Whether or not you agree with the concept of a gift tax, the fact of the matter is that when we make a substantial material gift to someone, that transfer is subject to Spanish gift tax. Unlike in some other countries, Spanish gift tax is paid by the recipient of the gift or inheritance, not by the estate giving the gift. In Spain, inheritances and gifts are taxed under the same law, “Impuesto sobre Sucesiones y Donaciones” or ISD for short.
The laws around gift tax rates, gift tax limits and exemptions are complex. Even the definition under tax law of what constitutes a gift can be counter-intuitive (for example, allowing someone use of an asset, such as a house, may constitute a gift for tax purposes). For that reason, it is wise to seek advise from professional lawyers or accountants to ensure you meet your tax obligations while ensuring you don’t pay any more than necessary.
What are the current gift tax rates and gift tax limits in Spain?
Spanish gift tax rates follow a progressive system, with a base tax rate determined by the value of the gift. That amount is then multiplied by a certain multiplier depending on the relationship between the donor and the recipient and the recipient’s pre-existing net worth. Then, depending again on the closeness of the relationship and other factors, the recipient may be subject to a tax-free allowance up to a certain amount.
Currently, the lowest base gift tax rate is 7.65%, which applies to gifts valued from €0 to €7993.46. The highest base rate is 34.00%, for gifts over €797,555.10. This is before any multipliers; in Spain, the gift tax limit is quite high, with a recipient of a large gift, distant relationship and no other reliefs and exemptions paying up to 82% as an effective rate.
How do you file a gift tax return?
Spanish gift tax must be paid using a gift tax return form on any Spanish asset being transferred, regardless of the residency status of the recipient. Similarly, any Spanish resident must pay gift tax if they are the recipient of a gift, regardless of what country the asset is coming from.
The form needed to file a gift tax return is called Modelo 651. Like most tax forms, it can be confusing to fill out correctly, so the assistance of an accountant or other professional is very helpful here.
Also, keep in mind that multiple gifts made to the same recipient in a period of three years are treated, for tax purposes, as a single gift, which may affect the base tax rate.
Finally, depending on your country of residence, you may be required to pay gift tax on the transfer of a Spanish asset in that country as well.
How non-residents can reduce their Spanish gift tax rate
One interesting workaround to help non-residents pay less Spanish gift tax if they wish to gift someone Spanish property is to start a company in their home country. They then make the new company the owner of the property, and instead of gifting the property directly, they issue shares of the company to the recipients. As long as the recipient is not a Spanish resident, Spanish gift tax will not apply because the asset being transferred is not Spanish either. However, a 1% transfer tax and additional capital gains tax may apply.