Taxation in Spain: regional and central government policies
In Spain, the management of taxes is divided between the central government and the autonomous regions. Taxes such as income tax and corporation tax are controlled by the central government, whereas others, including wealth tax, inheritance tax, and gift tax, fall under the jurisdiction of the autonomous regions.
Over the past few years, some autonomous regions have chosen to lower certain taxes they manage. For instance, the wealth tax was abolished in Madrid, Andalusia, and the Balearic Islands. In response to these taxpayer-friendly decisions, the central government introduced a new wealth tax, the well-known “Impuesto de Grandes Fortunas,” which is managed at a national level.
Similarly, many autonomous regions have significantly reduced inheritance tax (IHT) and gift tax (GT) for close family members. However, in line with the introduction of the “Impuesto de Grandes Fortunas,” the central government now intends to establish a new IHT and GT to ensure these taxes are uniformly imposed across Spain, preventing any region from offering more favourable conditions.
Please find in the following table the autonomous regions who have applied reductions in gift tax and a summary of these reductions:
| Autonomous Region | Applicable Reduction |
|---|---|
| Andalucía | 99% |
| Madrid | 99% |
| Castilla y León | 99% |
| Extremadura | 99% up to €300,000, 50% between €300,000 and €600,000 |
| Región de Murcia | 99% |
| Canarias | 99.9% |
| Castilla-La Mancha | Progressive reduction from 80% to 100% depending on the taxable base |
| Aragón | 99% for descendants under 21, 99% up to €500,000 for other relatives |
| Comunidad Valenciana | 99% |
The argument against wealth tax, inheritance tax, and gift tax
When purchasing assets, individuals already pay the necessary taxes at the time of acquisition. For example, when buying a property, the buyer pays transfer tax. Furthermore, if these assets generate income, the owner must pay income tax on that revenue. Given these circumstances, why should individuals also be subject to wealth tax simply for owning an asset? This results in double taxation, which many consider unjust. In fact, apart from Switzerland (where the wealth tax is significantly lower than in Spain), Spain is the only country in Europe that still enforces this tax.
The same reasoning applies to inheritance tax and gift tax between close family members. If a married couple jointly owns assets, it seems unfair for the surviving spouse to be taxed again upon the other’s passing. This constitutes yet another instance of double taxation. Recognising this unfairness, some autonomous regions have opted to eliminate these taxes entirely, reinforcing their belief that these taxes should not exist.
Implications of a new National Inheritance and Gift Tax
As reported in the press, a new national inheritance tax may soon be introduced. This is expected to be an additional tax to the existing IHT, ensuring a minimum level of taxation on inheritances throughout Spain, and potentially on gifts as well.
For those already considering gifting assets, especially in autonomous regions that currently offer reductions in GT, it may be advisable to act promptly to benefit from these reductions before the new IHT and GT regulations come into effect.
Considerations when gifting property
If you decide to gift property to a family member, such as your daughter, there are several tax implications to consider:
• Plusvalía Tax: This tax, issued by the local town hall where the property is situated, must be paid by the recipient of the gift.
• Capital Gains Tax: This tax is paid by the donor and is calculated based on the difference between the gift value (which must be at least the reference value of the property) and the original purchase value.
To maximise tax efficiency, careful planning is important regarding both the timing of the donation and the selection of the property (in the case there is a selection of properties from which you can choose from).
The taxable base for the plusvalía tax depends on the duration of ownership. The applicable coefficients change based on the number of years since the property was acquired. For example, waiting nine years may reduce the coefficient, whereas holding the property for 20 years could increase it.
Additionally, properties purchased before 31 December 1994 benefit from a relief on capital gains applicable up to 19 January 2006. Thus, donating such properties sooner rather than later can minimise capital gains tax liabilities.
Finally, if the donor is over 65 years old and donates their primary residence, the capital gain is exempt from taxation, providing an additional incentive for strategic estate planning.
Conclusion
While tax standardisation across Spain may be necessary to ensure fairness, the existence of wealth tax, inheritance tax, and gift tax remains controversial. Regions that have abolished these taxes have done so because they view them as unfair. With the possible introduction of new national inheritance and gift taxes, individuals should consider taking advantage of current tax reliefs while they remain available. Proper tax planning can help mitigate the financial burden imposed by these taxes and ensure efficient wealth transfer to future generations.
