Transferring your holiday property wisely can save a lot of money, as in extreme cases the tax levied on inheritances or gifts in Spain can be more than 70 per cent. It can, however, also be done much more cheaply and to that end, we would like to provide an overview and explain where traps lurk and where the opportunities for non-residents can be found.
Anyone who owns a property in Mallorca must sooner or later ask themselves the question – what will happen to my holiday property when I am no longer alive? Is giving it as a gift during my lifetime the right step or would a normal inheritance be a better way? When transferring real estate in Spain a number of legal regulations have to be considered, and it makes sense to deal with these issues well before the transfer takes place. It can become complicated, particularly in cross-border situations (eg. German taxpayer – Spanish property). It is, therefore, always better to engage advisors in both countries who can properly communicate with each other.
Transferring your holiday property wisely can save a lot of money
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Tax differences between inheritance and gifts
Spanish regulations differ considerably from those abroad. For example, although inheritance and gift tax are the same in Germany this is different in Spain where, when an inheritance takes place, only the payment of inheritance tax is required. The factor used for assessing this is the market value of the property at the time of death. Unlike in Germany, Spain generally waives taxation of any increase in the property value, and the heir pays inheritance tax only on the currently updated value of the property.
Balearic inheritance tax
In the Balearic Islands, the minimum inheritance tax rate for the next of kin of the deceased owner is only one per cent (up to 700,000 euros). The tax rate can, however, still increase based on former assets and the degree of the relationship, but for the closest family circle conditions apply that often lead to lower taxation than in Germany.
An important factor is also the basis of assessment, i.e. the amount on which the tax must be paid. For real estate, the reference value has been used as the minimum value since January 2022. The land registry office determines this value annually on the basis of the size of the property and the square-metre costs established in the respective areas.
Significant relief through tax allowances, however, should not be expected as in the case of inheritance tax they are at best 50,000 euros.
A watchful eye on non-residents
In the case of non-residents, the authorities attach particular importance to ensuring that Spanish property is transferred to its legitimate heirs. Spanish inheritance tax is limited to property and rights located in the country.
Since 2015, non-residents – i.e. people who do not live permanently in Spain – can choose between the central government regulations and the inheritance tax regulations of the region in which the majority of the estate is located. For Mallorca, this means that heirs can benefit from the – in comparison – more favourable tax rates for close relatives that apply on the islands. As a rule, the regional regulations are more favourable, making the choice easier. In all cases, professional advice should be taken as the regulations vary from region to region.
It is also important to note that a period of six months only is allowed between the date of death and payment of the inheritance tax due. Particularly for heirs who are not residents in Spain, this period can be very short. A certificate of acceptance of the inheritance, and proof that inheritance tax has been paid are the indispensable prerequisites for having the property transferred to the new owner.
Whoever gives away property in Spain without payment – as distinguished from an inheritance – may have to pay income tax. While gift tax is paid by the person receiving it, income tax must be paid by the donor. The tax is due on the increase in value of the apartment or house since the purchase and thus corresponds to the profits tax which would be due in the case of a sale. Depending on the amount of this theoretical gain, the income tax can be significantly higher than the actual gift tax.
Example: A holiday home in Palma was purchased 20 years ago for 200,000 euros. It is to be given as a gift but is now worth twice as much. Then the person receiving the gift pays a gift tax on 400,000 euros, which on the Balearic Islands is seven per cent for close relatives, i.e. 28,000 euros. The donor also pays an income tax of 19 per cent on a – admittedly only theoretical – capital gain of 200,000 euros, i.e. 38,000 euros. In total, the family has to pay 66,000 euros for this transfer, which corresponds to 16.5 per cent of the market value of the property.
In the case of gift tax there are no allowances at all, only concessions in some special cases. While a blanket tax rate of seven per cent applies to close relatives, under unfavourable conditions a tax burden of 70 per cent can be levied for relatives not considered close, or non-relatives.
Mallorca’s alternative: the succession pact
Another option for the Balearic Islands is the application of a succession pact, allowed by only a few regions. The so-called “Pacto Sucesorio” is equivalent to a gift but under the tax conditions of an inheritance. This can be significantly more favourable although not in all cases, so each case should be examined individually to establish whether using the “Pacto” really brings an advantage.
The use of this old legal instrument as a new type of tax-saving model, however, has only been completely clarified for the use of residents. Its use by non-residents with foreign citizenship is questionable. At the beginning of July 2022, the parties in the Balearic Parliament agreed to review the “Pacto Sucesorio”, thereby ensuring legal security. The corresponding law is to be passed by the end of the year, so until then, it can only be speculated how the new regulations will be formed.
The tax and legal consultation company PlattesGroup will provide further services and information on the problems of inheritance and gifts in Spain. Requests for advice can be sent to: info@plattesgroup.net.