Donation or inheritance: Which is better?
One of the eternal questions raised in our notary office is what is better, to donate or to wait to inherit, especially when it comes to parents and children. Therefore, in this article, we want to clarify certain issues that should be taken into account before making this decision, including the inheritance taxes vs the donation taxes, so that you can evaluate the best option between inheritances and donations.
What is the difference between a donation and an inheritance?
To understand the difference between inheritances and donations, we must start by defining them. A donation is understood as any act of disposition by which a person gratuitously transfers a good or right to another person. On the other hand, an inheritance is the legal act by which the goods and rights of a deceased person are transmitted to their heirs.
With both concepts in mind, the main differences between donation and inheritance are as follows:
- The cause: In a donation, the cause for making the donation is the mere will to give freely, whereas in an inheritance it is the death of the owner of the goods.
- The timing: While in a donation the transfer of goods and rights can be carried out at any time with the simple expression of will by the donor and the donee, in an inheritance it is necessary, as an essential requirement, the prior death of the owner of the goods.
- Taxes on inheritances and donations: This is where the main difference between donation and inheritance lies, at least in practical terms.
Donate or Inherit: Which is Cheaper?
To answer the question of what is better: to donate or to inherit?, we must take into account the inheritance taxes and the donation taxes, as the fiscal cost is often the most expensive. There are different taxes that would be applicable both to donations and to successions, and their analysis will help us know whether it is better to donate or to inherit.
The inheritance and gift tax (ISD)
Both taxes are regulated by the same national law, the Law on Inheritance and Gift Tax 29/1987, although the regulation of tax rates and allowances, which fall under the jurisdiction of the Autonomous Communities, varies from one to another. In general, taxation on inheritances tends to be more favourable than on gifts, although, as we have already mentioned, this will largely depend on each autonomous community, and especially on the degree of kinship.
If you wish to expand this information, you can read this article.
It is important to know that, in both cases, the taxpayer, who is the one who must pay the tax, will be the beneficiary of the succession or the donation.
The municipal capital gains tax (IIVBNU)
In the event that the inherited or donated asset is an urban property, this tax should be paid for the Increase in Value of Urban Land, and the amount will vary depending on the length of time the previous owner held the property.
The person obliged to pay this tax will be the donee or the heir, upon receiving the said property free of charge.
You can learn more by reading our post about the land registry.
Income tax (IRPF) and donations and inheritances
Here we encounter the most important issue, as donations may be subject to income tax, moreover, the person who must pay this tax is not the donee, but the donor, that is, the one who "gives" the asset to another. If the donor acquired it for one value and donates it for a higher value, the Tax Agency understands that there is a gain, and it must be taxed in the income tax.
This tax will not apply when, for example, what is donated is money, since there is no variation in the nominal value of money.
For its part, inheritances are exempt from this type of tax, even though they represent an increase in assets in favour of the heirs, which is called the deceased's capital gain. This represents a substantial difference between donation and inheritance.
And then, what is better: to donate or to inherit?
In principle, and from the point of view of fiscal and tax cost, it seems that inheritance is the best option, but other important factors must also be taken into account.
As we have mentioned previously, to carry out the inheritance, one must wait for the death of the holder, which can delay the transfer of an asset. On the other hand, donation is much more flexible in this regard, as it allows the parties to transfer an asset or right at any time. Donation can help the beneficiary's financial situation, or it can serve to distribute assets before death and avoid possible future disputes when dividing the inheritance, as the interested parties know which assets they receive, expressly respecting the will of the donors, who are still alive.
It should also be noted that, except in cases specified by law, donations are irrevocable, that is, once made they cannot be "taken back", whereas dispositions made in a will can be modified and cancelled at any time before the testator's death.
In short, although at first it may seem that inheriting is the best option, as it is subject to lower taxes, there is no general answer, and each situation must be analysed specifically.
Frequently asked questions about inheriting or donating
As experts in inheritances in Barcelona and Catalonia, below we want to answer various questions that you frequently ask us at the notary’s office.
How does a donation affect the inheritance?
A donation can have a significant impact on the inheritance. In general terms, donations made before death reduce the inherited estate, which means that there will be fewer assets and properties available to be distributed among the legitimate heirs. Furthermore, donations are subject to taxes and can affect the fair distribution of the inheritance among the beneficiaries. It is essential to consult a legal or tax professional to fully understand how donations can influence the inheritance and to make informed decisions accordingly.
If the donation can affect the hereditary estate, can it be corrected or compensated in the inheritance?
Yes, there are mechanisms to compensate for that donation made during the lifetime of the deceased, through two figures; collation and reduction for inofficiousness.
- Collation is the legal figure that allows the inclusion in the inheritance of the value of donations that a person made during their lifetime. Instead of ignoring those donations, they are counted as part of the inheritance. This means that the value of the donations is added to the total inheritance and then distributed among all the heirs more equitably.
Collation is regulated in article 1035 and following of the Civil Code, and in articles 464.17 of the Catalan Civil Code. But this collation only takes place when:- The beneficiary of the donation must be an heir and also a forced heir; the Civil Code speaks in article 1035 of a forced heir in the sense of a legitimised heir who is also an heir; therefore, a non-legitimised heir and a legitimised non-heir have nothing to collate (since collation involves an operation between co-heirs-legitimised heirs).
- There must be several heirs. For collation to occur, there must be several legitimised heirs in the succession.
- It has not been expressly excluded by the donor, in accordance with article 1036.
- Only the value of the donated goods is brought into the inheritance estate, not the goods themselves, which remain in the possession of the beneficiary.
- Reduction of inofficious donations. Inofficious donations are understood to be all those donations that harm the legitimised rights of the persons called to the succession. Therefore, it is necessary that there are legitimised heirs with rights over the inheritance estate, but the beneficiary can be any person, unlike collation. In this case, the donation will be reduced to the extent that it harms the legitimate portion.
Can I donate all my assets during my lifetime?
According to article 634 of the Civil Code, the donation may include all the present assets of the donor, or part of them, provided that the donor reserves, in full ownership or usufruct, what is necessary to live in a state corresponding to their circumstances.
Therefore, it is necessary for the donor to reserve sufficient assets or rights to be able to live according to their circumstances (something very subjective), in order to protect the rights and needs of the donor themselves.
How to process an inheritance or donation with JLA?
In short, although at first it may seem that inheriting is the best option, as it is subject to lower taxes, there is no general answer; each situation must be analysed specifically to determine whether it is better to donate or inherit. That is why having the advice of a notary for inheritances can be key to making the right decision.
At JLA Notarios we can help you decide which is the best option for each case. We specialise both in managing donations and in inheritance procedures with a will. If you are thinking of making a donation, our notary for donations will accompany you throughout the entire process. Contact us via our email bcn@jlanotarios.com, our contact form or visit our notary office in Barcelona. We will be delighted to welcome you.
If you want to learn more about other related services we offer, you can consult the section on our website about Wills and inheritances. We hope this article on whether a donation or inheritance is better has been useful to you.
