Cash Gifts, Interest-Free Loans and Tax Matters [Spanish tax attorney´s advices]

The gift tax in Madrid is mandatory for gifts of money, real estate, and/or any other asset with a cash value that a child receives from their parents, even when the parents reside outside of Spain.

The gift tax is applicable by obligation based on residency and by de facto obligation if the recipient resides in Spain.

For example, a cash gift involves giving money to another person without the need for them to repay you. When making a gift in Spain, the Inheritance and Gift Tax must be paid and the amount to pay varies based on the Autonomous Community in which the gift is made.

We have managed several cash gifts made from outside Spain to people who reside here, from countries including Argentina, Italy, Bolivia, Peru, the U.S.A., the Czech Republic, Russia, France, the U.K., Brazil, etc.

Cash Gifts in the Community of Madrid

In the Community of Madrid, the amount to pay for the Inheritance and Gift Tax depends on whether or not the gift is made between family members. For example, for gifts between parents and children or between spouses, the Tax only needs to be paid on 1% of the amount of the gift, while if the money is used to purchase a habitual residence the Tax does not need to be paid. The following three requirements must be fulfilled:

What is the minimum amount considered a gift?

Any money given to another person is considered a gift and the amount does not matter. Many people think that it is not necessary to pay the Inheritance and Gift Tax for gifts of up to €3,000, but this is not true.

The good news is that depending on the Autonomous Community in which the gift is made you may not need to pay much or anything at all for the tax.

If parents loan money to their children or if siblings loan money to each other, is it considered a gift?

In order to avoid paying the Tax, many people say that they have loaned the money and thus do not have to pay any tax. But for a loan to be legal it must be drafted on a private document that includes the money that is loaned, the name of the people involved in the loan, the late payment interest, and the deadline to repay the money. This must also be drawn up before a Notary Public. If the loan is not created legally the Spanish Tax Office can penalize you for making a fraudulent gift and you will have to pay a fee as well as the taxes that you sought to avoid.

Another more advantageous option

How can I justify a cash gift?

There are several different ways to do this:

In our experience, we have come across clients who have been penalized for not correctly following these procedures.

Do you have to go a Notary Public to make a cash gift?

Yes, and you will have to go to the Notary Public for any amount that you want to give.

How is a loan made between private individuals?

The difference between a loan and a gift is that if you give a loan the other party has to repay the money to you and in a gift the money is not repaid.

Loaning money between private individuals is exempt from the gift tax but the self-assessment form for the creation of the loan must be submitted.

Do not forget that loans between family members or private individuals must be executed with a private contract before a Notary Public which must includethe deadline to repay the money, the late payment interest and the amount loaned.

The repayment deadline must be respected, otherwise the Spanish Tax Office will penalize you for making a fraudulent gift. The safest option in order not to have issues with the Spanish Tax Office is to send the money through a Bank.

What requirements do I need to comply with to make a gift during your lifetime before a Notary Public?

The individual must be of legal age, not be legally incapacitated and the gift must respect the legal limit of what can be given in inheritance to the recipient of the money. This must also be drawn up in a public document before a Notary Public.

In a cash gift, is the money sent (bank transfer) before or after going to the Notary Public?

The money must be sent before going to the Notary Public. It is extremely important to pay the gift tax within 30 days from when the money is transferred.

To be sure that you meet all the legal requirements to make a gift, it is essential to seek the professional guidance of attorneys who specialize in gifts to be sure that you are correctly following all the legal processes.