Taxation of the donation of bare ownership in Personal Income Tax

The transfer of the bare ownership of a property, while retaining the usufruct, carries specific tax implications for Personal Income Tax (IRPF). A recent binding ruling from the Dirección General de Tributos (DGT) has specified the method for calculating the capital impact of these operations.

What the DGT has ruled

The DGT establishes that the capital gain or loss derived from the donation of bare ownership is determined by the difference between the transfer value and the acquisition value of said right. To determine the transfer value, the valuation rules provided in Law 29/1987 on Inheritance and Gift Tax must be applied, and this amount may not exceed the market value.

Furthermore, the advisory body points out that to separate the value of the usufruct from that of the bare ownership, it is mandatory to apply the valuation rules specific to the Inheritance and Gift Tax. A relevant aspect is that, should the operation result in a capital loss, it will not be deductible for the taxpayer due to its nature as a lucrative transfer.

What it means for you

If you are an individual deciding to donate the bare ownership of an asset while retaining the usufruct, you must take into account that this operation has direct effects on your income tax return. The key lies in the correct valuation of both rights (bare ownership and usufruct) following inheritance and gift tax regulations to avoid errors in the calculation of capital gains.

What you should do

In the event of such an operation, it is necessary to:

• Correctly identify the acquisition value of the bare ownership.
• Apply the valuation rules of Law 29/1987 to break down the value of the usufruct and the bare ownership.
• Verify that the transfer value does not exceed the market value of the asset.
• Assess each particular situation to determine whether there is a taxable gain or a non-deductible loss.