Choosing between donating while you are alive or leaving your estate as an inheritance is a complicated decision and depends on multiple factors. The tax implications of each option, the regulations applicable in each autonomous community of Spain and the patrimonial situation of the donor, are decisive when making the most advantageous decision. This choice is of great importance, since it directly affects the patrimonial assets and the future of loved ones.
In the first place, it is necessary to know what both possibilities consist of, assuming that both allow the distribution of assets. In the case of inheritance, the transmission of the patrimony is made after death, while the donation during life allows the transmission of all or part of the assets during the life of the donor. Both options bring with them benefits and obligations, without it being possible to affirm that one option is better than the other in all cases. It is important to point out that in a living donation, the donor assigns his or her assets and the person to whom they are assigned must accept them, and it is essential that they reach an agreement for the donation to be possible. In this way, the person who receives the donation has the possibility of expressing her preferences to the donor.
In the case of inheritance, being the transmission after death, what is stipulated in the will cannot be subject to change. On the other hand, the will can be modified during life as many times as you want. Another noteworthy difference is that a living donation can be reversible if there is a binding contract in it and it is breached, or even if the person receiving the good commits a crime against the donor.
From the point of view of the donee, the person who receives the inheritance or the donation, there are also differences to take into account. This is one of the most important factors to assess when choosing the way to distribute the assets. In the case of a living donation, with few exceptions, the donation is deducted from the inheritance, not being able to reduce the legal third part corresponding to the legitimate one.
This means that living donations in favor of the donee will become part of what corresponds to him as an inheritance, the value of the donation being at the time of distribution discounted from the part that corresponds to him.
When accepting the donation or inheritance, in both cases, the donee must face the Inheritance and Donation Tax. It is a direct tax that the recipient must pay and, as inheritance and donation are very different circumstances, they are collected within the same legal figure. Once this tax has been settled, either by inheritance or a living donation, it must appear in the income statement.
Both in the case of living donations and inheritances, the payment of the municipal capital gains must be made, which is how the Tax on the Increase in Value of Urban Land, (IIVTNU) is known.
Regarding personal income tax on living donations and although it must be applied in a general way, it should be noted that there are exemptions. If the donor’s assets are worth more than when they were acquired, they must be included as capital gains in the donor’s return and must pay the corresponding personal income tax, which can be around 20%. Except in the cases specified and categorized as exceptions, in which the donee would be exempt from paying this tax.
There are specific patrimonial situations in which the advice of an expert is necessary to determine if a living donation or an inheritance is better. For this, it is key to know, for example, the taxation to take into account in the acceptance of an inheritance.
The donation in life favors direct help, since the goods are delivered immediately. On the contrary, in the case of an inheritance, you have to wait for the death of the person and you have to comply with certain mandatory procedures and manage the necessary documentation to process an inheritance before the delivery of the assets.
As a general rule, donations have personal benefits when the amount of money is very high, when there may be disputes between heirs, or when there are company shares in the assets. But what has to be donated is the excess assets, not the personal ones, since once the donation is made, control over it is lost
The Inheritance and Donations Tax is the tax that regulates inheritances and donations during life, which obliges to pay taxes to the Tax Agency and at the regional level depending on who transmits and to whom it transmits. Each autonomous community regulates this process differently and applies different reductions, exemptions and bonuses.
If a property is donated or inherited, you must also pay the Tax on the Increase in Value of Urban Land, better known as Municipal Capital Gains Tax. The payment of these taxes corresponds to the heirs and donees.
Regarding personal income tax, inheritances are exempt from this tax –unless the assets generate separate income, such as rent or an investment fund–; On the other hand, in donations, the donor will have to declare the donation as a capital gain.
From a tax and cost perspective in general, inheriting is cheaper for the recipient of the assets with the living donor. It is also necessary to take into account the differences between communities when paying the Inheritance and Donations Tax. There are communities that offer significant reductions and bonuses depending on the tax base or the degree of kinship at the time of inheriting, which makes inheriting more profitable.