Dear Sirs,

We will eventually be passing on our property in Spain to our three children. We have made Spanish wills to this effect, so hopefully it should be straight forward after we leave this earth.

We have heard that it is better to 'gift' the property to them, during our lifetime, and we have been told that it is easier and cheaper to do so now, instead of after our passing.

We would be grateful for your opinion.

ANSWER

You are correct in the sense that there are people that believe that 'gifting' the property during their lifetime attracts a lower tax than the amount that would be paid in inheritance tax.

As in any tax calculation, the value of the property is paramount in establishing the amount of tax to pay. Since we don't have this figure, we can explain how these two taxes (gift tax and inheritance tax) are different).

Both of these taxes share the same sliding scale, i.e. the higher the value, the higher the percentage. Both taxes also share the tax free allowance of €100,000, which is deducted from the value of the gift or inheritance, before the sliding scale is applied to the resulting figure, providing the transaction is between parents and children.

The difference is that for inheritance tax purposes, the amount to pay has a further reduction of 50% of the quota. Gift tax does not have this extra reduction.

Therefore, concerning taxation, there is no tax benefit for your children if you 'gift' the property to them during your lifetime. It may be better to wait until your children inherit. There will be a bit more paperwork to do, but since you have made Spanish wills, it will be quite simple and straight forward.

One tax that may be applicable when and if you make a gift, is Capital Gains Tax. It is hard to understand this. If you 'gift' something, it is no longer yours and you haven't received anything in exchange, and this is why it is called a gift in the first place. So how can you have made a taxable profit? Since this one is quite difficult to get one head's around it, I will try to explain.

Usually CGT is payable when one has made a profit disposing of an asset. This profit is calculated by deducting the transfer price from the acquisition price and the result is the profit.

In a gift, the calculation is the same, i.e. the value allocated to the gift (the market value according to the law) minus the price you paid for it, will result in a figure that will be taxed accordingly.

To simplify matters even further, if your children visit Spain it may be advisable for them to apply for and obtain NIE numbers when they are here, as they will need them to inherit or to accept a gift. It also may be advisable for them to give a Power of Attorney to your usual solicitor so he or she can act on their behalf when the time comes, as they will have to sign in person or through their representative to accept the inheritance or gift, as the case may be.

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This column is intended for informative purposes only and we strongly advise any readers to seek professional advice prior to taking any action.