In estate and succession planning, a bare ownership donation with a lifetime usufruct reserved for the donors is a common legal transaction. However, splitting ownership has immediate tax consequences for both parties.
The donee pays Inheritance and Gift Tax. The donor, for their part, must assess how the transfer affects their Personal Income Tax.
The General Directorate of Taxes has clarified how to assess these cases. In particular, it defines how the donor must calculate the change in net worth.
Bare Ownership Donation: A Change in Net Worth
A lifetime gift of bare ownership changes the composition of the donor’s assets. Under Personal Income Tax rules, this change creates a gain or a loss.
To calculate it, the donor compares two figures: the acquisition value and the transfer value of the ownership interest.
Since a donation is a gratuitous transfer, the Inheritance and Gift Tax rules set the transfer value. However, this value can never exceed the fair market value.
How to Value Bare Ownership
The main difficulty is splitting the property’s value correctly. In other words, the donor must determine which share corresponds to the bare ownership and which to the reserved usufruct.
For this, the Personal Income Tax Law refers to Article 26 of the Inheritance and Gift Tax Law. For a lifetime usufruct, the value depends on the usufructuary’s age:
- The usufruct equals 70% of the property’s value if the usufructuary is under 20.
- This percentage drops by 1% for each additional year of age, down to a minimum of 10%.
Therefore, the transfer value of the bare ownership is the property’s total value minus the usufruct value at the time of the gift.
In addition, the donor must apply the same proportion to the property’s original cost. This gives the acquisition value for the calculation.
Tax Treatment of Gains and Losses
The law treats gains and losses very differently in a bare ownership donation:
- Gains are taxed. If the donor makes a capital gain, it goes into the savings tax base and is taxed at the savings rates.
- Losses are not deductible. If the donor makes a capital loss, the law does not allow its deduction. As a result, it cannot offset other income for that tax year.
Conclusion: Plan Before You Donate
A donation with a reserved usufruct is a useful tool for transferring assets in an orderly way. However, it requires tax planning in advance. Otherwise, the donor may face an unexpected and substantial tax bill.
For this reason, it is essential to calculate the acquisition and transfer values correctly and to apply the age-based usufruct rules carefully.
At CYSAE, our corporate and estate tax team designs asset restructuring strategies. We ensure full regulatory compliance and maximum tax efficiency for our clients.
