Which is the better option: donation or inheritance?

Given the current socio-economic situation, more and more people are opting for a donation instead of waiting for an inheritance.

When opting for one option or the other, it is necessary to contact a lawyer who is an expert in donations who can explain to you the taxes that you would have to pay in each of the modalities, from Personal Income Tax to Inheritance and Gift Tax, including the famous municipal capital gains tax, with great differences depending on the community where you live.

Inheritance and gift tax is regulated by each autonomous community. As a consequence, the tax rate (percentage to be paid) is different in each region, being the most affordable in Andalusia, Madrid, Murcia and La Rioja. Because in donations and inheritances between parents and children, a 99% rebate on the tax liability will be applied, which means that only 1% of the tax liability will have to be paid. Provided that the donation is formalised in a notarised public document and the origin of the funds is proven, when the donation is in cash.

Although inheritance is still the most widely used option as it is the least expensive, it is not always the most convenient. Below, we explain the differences between the two:

1. Inheritance and gift tax

This tax is payable by the person who inherits or receives a donation.

In the case of inheritance, the tax must be filed in the place of residence of the deceased person, and the amount payable depends on the amount of the inherited assets.

The total amount of the estate constitutes the taxable base for inheritance tax.

In the case of donations, the place of filing will depend on the property donated:

A. Donation of real estate. The place of presentation of the tax will be the Autonomous Community where the real estate is located.

B. Donation of movable goods. For example, if you have received money in the donation:

- In the Autonomous Community where you reside.

- If there are several donees with different residences, the tax will be filed in the Autonomous Community where the donee of the highest value goods resides.

C. Municipal capital gains tax: if the inherited/donated property is real estate, in addition to the Inheritance and Gift Tax, both the heir and the recipient of a donation of real estate must pay capital gains tax for the increase in value of the property. The tax is payable at the Town Hall where the property is located.

2. In the income tax return

In the case of inheritances, these are exempt from taxation, but in the case of donations, the donors of assets must pay a tax on the transfer of assets. The transfer of your assets must appear in the personal income tax return as a purchase and sale that generates a profit for the donor, unlike an inheritance.

The tax office associates the donation with the sale of the property and considers it as an increase in wealth. Exactly the same as that which would occur between the acquisition value of the property and the transfer value of the property. If the difference is positive, it will be reflected in a tax by brackets that will be around 21%, which is a small obstacle for the donor.

WHAT ARE THE ADVANTAGES OF DONATION?

Nowadays, the gift tax has great bonuses. Here are some of them:

1. One of the advantages of the donation is that it can be made partially, for example, transferring the bare ownership of the property, but reserving the usufruct during life, something recommended for those over 65 years old who donate their habitual residence ensuring the inheritance of their children, but without having to pay the increase in assets in the IRPF (Personal Income Tax).

2. The donation may be subject to certain conditions for the donees, and it is also possible to modify the donation in favour of another person.

3. According to the Civil Code, the donation can be revoked in the event of ingratitude, if the donee commits a crime against the person, honour or property of the donor, if the donee accuses the donor of a crime that would give rise to ex officio proceedings or if the donor is improperly denied maintenance.

There are many factors that can tip the balance in favour of donation or inheritance. For this reason, we recommend that you consult a specialist on the advantages and disadvantages that can be found in each case.