Inheritance and gift tax

Inheritance and Gift Tax is the tax charged on capital gains obtained without valuable consideration. In other words, it is the tax paid by a person who receives an inheritance or certain types of gifts. The term covers two different concepts (inheritance and gifts) that are both included in the same legal precept. Also, and although this is not often known about, this tax is also charged on amounts received by life insurance contract payees if the contracting party is different to the payee, unless they pay income tax.

Inheritance tax is applied to a person's estate after he/she dies. In order to proceed, there must be an heir at law or the person who died must have written a will. If neither of the above circumstances apply, or if an inheritance is renounced, the central or autonomous region government (in accordance with the law) will acquire the assets at issue.

As regards gifts, a tax is charged on the value of a financial gift or another tangible asset received by an individual. An example of this is if one relative gives another a property, vehicle or money as a gift. Although on this occasion the gift is given when both parties are still alive and not when the person granting the asset has died, it must still be taxed.

Characteristics of Inheritance Tax

It is important to highlight four of the main characteristics of Inheritance Tax in order to define and categorize it:

It is a personal tax: it must be borne and paid by the individual who receives the inheritance or gift.

It is a subjective tax. Therefore, the circumstances of the taxpayer (i.e., the individual who receives the asset and is responsible for paying the tax) are taken into account.

It is a direct tax: it is applied to the transferred income or assets and is paid to the Tax Agency.

It is a progressive tax: this means that a higher tax rate will be charged on larger quantities of taxable income. Accordingly, the greater the amount or value of the asset received, the more tax will be payable.

Regulatory framework

The Inheritance and Gift Tax is governed by Law 29/1987 of December 18 and Royal Decree 1629/1991 of November 8, approving the Regulations of said tax. However, this tax is assigned to the Spanish Autonomous Communities, which can exercise certain powers, such as regulating taxable income reductions, tax rates, and tax deductions and rebates.

As a result of this, tax rates may vary in different regions in Spain.

Inheritance tax must be paid within a period of six months following the death of the person transferring the assets, while gift tax must be paid within a period of 30 business days from the day after the date on which the gift was registered (there are some exceptions to this rule). Payments must be made to the Tax Agency using form 650 (mortis causa acquisitions), form 651 (gifts) or form 655 (consolidation of ownership due to the extinction of the usufruct).

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