Gifting a high-value property to children in Catalonia

If we own a flat, house or any other high-value property and want to transfer it to our children, one of the first questions is whether it is better to do so now through a gift or wait for them to receive it as an inheritance.

Gifting a property to children in Catalonia can give rise to taxes both for the person receiving the property and for the person transferring it. Therefore, we should not only calculate Gift Tax.

The same transaction may involve Inheritance and Gift Tax, the parent’s personal income tax, municipal capital gains tax and, for certain estates, future implications for Wealth Tax, the Solidarity Tax on Large Fortunes or estate planning.

At Barcelona Tributario, we are tax lawyers specialising in estate planning, gifts and inheritances in Catalonia. Before going to the notary, we calculate what happens if we make the gift now and compare it with the scenario of retaining the property until a future inheritance.

What taxes are payable when gifting a flat to a child?

We need to distinguish what each person pays.

The child: Gift Tax

The child who receives the property free of charge must settle Inheritance and Gift Tax under the gifts category.

The father or mother: possible personal income tax

For the parent, giving away the property may generate a capital gain even if they receive no money in return.

Municipal capital gains tax

If urban land or a property incorporating such land is transferred, we must also review the Tax on the Increase in Value of Urban Land.

In a free transfer, the taxpayer is normally the person acquiring the land or right, namely the child.

How much does a child pay on a gift in Catalonia?

There is a very important difference between the general tax scale and the reduced scale for certain gifts between close relatives.

Reduced scale between parents and children

Where the legal and formal requirements are met, gifts between ascendants and descendants may currently benefit from a reduced scale:

• 5% on up to 200,000 euros of taxable base.
• 7% on the band between 200,000 and 600,000 euros.
• 9% on the amount exceeding 600,000 euros.

This scale is particularly relevant when we want to gift a property to children in Catalonia.

A public deed is essential

The reduced scale for groups I and II requires compliance with the formalisation requirements set out in the legislation.

For a gift of real estate, we must structure the transaction correctly in a public deed and subsequently settle the tax.

The child’s existing wealth also matters

After calculating the gross tax liability, a coefficient linked to the relationship and the donee’s pre-existing wealth is applied.

For children and other taxpayers in groups I and II, the current coefficients are:

• Pre-existing wealth of up to 500,000 euros: 1.00.
• Between 500,000 and 2,000,000 euros: 1.10.
• Between 2,000,000 and 4,000,000 euros: 1.15.
• More than 4,000,000 euros: 1.20.

Therefore, two children receiving exactly the same property may not necessarily bear the same cost if their pre-existing wealth differs.

Is there a 95% reduction for gifting a home to a child?

There is no general 95% reduction simply because a parent gifts their home to a child.

This is a point that causes considerable confusion.

The child’s first main residence

Catalonia does provide a 95% reduction for certain gifts of a home that will become the descendant’s first main residence, or of money intended to acquire it.

However, this reduction is subject to requirements and has a maximum limit.

Relevant requirements

Among other conditions, we must currently check:

• That it is the descendant’s first main residence.
• That the donee is under 36, except in certain cases of disability.
• That the statutory income limit is met.
• That the residence and retention requirements are observed.
• That the transaction is formalised correctly.

The general limit for the reduction is currently 60,000 euros, which may be increased in certain cases of disability.

Therefore, for a property valued, for example, at 800,000 euros, we should not assume that 95% of its entire value will automatically be exempt.

The 95% reduction for a main residence in an inheritance is different

Part of the confusion comes from the rules applicable to inheritances.

In an inheritance, Catalonia provides for a 95% reduction on the acquisition of the deceased person’s main residence for certain relatives and within the statutory limits.

This inheritance reduction should not automatically be applied to a lifetime gift.

This is precisely why, before gifting a property to children in Catalonia, we must compare the tax treatment of both scenarios.

The tax many people overlook: the father or mother’s personal income tax

This can be the most significant cost of the entire transaction.

For personal income tax purposes, a gift may generate a capital gain for the person transferring the property.

Conceptual example

Imagine that we bought a flat many years ago for 200,000 euros and its current tax value for transfer purposes is much higher.

Even if we give away the flat and receive not a single euro, a capital gain subject to personal income tax may arise.

How it is calculated

We must compare the tax acquisition value, taking into account the legally applicable adjustments, with the transfer value determined in accordance with the tax rules for gratuitous transfers.

As a general rule, the resulting gain is included in the savings tax base.

Savings tax rates

The current combined state and regional scale reaches the following rates:

• 19%.
• 21%.
• 23%.
• 27%.
• 30% for the portion falling within the higher bands.

For properties that have appreciated significantly in value, this personal income tax may be more financially relevant than Gift Tax itself.

Very important exception: donor aged over 65

The Personal Income Tax Act provides for an exemption on capital gains arising from the transfer of a main residence by people aged over 65 or people in a situation of dependency, under the legally established terms.

This can completely change the analysis.

If the property we wish to gift to our children in Catalonia is our main residence and we meet the exemption requirements, we should examine this scenario specifically before ruling out a gift.

If only bare ownership is transferred or a usufruct reservation is structured, it is also advisable to review how the specific transaction fits within the applicable tax rules.

Why can an inheritance have different tax consequences?

In a transfer on death, the deceased does not incur the same personal income tax capital gain that may arise from a lifetime gift.

This factor is particularly relevant where the property has accumulated a very substantial increase in value.

Gift

We may have:

• Gift Tax for the child.
• Personal income tax for the parent.
• Municipal capital gains tax.

Inheritance

We must consider:

• Inheritance Tax.
• Applicable reductions and allowances.
• Municipal capital gains tax.
• Tax acquisition value for the heir.

We should not decide between making a gift and leaving an inheritance by comparing only the Inheritance and Gift Tax rates.

What value should we declare for the property?

Since 2022, we must pay particular attention to the reference value.

If there is a reference value

For Gift Tax purposes, properties with a reference value must be valued at the higher of:

• Reference value.
• Value declared by the parties.

If there is no reference value

The tax base is determined using the higher of the declared value and the market value, without prejudice to the tax authorities’ powers to verify it.

For this reason, we do not recommend simply setting a low value in the deed with the intention of paying less tax.

Municipal capital gains tax on a gift

If the property is urban, we must also consider municipal capital gains tax.

For gratuitous transfers, the legislation assigns taxpayer status to the person acquiring the land or right.

The amount will depend, among other factors, on the municipality, the cadastral value of the land, the period over which the gain arose and the rules applicable at the time of transfer.

In certain cases, we must also assess whether there has actually been an increase in the value of the land.

Can I gift only the bare ownership?

Yes, we can consider gifting the bare ownership while reserving the usufruct.

This is a common approach when the owner wants to bring forward part of the transfer while continuing to use the property or receive its rental income.

What the usufructuary retains

Depending on how the right is structured, they may retain the use and enjoyment of the property for their lifetime.

The child initially receives the bare ownership

They are taxed on the value of the right they are acquiring.

The subsequent consolidation must be considered

When the usufruct ends and the child acquires full ownership, there is specific taxation for the consolidation.

Therefore, gifting bare ownership does not mean eliminating the tax relating to the usufruct. To a large extent, we are spreading the taxation of the acquisition over different points in time.

Does gifting bare ownership always mean paying less?

No.

It may make a great deal of sense from an estate planning perspective, but we must calculate:

• Initial tax on the bare ownership.
• Personal income tax for the donor.
• Municipal capital gains tax.
• Taxation of the future consolidation.
• Value of the rights transferred.

Only then can we compare it with gifting full ownership or retaining the property until inheritance.

Can we gift the flat to several children?

Yes, but we will create co-ownership if they all receive percentages of the same property.

For tax purposes, each child will be a taxpayer in respect of the share they receive, and their financial position will be taken into account.

The problem may arise later

If one child wants to sell and another wants to retain the property, management conflicts may arise.

For estates with several properties, it may be more sensible to consider an asset allocation that avoids unnecessary co-ownership.

Does it make sense to spread the gift over several years?

We must be very careful with this strategy.

Catalan legislation requires the aggregation, where applicable, of gifts and certain succession agreements received from the same donor during the preceding three years.

Therefore, artificially splitting a single transaction into several gifts made close together does not guarantee that we can repeatedly benefit from the first bands of the tax scale.

What if we first contribute the property to a company?

We do not recommend creating a company solely with the idea of “putting the flat into it and then gifting the shares”.

The initial contribution of the property may have its own tax consequences, and a future gift of shares will only benefit from family business relief where all requirements are genuinely met.

An asset-holding company that simply owns a property does not automatically become a family business.

What deadline do we have after signing the gift?

In Catalonia, the person receiving the gift must file form 651 and pay the tax, as a general rule, within one month of the act or contract.

The deadline is calculated from date to date.

We must then also deal with, where applicable:

• Municipal capital gains tax.
• Land Registry registration.
• The donor’s personal income tax in their annual tax return.

What information do we need to calculate whether making a gift is advisable?

Before gifting a property to children in Catalonia, we recommend having at least the following:

• Current value of the property.
• Reference value.
• Date and price of acquisition.
• Expenses and investments made.
• Use of the property.
• Donor’s age.
• Whether it is their main residence.
• Child’s pre-existing wealth.
• Child’s age and income.
• Whether there are other children.
• Rest of the family estate.

With this information, we can calculate different alternatives.

How we work at Barcelona Tributario

At Barcelona Tributario, we do not start by recommending a gift.

We start by running the numbers.

1. We calculate the full gift

We estimate Gift Tax, personal income tax and municipal capital gains tax.

2. We review the reductions that actually apply

The descendant’s first home, family business or other specific reliefs where applicable.

3. We calculate the inheritance scenario

We compare what would happen if the owner retained the property.

4. We consider usufruct and bare ownership

Where the family objective justifies it, we also calculate this alternative.

5. We analyse the estate as a whole

The decision concerning one property may affect the future distribution among different heirs.

6. We coordinate the structure before the deed is signed

Once the appropriate tax and estate planning option has been chosen, the transaction can be formalised consistently with the analysis carried out.

Conclusion: gifting does not always mean paying less tax than inheriting

Gifting a property to children in Catalonia can be a sound estate planning decision, but we should not make it by looking only at Gift Tax.

The child may benefit from the reduced scale applicable between close relatives, but the parent may generate a considerable capital gain in their personal income tax.

In certain cases, such as the transfer of a main residence by a person aged over 65, this analysis may change significantly.

We must also review the reference value, municipal capital gains tax, the child’s pre-existing wealth, possible reductions, usufruct, bare ownership and the effect the transaction will have on the future inheritance.

Therefore, before gifting a property to children in Catalonia, the right approach is to compare at least the gift of full ownership, a possible gift of bare ownership and the inheritance scenario.

At Barcelona Tributario, we are tax lawyers specialising in gifts, inheritances and estate planning in Catalonia. We analyse every tax before the deed is signed so that the family understands the real cost of each alternative.