The Flemish Government recently announced that the so-called "suspect period" for movable donations will be extended from 3 to 5 years. This means that if the donor dies within 5 years of an unregistered donation, (higher) inheritance tax may still be due.
This change also affects the split purchase of foreign property, such as in Spain. A split purchase is often financed through a bank gift, making it crucial to think carefully about succession planning when buying Spanish property. In some cases, retrospective gifting of Spanish property can be a more advantageous alternative.
Even if you already own Spanish property, a gift may be worth considering. Many Spanish regions currently have favourable gift tax rates, offering an attractive opportunity to transfer property to the next generation inexpensively.
In this article, you will read why gifting Spanish property can be a smart move.
The classic: the split purchase
In a split purchase with the parents and children, the parents buy the usufruct of the property. With usufruct, the parents retain control over the property: they can use the home at will and also rent it out if they wish. In return, the usufructuaries cover periodic charges, such as local taxes and maintenance costs.
The children buy the bare ownership of the property. They have no right of use and are not liable for periodic charges and taxes on the property. Later, normally on the death of the usufructuaries, they become full owners.
In the above scenario, prior to buying the property, the parents will gift the money to finance the bare ownership to the children. With the donated money, the children will then buy the bare ownership. If the gift is a bank donation is concerned (a so-called indirect donation), the donation is tax-free in Flanders on condition that the donors continue to live for another (currently 3, from 2025 years perhaps ) 5 years. This period is referred to in jargon as the 'suspect period'. Upon death within the suspect period, the donation is taxed at the high progressive rates of Flemish inheritance tax (3% - 9% - 27%).
With a registered moveable gift, for example via a notarial deed, this suspect period does not apply, but you pay a flat rate of 3% (or 7%) gift tax in Flanders.
To avoid this suspect period and to avoid paying gift tax in Belgium, a property donation in Spain may be a valid alternative.
After purchase Spanish donation
Because of the low gift taxes in most autonomous regions in Spain, it may be more interesting for the parents to buy the full property first and then gift the bare property to the children. In Costa Blanca, Murcia and Andalusia, for example, there are currently 99% tax credits for beneficiaries in the direct line and the surviving partner, making the final gift tax quasi non-existent.
In Spain, capital gains tax is also levied on the gift. However, if the gift follows quickly after the purchase, no capital gain is realised yet and therefore no capital gains tax is payable.
However, those who already own foreign property may therefore first check what the minimum tax reference value is with real estate. This value is used as the taxable basis of Spanish gift and capital gains tax. If this value is lower than the purchase price, plus the purchase costs, there is still no capital gains tax to pay.
Moreover, the so-called suspect period does not apply to real estate donations. When donating foreign real estate, there is no registration requirement in Belgium. You therefore have no risk of the higher assessment in Flemish inheritance tax for a period of 5 years (3 years in 2024). In addition, there is also no push-up effect in Flemish inheritance tax.
The accretion of usufruct
On the death of the usufructuaries, the bare owners become full owners. The value of the usufruct, which returns to the bare owner, is called the 'accretion' and is taxed in Spain. This tax depends on how the usufruct is created.
If usufruct arose through a split purchase, transfer tax is applicable. These are rates of 10%, 8% and 7% respectively in Costa Blanca, Murcia and Andalusia. The rates are levied on the value of the usufruct at the time of the usufructuary's death.
If it usufruct arose by gift, the gift tax applies from the moment the donation took place. This means that the value of the usufruct will quasi not be taxed. Another reason to donate bare ownership afterwards, after purchase.
In Flanders, accretion is tax-free.
Decision
Between (grand)parents and (grand)children, split purchases are less interesting than donating bare ownership afterwards, after purchase:
- there is no suspect period of (soon) 5 years, with risk of high taxes in Flemish inheritance tax;
- there is no gift tax to pay in Flanders;
- Spanish gift tax is negligible thanks to reductions of 99%;
- there is no capital gains tax in Spain if a timely gift is made after purchase;
- the accretion of the usufruct is later quasi untaxed.
For these reasons, a gift is preferable to a split purchase in most cases. Note that in succession planning, every situation is different. You need to consider several factors - which may differ depending on the situation - when drawing up a conclusive plan.
Review our free webinar
Retrieved from Thursday 24 October we organised a free webinar explaining the different options about gifting in Spain.
Duration: +/- 45 minutes
Do you have any questions about donating in Spain? If so, please feel free to contact with us. We can assist you with the settlement of a gift in Spain.
