Acquisition Value in a Gift of Bare Ownership by the Donor

How to calculate the donor’s acquisition value when gifting bare ownership

This post explains how to determine the acquisition value of real estate when calculating a possible capital gain or loss for Spanish Personal Income Tax in cases involving a gift.

When a property’s bare ownership is gifted, the donor will realise a capital gain or loss, because the composition of the donor’s assets changes, giving rise to a change in value. This follows from Article 33.1 of Law 35/2006 of 28 November on Personal Income Tax and the partial amendment of the laws on Corporation Tax, Non-Resident Income Tax and Net Wealth Tax (Official State Gazette of 29 November). The gain or loss is calculated as the difference between the acquisition and transfer values, as set out in Articles 34 et seq. of that Law. Those values are defined in Articles 35 and 36 for transfers for consideration and transfers without consideration, respectively.

For transfers for consideration, the acquisition value is the actual amount paid to acquire the property, plus the cost of any investments and improvements, as well as the expenses and taxes inherent in the acquisition that were paid by the purchaser, excluding interest.

The transfer value is the actual amount for which the disposal took place, less the expenses and taxes inherent in the transfer that were paid by the transferor. The actual disposal value is the amount received, provided it is not lower than the normal market value; if it is lower, the market value prevails.

Article 36 of that Law provides: “Where the acquisition or transfer was made for no consideration, the rules in the preceding article shall apply, using as the actual amount of the respective values those resulting from the application of the rules of Inheritance and Gift Tax, which may not exceed market value. (…)”

Accordingly, the capital gain or loss is calculated as the difference between the transfer value of the bare ownership (the value resulting from the Inheritance and Gift Tax rules) and the portion of the acquisition value attributable to the bare ownership.

To determine which part of the property’s value corresponds to the usufruct and which to the bare ownership, Article 26(a) of Law 29/1987 of 18 December on Inheritance and Gift Tax applies. It provides:

“a) The value of a temporary usufruct shall be deemed proportional to the total value of the assets, at a rate of 2 per cent for each year, up to a maximum of 70 per cent.

For lifetime usufructs, the value shall be estimated at 70 per cent of the total value of the assets when the usufructuary is under twenty years of age, and shall decrease as the usufructuary grows older, by one percentage point for each additional year, subject to a minimum of 10 per cent of the total value. The value of the bare ownership right shall be calculated as the difference between the value of the usufruct and the total value of the assets. Where a lifetime usufruct is also temporary, the bare ownership shall be valued under whichever of the preceding rules assigns it the lower value.

(…)”

Therefore, the transfer value of the bare ownership is the property’s total value less the value of the usufruct at the time of the gift. The same proportion may be used to determine which part of the acquisition value corresponds to the bare ownership and which to the usufruct.

If a capital loss arises, it is not taken into account under Article 33(5)(c) of the Tax Law, which excludes, among other things, losses arising from transfers for no consideration made between living persons or from gifts.

Any capital gain would be included in the savings tax base, as it arises from a transfer, in accordance with Article 49 of the Tax Law.