Ramón is 74 and lives in Salamanca. In 1998 he bought a flat for 90,000 €, costs included, which today has a cadastral reference value of 260,000 €. He wants it to go to his daughter Irene, and a friend has told him that "it's better to give it to her now, because you pay a fortune on an inheritance". Before going to the notary, Ramón ought to know that the gift sets in motion a tax that an inheritance would never charge him: income tax on thirty years of increase in value.
Three taxes, not one
When people compare giving with inheriting, they usually look only at the Spanish inheritance and gift tax (Impuesto sobre Sucesiones y Donaciones, ISD). That is the wrong way to frame it. A gratuitous transfer of a property can touch three taxes:
| Tax | Who pays | On a gift? | On an inheritance? |
|---|---|---|---|
| Inheritance and gift tax (ISD) | The recipient | Yes | Yes |
| Income tax (IRPF) on the capital gain | The person transferring | Yes | No |
| Municipal plusvalía (IIVTNU) | The recipient, on gratuitous transfers | Yes | Yes |
The key box is the second one. Article 33.3.b) of the Spanish Income Tax Act (IRPF) says that there is no capital gain on gratuitous transfers on the taxpayer's death. It is what is colloquially called the "dead man's gain": the increase in value built up during the deceased's life is not taxed in their income tax. A gift, by contrast, is a change in the donor's assets, and in addition any losses it produces are not taken into account (article 33.5.c).
Ramón's income tax if he gives the flat
- Transfer value: the value resulting from the inheritance and gift tax rules, not exceeding market value (article 36 of the Income Tax Act). Here, 260,000 €.
- Acquisition value: 90,000 €. To keep it simple we do not add depreciation or improvements; in a real case they are reviewed.
- Gain: 170,000 €, which goes into the savings base.
- Savings scale (State plus regional, articles 66 and 76): 19 % up to 6,000 €, 21 % up to 50,000 €, 23 % up to 200,000 €.
- Approximate tax: 6,000 × 19 % + 44,000 × 21 % + 120,000 × 23 % = 1,140 + 9,240 + 27,600 = 37,980 €, before the effects of the personal allowance.
That money comes out of Ramón's pocket even if Irene pays nothing in gift tax. No regional relief on gift tax removes it, because it is a different tax.
Inheritance and gift tax in each scenario
To show the mechanism we use the State scale and reductions in Law 29/1987. Many autonomous communities (Spain's regions) have reliefs that greatly reduce the tax in both cases, and differently for inheritances and for gifts; that is why the real calculation is done with the rules of the relevant region on the date of the event.
Gift. The State rules provide no kinship reduction for gifts (article 20.5). A base of 260,000 € and tax of 45,266.81 € (40,011.04 € for the band up to 239,389.13 € plus 25.5 % of the rest).
Inheritance, if the flat is Ramón's habitual home when he dies.
- Group II reduction because she is a daughter aged over 21: 15,956.87 €.
- Habitual home reduction under article 20.2.c): 95 % of the value, capped at 122,606.47 € per heir. 95 % of 260,000 € is 247,000 €, so the cap applies: 122,606.47 €.
- Net taxable base: 260,000 − 15,956.87 − 122,606.47 = 121,436.66 €.
- Tax: 15,606.22 € + 18.7 % on 1,678.99 € = 15,920.19 €.
The home reduction requires Irene to keep what she acquired for the ten years following the death; the details are in the reduction for the deceased's habitual home.
The full comparison
| Item (State scale, no regional reliefs) | Give today | Inherit |
|---|---|---|
| ISD paid by Irene | 45,266.81 € | 15,920.19 € |
| Income tax paid by Ramón | approx. 37,980 € | 0 € |
| Municipal plusvalía | Yes (calculated by the town hall) | Yes (calculated by the town hall) |
| Acquisition value for Irene if she sells | 260,000 € | 260,000 € (or the value at the date of death) |
Under the State rules, inheriting is cheaper twice over. In regions with very high reliefs for gifts between parents and children, the gift tax can be almost zero, but Ramón's income tax is still there.
Article 30.2 of Law 29/1987 adds together the gifts made by the deceased to the same heir in the four years before the death, for the purpose of calculating the rate on the inheritance. If Ramón gave part now and died three years later, Irene's inheritance would be assessed at an average rate calculated on the sum of both. Giving little by little does not escape progressive rates if the period is short.
When a gift does make sense
There are situations in which a lifetime gift pays off despite everything:
- Assets with no latent gain. Money does not generate a gain in the donor's income tax. Giving cash avoids the problem Ramón has with the flat. We deal with it in parents helping with the deposit on a flat.
- Assets at a loss or with little increase in value. If the flat was bought at a high price a few years ago, the gain is small.
- Family business. Article 33.3.c) of the Income Tax Act excludes the gain on a gift of businesses or shareholdings that meet the requirements of article 20.6 of the inheritance and gift tax law; the recipient takes over the donor's values and dates.
- A present need of the child. Sometimes the aim is not to save tax but for the child to have the asset now. Then it is a matter of choosing the lower cost, not of avoiding it.
A common variant is to give the bare ownership and keep the usufruct (the lifetime right to use the property). It reduces the base of the gift, because bare ownership is valued by deducting the usufruct according to the donor's age (article 26.a of Law 29/1987), but it has a catch: article 11.1.c) presumes that assets transferred by the deceased in the four years before death while keeping the usufruct form part of the estate. And the donor's income tax gain arises all the same on the part transferred.
There are also civil-law limits: what is given during one's lifetime is counted when calculating the forced shares of the other children. If Irene has siblings, it is worth reading what the legítima is and how it affects you.
What to ask before deciding
To compare properly you need five pieces of information: the acquisition value and date of the asset, its current reference or market value, the donor's region of residence (and, for gifts of money, the recipient's), whether the property is a habitual home, and the age and wealth of the person receiving it. With those you can calculate the full bill for both scenarios, including all three taxes.
If you would like us to do that calculation with your region's rules, send us the details in the inheritance form. We do not guarantee that the comparison will favour a particular option; we give you both figures and the risks of each.
Ramón decided not to give away the flat and to make a will instead. He did give Irene part of his savings, with no gain to tax, and formalised it before a notary.
Comparisons between giving and inheriting with donors or heirs outside Spain are dealt with within Salama Tax for inheritance and gifts, where in addition to the Spanish tax you have to coordinate with the adviser in the other country.