How to save taxes when inheriting?

How to save taxes when inheriting?
Published on: 2 November 2022

Inheritances are subject to inheritance tax. Many people do not realize that whether they receive money or goods, inheriting an estate means paying high taxes. It may seem strange, as these items have already paid their respective taxes and that is why it is best to leave the inheritance in the hands of a family lawyer for proper advice.

The tax burden of an estate can be so high that some people give up their estate because they cannot afford to pay the taxes associated with it if it is a property or item that is difficult to sell.

How much inheritance tax do I have to pay?

Estate taxes depend on the autonomous community, but there are a series of guidelines at the state level. These vary, ranging from 7.65% to 34%, depending on the amount inherited. The amount you inherit may be subject to a series of state cuts:

  • Group I: If descendant or adopted child is under 21 years of age, the quota will be reduced by €15,953.87, of which the heir must increase by €3,990 for each year that disappears until the age of 21, up to a cap of €40,946.96.
  • Group 2: descendants or adopted children over 21 years of age. In these cases, there is a reduction of 15,956.87 euros.
  • Group 3: 2nd and 3rd degree relatives, whether direct or immediate family members, a reduction of 7,993.46 euros.
  • Group 4: Relatives from the fourth degree, without reduction or exemption.
  • Disability tax credit: €47,859.59. The tax credit applies to heirs with a disability equal to or greater than 33%. Those with a disability equal or higher than 65% can benefit from a reduction of 150,253.03 €.
  • Life Insurance: If they are inherited, a 100% reduction will be applied, up to a maximum of 9,195.49 euros.

How to pay less tax on inherited funds?

Pension plans or funds are also inherited and must be taxed. The heir will not receive any money from the fund, but the deceased shares corresponding to him/her and the date of death corresponding to those shares will be subject to estate tax.

The heirs may not at any time sell inherited funds or pension plans, so they must wait for a deadline set by the heirs. In the case of an inherited fund, you will pay the same taxes as any investor. When it is not dedicated to the purchase of another fund, these taxes can be between 19% and 23% of the income you obtain through it. If you use it to buy a new fund, the capital gains will be tax-free.

What about donations and loans between individuals?

A gift is the disinterested transfer of property prior to death. For legal purposes, it can be considered an advance of inheritance, so this part will be deducted from the inheritance you will receive. It is also possible that after accepting a gift, upon becoming an heir, the beneficiary may be required to contribute an asset equal to the assets received, provided that part of the inheritance has not been deducted.

Donations are also subject to taxes that depend on the autonomous community. Some even give large bonuses for donations between parents and children. For example, in the Community of Madrid, if done before a notary, the bonus is 99%. The fee is due within one month of receipt of payment and must be paid by the beneficiary. It must be paid in the community where you receive it.

Both inheritance and donation entail that the recipient must pay taxes in the local government. But there is a solution that can help you save taxes, and that is interpersonal loans, which can be contracted at 0% interest. In order to receive a loan there must be an agreement between the people that establishes the amount borrowed, the interest and the method of payment and it is mandatory to communicate it to the tax authorities to register the loan through the Model 600. But you must know that this is not a donation and the money must be returned to the person who borrowed it according to the terms of the contract. In short, loans between individuals are a good way to avoid paying property tax.

Keys that make inheritance cost less money

If the person who caused the inheritance is about to die, one option is to be proactive and do something to get liquidity for the treasury.

Another option would be to plan the inheritance and its costs, and make a partial self-settlement. In this case, the law allows it not only for life insurance and pensions, but also for loans, securities, property or money of the deceased or similar, if there is sufficient reason to justify it.

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