Spanish Inheritance Tax Don’ts #1: The Improbable Sale to Children

September 25th, 2010

Following my previous post in which I briefly described the common pitfalls of non resident inheritance planning, in this post I will analyse a bit more in detail the first point: what involves selling your property to your children.

The sale of property by the parents to the children is called in Spanish law (presumably also that of other countries’) a “simulated” sale, which means that it is not real, normally for one (of all) of the following reasons:

Lack of proof of payment of the purchase price: this is an obvious conclusion and needs little explanation: if no money has changed hands then no sale has happened.
Lack of financial capacity to acquire property or assets (this is typical of children or people with no known occupation).
Low or unreal price: This indicative fact is normally assessed in conjunction with others, such as the one below.
Relationship between seller(s) and buyer(s): This is also an indicative fact to conclude that there was no intention to really sell a property.
The “seller” remains in control of the property, what is called in Latin legalese, retentio posesionis.
Reformations made by the “seller” on a property which no longer belongs to him. According to existing case-law (and logic), this openly defies the rules of normal human behaviour for nobody would spend substantial sums in someone else’s property, nor (according to these rules, and the judge) nobody would consent someone else to make reformations in his own property, without a contract of some type

Because a “simulated” sale is null and void, the transaction can be challenged by the Tax office, other inheritors or creditors. The consequence of this happening is that the transaction could be classed as gift (donation) and taxed accordingly, which implies that the gifter has to pay Capital Gains Tax in addition to Gift Tax paid by the beneficiary, which is the same as IHT but without applicable allowances, certainly not a nice situation to be in!

As an example, if a €240,000 property was sold “illegally”, that is, with no consideration, to a child or to a friend (higher tax scenario), and it was successfully proven that it was a simulated sale, then applicable taxes would be of €40,000 and €90,000 respectively!

A variation of this would be where the funds are given to the children who then buy the property. This, in itself, is a gift, but it does not necessarily have to take place in Spain (true for non residents). Residents, on the contrary, are subject to Spanish tax rules and regulations.