Gift and capital gains tax

Fiscal and legal advice from Webster Asesores

Dear Sirs,

A number of years ago we purchased an apartment in Torrevieja, and we now realize that travelling to Spain at our age is no longer practical.

We decided to give it to our two children. According to our adviser, we won’t be liable to pay any gift tax, but he says that we will be liable to pay capital gains tax.

We can't understand the reason for this, and the answer we receive doesn t ´ explain why we have to pay this type of tax, especially since we won’t be making any gain. In fact, we will be making a loss, because we are giving it away.

Perhaps you can explain and this might be interesting for other readers.

Answer

Odd at it may seem, your adviser is correct. I understand that it is a concept that is hard to grasp. You give away something and receive nothing in compensation, so your assets are less than before the gift... so how is it possible that you have to pay a tax on a nonexistent profit?

The issue is that the CGT calculation is based on the difference between the value given in the deeds for the property at the time of purchase, and the value given to the property at the time of its disposal, be it by sale or gift.

A property transaction in Spain is taxed, based on its value and not necessarily its price.

That is why one doesn’t see many property purchases for the price of € 1. It is possible that a house has negative equity, i. e. the mortgage loan is higher than the value of the property. If this is the case, the value of the property still has to be declared as the purchase price, regardless of the outstanding loan. The amount of the loan would be deducted from the price that one pays, but the purchase tax will be based on the value of the property, without taking into account the loan.

The value of the property can be determined using its rateable value ( Valor Catastral) and multiplying this by a coefficient that varies from town to town.

It is very likely that your advisor has used this formula to ascertain the minimum value to be given to the property for gift tax purposes, and this figure is quite a lot higher than then amount stated in the deeds when you purchased.

This difference, minus any necessary expenses paid when you purchased, such as the purchase tax, notary fees, land registry fees etc., will then be taxed as if it was a sale.

The local ‘ plusvalía’ tax will also have to be paid to the town hall. This tax is based on the increase of the rateable value of the land ( not the building) during your ownership. There is a period of 30 days in which to pay this tax, starting from the date the gift is signed at the notary’s office. If it is not paid during this period, certain surcharges will be added to the bill.