Understanding Inheritance and Gift Tax (Act 87, 1991)
Estate and Gift Tax
Act 87, 1991
This regulation, along with regional government powers, governs inheritance and gift taxes. Valencia Autonomous Law 13/1997 further clarifies tax assignments. While inheritance and donations share common standards, they are distinct concepts.
I. Inheritance Tax
1. Inheritance and Accrual
Inheritance tax (HI) applies to property acquired upon the death of a natural person. If the acquirer is a legal entity, income tax applies. Each inheritor is taxed separately. For example, three heirs result in three separate taxable events.
Vesting occurs upon the deceased’s death.
Resignations:
- Targeted Resignation: Two settlements are required—one for inheritance by the resigning party and another for the beneficiary.
- Outright Resignation: A single settlement for the beneficiary is sufficient.
2. Contributors
Contributors are the natural persons inheriting the estate. There are several types of inheritors, including vulgar and pupillary substitutes.
- Vulgar Substitute: Designated by the testator to replace a primary heir if they predecease the testator, decline the inheritance, or are unable to accept it.
- Pupillary Substitute: Appointed for offspring under 14 years old, should they die before that age and be unable to make a will.
- Exemplary Substitute: Similar to pupillary substitution, but for offspring over 14 declared incompetent due to insanity. If the original heir becomes competent, the substitute inherits.
3. Taxable Base
The taxable base is the fair market value of acquired assets, less debts and expenses. This is assessed individually for each heir. The administration can verify declared values.
Calculations consider the surviving spouse’s usufruct, including household effects (taxpayer’s personal assets), computed as 3% of the estate.
Usufruct of Surviving Spouse:
- Spouse with Children: Legal usufruct of 1/3 of the estate.
- Spouse with Ancestors: Usufruct of 1/2 of the estate.
- Spouse without Descendants or Ancestors: Usufruct of 2/3 of the estate.
The usufruct’s tax base is a percentage of the property’s value, based on the usufructuary’s age at the time of death. Starting at 70%, it decreases by 1% per year over age 19, with a 10% minimum.
Example: Spouse is 69 at time of death; property value is 1,000. Usufruct value: (69 – 19 = 50); (70% – 50% = 20%); (20% * 1,000 = 200).
Temporary Usufruct: Calculated at 2% per year of usufruct duration, capped at 70%, applied to the property’s value.
Example 1: 20-year usufruct of a 1,000 property: (20 * 2% = 40%); (40% * 1,000 = 400).
Example 2: 45-year usufruct of a 1,000 property: (45 * 2% = 90%, capped at 70%); (70% * 1,000 = 700).
Bare Ownership: Calculated as the total property value minus the usufruct value. The applicable average rate is based on the total property value.
Example: Property value: 1,000; Usufruct value: 200; Average rate for 800: 7%; Average rate for 1,000: 8%. Bare ownership share: (1,000 – 200 = 800); Tax: (8% * 800 = 64).
Hereditary Reservations: If the acquirer only has enjoyment rights, the settlement uses the usufruct concept. If they have full ownership rights, the settlement uses the freehold concept.
Substitute Trustee: The heir (trustee) is charged with preserving and transferring assets to a third party (trustee). The trustee’s settlement uses the usufruct concept, while the ultimate trustee’s settlement uses full ownership.
Example Calculation: Three siblings inherit equally; widow (69 years old) has usufruct; total asset value: 9,000; debt: 200; expenses: 70; trousseau: 3% of 9,000 = 270; net value: 9,000.
Widow’s Usufruct: (20% * (1/3 * 9,000) = 600).
Each Sibling’s Share: ((9,000 – 600) / 3 = 2,800); Kinship reduction: 200; Taxable income: 2,600; Tax rate: 20%; Tax: (20% * 2,600 = 520).
Widow’s Liquidation: Base: 600; Kinship reduction: 200; Taxable base: 400; Tax rate: 10%; Tax: (10% * 400 = 40).
Hereditary Reservations: If the acquirer has only enjoyment rights, settlement is based on usufruct. If they have full ownership, settlement is based on freehold. In a trust, the trustee’s settlement is based on usufruct, while the ultimate trustee’s settlement is based on full ownership (Art. 53 Regulation).