The taxation of the consolidation of the ownership in the bare owner due to the death of the usufructuary

It is no secret that the Spanish tax system suffers from excessive and marked complexity. In fact, the simplification of the tax system has been one of the main claims that in recent years have been made by those of us who are dedicated to tax advice. We understand that this simplification would not only benefit the taxpayer, but would also avoid much of the conflict with the Tax Administration.

In this article we will analyse one of those clear examples in which compliance with tax obligations can become extremely complex and a real gibberish for the taxpayer: the consolidation of the domain in the bare right of ownership due to the death of the usufructuary.

The dismemberment of the domain between the rights of usufruct and bare owner is certainly frequent, not only in inheritance law because of the legitimate rights in favor of the surviving spouse, but also increasingly in personal estate planning. As is known, the sale or donation of bare ownership of the habitual residence, with reservation of the right of life usufruct by the seller himself, is an increasingly widespread practice in people over 65 years of age.

In principle, we can affirm that the taxation of the dismemberment of the domain is relatively peaceful, since it is usually consistent with the legal nature of the operation itself.

Indeed, if the dismemberment of the domain is for profit, the operation will fall within the scope of the Inheritance Tax (ISD).

On the contrary, when the dismemberment occurs in a purchase, we will fall within the scope of the Transmission Tax (TPO), or the VAT and the Stamp Duty Tax (AJD), in those cases in which the either in question was related to a business or professional activity.

In both cases, logically, the implications that may eventually occur in the person who reserves the life usufruct (who will have a capital gain or loss in his personal income tax due to the difference between the transfer and acquisition value of the bare property) must be taken into account) and also the application of other taxes, such as municipal capital gains.

However, the main problems with the tax administration do not occur at the time of the aforementioned dismemberment, but are generated at the time of consolidation of the domain motivated by the death of the usufructuary, where the tax regulations do not respond precisely to all the problems that arise for the one who acquires full dominion.

In Resume:

Whoever first acquires the bare ownership and later consolidates the domain by extinction of the usufruct does not make a first acquisition and, later, a second acquisition of the usufruct, but a single original acquisition, which must be fully subject to TPO in two different phases

When the domain is consolidated upon the death of the usufructuary, it must be taxed by ISD taking into account the value of the asset at the time of dismemberment of the domain, applying the tax, in its form of inheritance, on the percentage that was not settled at the time. if the bare ownership is acquired, in accordance with the existing regulations at the time of the initial dismemberment of the domain with regard to the applicable rate, reductions and bonuses, and not with the current regulations at the time of consolidation

Contact our inheritance solicitor for more information.