Gifts: when the least costly part is the gift tax
When considering the tax cost of a gift, besides gift tax, there are other taxes which at times can be more costly than the gift tax itself, such as personal income tax and tax on the increase in the value of urban land, known as the “municipal capital gains tax”.
In this regard, when making a non-monetary gift, the personal income tax implications for the donor are the same as for a sale, and the donor will be taxed on the difference between the market value and the acquisition cost of the donated asset, at the marginal rate of 23%.
To facilitate gifts of family enterprises, the Personal Income Tax Law establishes that where the gift is of a company to which the 95% gift tax reduction applies, the capital gain generated for the donor will not be subject to personal income tax, and the asset shall keep the same acquisition cost and age for tax purposes for the recipients as it had for the donor.
The 95% gift tax reduction will mainly apply when the donor is 65 years or older, and if he/she has been performing management functions, he/she ceases to perform them and to receive compensation for them, and only in the proportion in which the assets are assigned to the business activity. In other words, if the company has surplus cash or real estate not used in the business, gift tax will be levied in full on the proportional amount corresponding to these assets, and according to the recent interpretation by the Directorate-General of Taxes, that amount must also be included as a capital gain in the donor’s personal income tax return.
Also, if a loss is incurred as a consequence of the gift, it will not be deductible for personal income tax purposes, and cannot even be offset against the income generated from gifts of other assets made in the same act.
Furthermore, in the case of gifts of real estate, municipal capital gains tax will be chargeable, and the party obliged to pay the tax is the person who receives the gift.
Lastly, gifts made in Cataluña between parents, children and spouses, provided they are formalized in a public deed, will be subject to the reduced gift tax rates, with the minimum taxation being 5% in these cases and the maximum 9%, depending on the amount of the gift.
Garrigues Tax Law department