Donation of money from parents to children

There are many reasons why it makes sense to make gifts from parents and children instead of waiting until death and the subsequent distribution of the inheritance. One of them is, for example, to help the descendant financially in a time of need and to reduce tax payments. However, this is a legally complex issue, which we would like to explain in detail here.

What are gifts of money from parents to children?

Donations from parents to children are regulated in article 618 of the Civil Code. Specifically, it defines them as an act of detachment by which a person gives another person one or more goods (money, jewellery, real estate...) while he or she is still alive.

The latter is particularly important, as it is what differentiates a donation from an inheritance. In fact, it is a highly recommended option when the parent is clear about what he or she is going to give to each of his or her children. It is also when they wish to solve possible financial problems or, simply, to see their position improved before their death.

In short, we hope to have cleared up all your doubts about gifts from parents to children. A complex issue, but one that can be more profitable than waiting for inheritance in many cases.

How are gifts of money from parents to children taxed?

Once we have defined what a donation is, it is time to clarify what taxation is. Specifically, this figure is subject to the payment of three different taxes. Let's take a look at them.

Gift tax

When donating money or property to a child, it is the descendant who is obliged to pay gift tax. To do so, he/she has 30 working days from the moment he/she receives the donation.

This tax is regulated at state level (Law 29/1987 of 18 September 1987) and its amount varies between 19% and 23% of the value of the donation. However, it is managed by the autonomous communities.

Currently, those residing in La Rioja, Andalusia, the Community of Madrid or the Region of Murcia can enjoy a 99% rebate on the gift tax provided that they make the payment voluntarily within the 30 working days mentioned above and formalise the donation by means of a notarial public document.

But how to justify a donation of money? This aspect is key, as the Tax Agency may demand it sooner or later. Generally, the necessary documents are:

• Certificate of bank transactions. This is essential for donations of money. It must show the movement made between one account and another.
• Public deed before a notary. In this case, it is necessary when the donated asset is a real estate property. It must show the operation and the names of the donor and the recipient.
• Other notarial documents. These are required when the donation involves other types of goods, such as jewellery.

Tax on the increase in the value of urban assets

Also known as municipal capital gains tax. It is levied exclusively on real estate, such as homes, business premises, parking spaces or urban properties. It should be clarified that rural land is exempt from this tax.

The municipal capital gains tax is administered by the local councils and, as with the gift tax, it must be paid within 30 working days of the donation. In many cases, however, this can be extended.

It is difficult to determine the value of this tax, as each municipality applies its own rates. In addition, they also apply allowances, for example, depending on the number of years the property has been lived in or used. In any case, it can be quite a high amount.

Personal income tax

Both the donor and the recipient of the donation must indicate the transfer of the assets in their tax returns. However, the effects are very different.

In this respect, the donor can benefit from a tax deduction for the donations made, as they represent a decrease in his or her assets. On the other hand, the recipient of the donation experiences an increase in assets. The amount can also be quite high.

Is there an alternative to making an undeclared donation?

There are certain assets that are not usually declared when making a donation. These include, for example, jewellery and antiques, as well as small amounts of cash. However, when the amount involves relatively large sums of money or real estate, it is essential to pay the relevant taxes.

Many people, in order to make a gift during their lifetime so that their child can, for example, buy a house, resort to the formula of an interest-free family loan. However, the parent is obliged to submit a capital repayment plan, while the descendant has to pay transfer tax (ITP). 

However, both the child and the parent must prove to the tax authorities that the repayments are being made. If this is not done, the tax office will most likely interpret it as a donation and, therefore, claim the payment of the taxes with surcharge and add possible penalties.