What does gifting a property while keeping the usufruct involve?

Question

José Manuel Alburquerque · Accepted Answer

It means that the donor, usually a father or a mother, gives the property to a child or someone else, but keeps the usufruct for life, which is the right to use it and to collect any rent it produces. The child becomes the bare owner, which means owning the asset without being able to use it while the donor is alive. It must be done by public deed and there is no going back on it except in very specific cases. When the gift is made, the child pays the “impuesto de donaciones”, the Spanish gift tax, on the value of the bare ownership and may have to pay something more when the donor dies. The donor may have to pay income tax on the gain, unless they are over 65 and are giving away their principal residence. What changes for each party The donor can go on living in the property, or let it and collect the rent, for the rest of their life. The child cannot use it or ask the donor to leave. The child can sell their bare ownership, but the buyer will have to respect the usufruct. Selling the whole property requires both of them. When the donor dies, the usufruct ends and the child acquires full ownership without the need for another deed. If the child dies first, their bare ownership passes to their heirs, unless it was agreed in the deed that the property would then return to the donor. The gift does not put the property beyond the reach of debts the donor already had, if the donor has no other assets left to pay them. In addition, when the donor dies, what was given may count when calculating the forced share (“legítima”) of the other children. Taxes when the gift is made If the property is in Catalonia, the child files the return with the “Agència Tributària de Catalunya”, the Catalan tax authority, within the month following the deed. It is calculated as follows: The child pays only on the bare ownership. Under the national law on the tax, a lifetime usufruct is worth a percentage equal to 89 minus the donor's age, with a minimum of 10 % and a maximum of 70 %. The bare ownership is worth the rest. But the tax rate applied is the one that would apply to the whole property. With a public deed, the Catalan rate between parents and children is 5 % on the first 200.000 euros, 7 % on anything above that figure up to 600.000 and 9 % on the rest. The Catalan tax authority takes as the property's minimum value its “valor de referencia”, the reference value set by the Spanish land survey office, the “Catastro”. For example, a 70-year-old mother gives her son a flat worth 300.000 euros and keeps the usufruct, which is worth 19 %. If she gave the whole flat, the tax would be 17.000 euros, 10.000 on the first 200.000 and 7.000 on the other 100.000. As the bare ownership is worth 81 %, the son pays 81 % of that amount, 13.770 euros. The 95 % tax break for a young son or daughter's first home is unlikely to apply, because the son does not have the use of the flat. The donor declares in their income tax return the gain corresponding to the bare ownership, if the property is worth more than it cost them. They pay nothing on it if they are over 65 and it is their principal residence, even if they keep the usufruct. In general, they must have lived there for three consecutive years and still be living there when making the gift or have done so in the previous two years. The child also pays the “plusvalía municipal”, the municipal capital gains tax, without the tax breaks that town councils may apply on inheritance. When the donor dies When the usufruct ends, the child may have to pay something more to the tax authorities for that part, although not as income tax. If the donor dies within four years of the gift, the law on the tax presumes that the property is still part of their estate. In that case too, something more may have to be paid. In Catalonia, inheritance attracts tax breaks that do not apply to gifts, such as the 95 % tax break for the deceased's principal residence. For a child, inheriting usually works out cheaper. Giving in this way allows the division of assets to be brought forward without the donor being left without a home, but it does not always save tax. It is advisable to do the sums before signing.