THE USE OF THE USUFRUCT TO REDUCE SPANISH INHERITANCE TAX
It is very common to find ourselves in situations where it is advisable to study various financial possibilities in order to find the best tax formula when purchasing real estate.
On many occasions we find that many of our clients ask us about the best way to save inheritance and inheritance taxes in the future. That is to say, it is very common to find clients who integrate the acquisition of the property within an organization chart and asset structure in which they consider in the long term the eventual repercussions that the acquisition of a property in Spain may have on the future payment of the Spanish inheritance tax.
In this regard, it must be said that, as we indicate on our specialized inheritance section, taxes derived from the succession or inheritance of real estate located in Spain are subject to Spanish inheritance tax. Therefore, when purchasing a home in Spain, it is advisable to study the different formulas that can help us reduce or avoid inheritance tax in Spain.
One of the formulas most used by our clients is the usufruct.
The usufruct consists of the right to use and enjoy the property exclusively by those who hold this right, who are different people from those who hold the ownership of the property. That is, it is a division of two rights that affect property:
- The right to use and enjoy the property, which translates into the right of usufruct.
- The right of ownership of the property, which translates into the right of bare/naked property.
Therefore, when we find ourselves in this type of situation, what happens is that one person can acquire the use and enjoyment of a property, and another can acquire the entire property. The main consequence of this is that whoever holds the right of usufruct over the property has the right to use and enjoy it exclusively, without the other person being able to use it, or enter, rent it, or use it, ot EVENT TO SELL IT, without the consent of the person who has the right of usufruct.
In other words, whoever owns the usufruct can rent, live, use, etc the property as the real owner. The property cannot be rented, neither use or access, nor sell it without the consent of the usufructuary.
The most common case that we find is where parents who are in process to buy a property and want to have the children as owners, but keeping the exclusive use of the property for themselves, And, in the event of succession or inheritance, said property is passed to their children avoiding to pay Inheritance tax on the property for the usufruct.
With which, the most common case that we find in our office is that of the parents who acquire the right of usufruct of the property, and the children acquire the bare/naked ownership.
There is a formula to assess the percentage of property that holds the right of usufruct, and that of null ownership. This formula can be found in our specialized article.
An example, following the legal formula, the usufruct right is valued at 30%, and the rest of the property, or baked property, can be valued at 70 %.
In this way, the purchase transaction is instrumented as follows:
-Parents acquire the usufruct, which represents 30% of the property.
-The children acquire the anuda property, which is identified with 70% of the value of the property.
Following this example, parents, as usufructuaries of the property, enjoy and use it exclusively while they are alive, being able to prevent anyone from using it, including other members of their family. That is, they can prevent the use of the property by the same children who are the holders of the bare right of ownership, since the parents are the ones who hold the exclusive right to use it.
When the parents die, the right of usufruct is automatically extinguished, so the children, documenting the death of their parents, automatically become 100% of the owners of the property, and the USUFRUCT PART IS EXEMPTED OF SPANISH INHERITANCE TAX.
In this way, the immediate consequence is that the heirs, in the event that they become the 100 % holders of the right to the property, do not pay the inheritance tax on the part of the property that supposes the right of usufruct. That is to say, and following the example, they would not pay the succession rights from the 30% that the usufruct supposes.
However, as we explain in our specialized article, the heirs , although they will not pay Inheritance Tax on the acquisition of the usufruct part, they will have to pay the part of the purchase tax that was not paid at the time by the usufructuaries.
That is, at the time of acquiring the property, the parents, or the usufructuaries of the property, paid the purchase tax of the usufruct right, but not of the property. In other words, the tax they paid was to acquire a usufruct right, therefore, not the property right, which remained latent while the usufruct right was in force.
With which, the right or the payment of the purchase tax of the party that supposed the usufruct, in this case of the example of 30%, in case of death of the parents, or of the usufructuaries, would be pending to be paid by part of the heirs who receive this property.
I WISH TO BUY THE PROPERTY ON MY CHILDREN’S NAME
Another aspect to consider when buying a property on the children’s name is the origin of the funds used on the acquisition.
We receive a high number of clients who wishes to buy the full or part of the percentage of the ownership of the Spanish property on the children’s name.
This is perfectly possible in Spain, but with certain points to consider:
- The property in Spain is bought by the ones who pay for it. The buyer will be always the one who is paying for the price of the property.
- So, nobody can buy a property using the money of someone else. Even if the other is the father, the mother, or the spouse.
The above is very important to take into account in Spain, because, in case the children are buying the property using the funds from their parents this is a “DONATION”. Donation is the act where someone “gives” something to other free of charge, and without any correspondence.
If these cases are not properly instrumentalized in your country of origin, and the Spanish system detects that the Children are usging the money of their parents, this can be considered as a “donation” in Spain. And the main consequence of this is that in Spain, the Donation tax payment is quite similar to the Inheritance Tax.
So, in case that you wished to buy the property for your children, in order to avoid them to pay Inheritance Tax in the future, , and you do not obtain the proper legal advice about how to do it properly, you could be paying “Donation Tax” when acquiring the property.
A way to avoid to avoid to be taxed in Spain as a Donation, is formalizing that donation in your country of origin. For that, it will be necessary the following:
- To visit a Public notary on your country and ask him to formalize the Donation Act of a determinate amount on the name of the children. In this act, it is very important to indicate the notary to include in the deeds the following content:
- That this donation will be used to buy a property in Spain exclusively
- In case the children are married in a regime of “community of assets”, then, the children’s spouses must also sign the notarial act of the donation, recognising that the funds which are received by that donation are of “private” use of the receiver spouse, so, in no case will be part of the community assets of the couple.
- The notarial act must obtain La Hague Apostile, and must be translated into Spanish by an official translator.
- Once the act is formalized at the notary office, the parents can make the transfer of the funds to the bank account of their children.
- Then, each one of the payments on account of the purchase price must be respecting the percentage of each of the buyers.
- At the end of the acquisition process, the children will need to provide to the Spanish notary :
- The original of the Donation notarial act, apostiled with La Hague Apostile, and translated in Spanisg by an official translator
- The original marriage contract (or a notarized copy) apostiled with La Hague Apostile, and translated in Spanish by an official translator. This obligation to supply the the original marriage contract (or notarized copy) will be in both cases: marriage in Community of Assets, or marriage in Separation of Assets.
- The notary will request the different buyers all the copies of the transfers and payments to proof that each one of the different buyers have paid their part of their ownership from their own funds.
- Purchase expenses: On top of the purchase price, there will be expenses and taxes derived from the acquisition. The different buyers must pay also these expenses and taxes proportionally to the percentage of ownership which correspond to them.