Gifting a property to a child: tax implications for parents and children

Taxes payable by the child upon receiving the property

The recipient of the gift (donee) bears the direct tax cost of acquiring the property free of charge. Specifically, they must pay two main taxes: Inheritance and Gift Tax (ISD) and Municipal Capital Gains Tax (Plusvalía Municipal).

1. Inheritance and Gift Tax (ISD)

Inheritance and Gift Tax levies the unearned financial gain obtained by the child. This tax is devolved to the regional governments (Comunidades Autónomas), meaning the final amount payable varies substantially depending on where the property is located.

To calculate the tax payable, the property's tax value is used as the base. The progressive tax scale and specific regional allowances or reliefs are then applied to this figure. For example, regional legislation in territories such as Comunidad de Madrid provides tax reliefs of up to 99% on the tax liability for transfers between parents and children (Group II relatives), provided the gift is formalised in a public deed before a notary.

2. Tax on the Increase in Value of Urban Land (Municipal Capital Gains Tax)

Unlike in a traditional property sale, where the payment is borne by the seller, when gifting a flat to a child, the child is required by law to pay this local tax. The Tax on the Increase in Value of Urban Land (IIVTNU) taxes the increase in value of the urban land during the years the property belonged to the parents.

This tax is calculated according to the rules of the relevant town hall. The taxpayer can choose between the direct estimation method (calculated on the actual gain obtained from the difference in land values) and the objective estimation method (based on the cadastral land value and coefficients reflecting the years of ownership). If there has been no increase in land value between the date the parents purchased the property and the date of the gift, the transaction may be exempt from this tax, subject to documentary proof.

Taxes payable by parents after gifting a flat

There is a common misconception that because parents receive no money in exchange for the transfer, they are exempt from filing tax returns. However, for Personal Income Tax (IRPF) purposes, gifting a property is treated as equivalent to a sale at market price.

1. IRPF and capital gains

In their annual tax return (Declaración de la Renta), parents must declare the change in their asset composition. AEAT assesses whether a capital gain or loss has occurred by comparing two parameters:

• Acquisition value: The price originally paid by the parents for the property, plus expenses and taxes associated with that original purchase, minus depreciation if the flat was rented out.
• Transfer value: The tax value assigned at the time of the gift, which cannot be lower than the Land Registry's Cadastral Reference Value.

If the transfer value exceeds the acquisition value, the parents will have generated a capital gain subject to progressive tax rates within the savings base of IRPF. Conversely, if a capital loss arises, tax law explicitly prohibits claiming it for tax deduction purposes when derived from lifetime gifts (transmisiones lucrativas inter vivos).

2. IRPF exemptions applicable to parents

Regulations set out specific scenarios in which parents are exempt from paying tax on capital gains when gifting a flat to a child:

• Over-65s and primary residence: If the donors are aged 65 or over and the flat being gifted is their primary residence, the capital gain is fully exempt from IRPF.
• Persons in a situation of severe or major dependency: The same exemption applies if the owners are officially recognised as being in this situation.

It is worth noting that if the property gifted by a person over 65 is a second home or a rented property, the capital gain generated will indeed be subject to IRPF.

Impact of the Cadastral Reference Value on gifts

The tax base for Inheritance and Gift Tax is calculated neither on the value freely stated in the title deed nor on the ordinary cadastral value, but via the official Cadastral Reference Value published by the Directorate General for Cadastre.

This parameter is determined by analysing property sale prices declared before a notary in each area. If the value declared in the gift deed is lower than the Reference Value, the regional tax authority will use the Reference Value as the base and demand tax adjustments through supplementary assessments. Therefore, checking the Reference Value before visiting the notary is vital to calculate accurately the taxes associated with gifting a flat to a child.

Specific requirements when gifting social housing (VPO) in Comunidad de Madrid

When the flat to be transferred is subsidised housing (VPO) located in Comunidad de Madrid, administrative requirements apply. Properties subject to a public protection scheme have statutory limitations regarding maximum transfer prices and eligible recipients.

In Comunidad de Madrid, to complete the gift of a VPO property under an active protection regime, the following steps must be taken:

• Apply for prior administrative authorization from the regional housing authority in Comunidad de Madrid.
• Check whether the property file permits voluntary disqualification (descalificación voluntaria) prior to formalising the gift.
• Ensure that the value fixed for tax purposes in the transfer does not exceed the maximum legal sale price set by regional regulations in Madrid for the specific protection status assigned to the property.

Risks of disguising a gift as a property sale

Due to the tax burden involved in gifting a property in certain regional communities, some families consider executing a simulated sale for a nominal amount. This strategy carries significant legal risk.

AEAT cross-checks data and tracks bank transactions in transfers between relatives. If the tax authority proves that genuine, actual payment of the agreed price did not take place, it will reclassify the transaction as a disguised gift. Consequently, it will demand payment of the unpaid Inheritance and Gift Tax, adding late-payment interest and imposing financial penalties that can represent a high percentage of the unpaid tax.

Steps to process the gift of a flat with full legal certainty

To ensure the lifetime gift is fully valid and creates no tax or registration complications, it is advisable to follow a strict sequence of steps:

1. Preliminary review of encumbrances and values: Obtaining an official Land Registry extract (nota simple), checking the cadastral Reference Value, and verifying receipts for municipal property tax (IBI) and community fees.
2. Execution of public deed: Article 633 of the Civil Code mandates that gifts of real estate must be formalised in a public deed before a notary.
3. Tax settlement: Filing and paying ISD with the regional tax office and Municipal Capital Gains Tax with the local town hall within 30 working days of execution.
4. Land Registry registration: Registering the transfer of ownership at the Land Registry to confer full legal protection on the child's acquisition.

Legal advice to optimize property gifts

The decision to gift a flat to a child requires an analysis of the combined tax situation of both parents and children. Proper planning allows families to take advantage of available exemptions, anticipate IRPF impact, and draft protective clauses in the public deed, such as retaining a life interest (usufruct) or right of reversion.

At Sky Real Estate, our specialised team provides comprehensive family wealth management. The work of our professionals was recognized in the Sky Law European Legal Awards 2023-2025, reflecting our commitment to legal precision and tax optimization.

To manage property transfers with complete peace of mind and tax reassurance, consult our property lawyers.