The possibility of purchasing the property on the name of the children is frequently aimed at reducing inheritance tax liability. However the decision should be taken always by taking into account the particularities of the family, the value of the property, and also if you are going to take over a mortgage or not, therefore more details should be provided before choosing the best option.
In general terms, the options are:
a.- The parents purchase the life long right of use of the property (so-called "usufructo" in legal terms) and the children get just the "nuda propiedad", which is equivalent to the ownership right "stripped out" the right to use the property; in other words, there is an user of the property who is not owner (the parents) and there is an owner who is not entitled to use the property (the children). By doing this the parents have got an effective guarantee of using the property whilst they are alive.
However, the problem arises when they want to sell and they find that no on purchases the "usufructo", so that their children - as owners of the nuda propiedad - have to come along with them. Some recommend that the children gave PoA to the parents to enable them to sell the children's interest on the property on their behalf, but...the PoA in Spain are fully revokable at any time by the grantors under Spanish law... If there were disagreements among the children and the parents, and the former revoked the PoA, the outcome is uncertain. It would be some kind of stalemate.
Furthermore, once the parents die, their "right of use" reverts to the children, who become then FULL OWNERS. However the transfer back of the right of use is subject to the Spanish inheritance tax.
The point is if the cost of the whole system is lower than the savings you would make in inheritance tax...
Once again, the cost of this option has to be ascertained by taking into account the values of the property.
b.- to put the children as joint owners, i,e 50% of the property becomes shared among the children and 50% between the parents. This reduces inheritance tax liability but it gives rise to other side problems: now the parents have to put up with someone who is joint owner and has a say in the use of the property and also when it comes to sell it. I will simply outline some of them:
- the joint ownership situation is considered as non operative and therefore our laws grant any joint owner the possibility of putting the property at auction if they do not reach an agreement as to the use of the property, and the property cannot be divided. For example: If the parents allow child A to hold a 25% of the property, A dies and his will appoints as heir to his wife and she does not get along well with the parents,,,his wife appears as owner of 25% and now every decision has to be agreed with her. And if not, there is no chance to sell.
- What happens to the improvements made in the property? there is always one who has invested more in the property and he/she thinks that the property is worth more and he always want a bigger part of the profit, if there is any; in contrast, there is always one who has not done anything and has not paid anything in his life, but of course it is necessary to deal with him and he/she wants his part...free of costs, naturally.
- What happens if one of the child holds a 25% and he goes bankrupt in the UK? It would seem that the parents would have to RE- purchase the percentage of property which had been seized by the bankrupcy administrators...that or the forced sale of the property at auction, at a very low value! I would personally think twice if my child was self employed or had a company, in the present times.
All these problems and some more - except probably the bankrupcy - an be sorted out previously with an agreement signed by all joint owners, which covers all these possibilities.
c.- A company, now what do we do: a UK Company, an offshore company, an Spanish company or a combination of these tthree (Spanish company whose shares would be held by a UK company)?
This is a complicated option which gives rise to many many difficulties and considerable costs, as every year it is necessary to do some maintenance of the company -such us company accounts, etc. I would not recommend it unless the costs and the consequences were calculated carefully.
d.- If the main worry is the inheritance tax liability, another suggestion is contracting a life insurance to cover the approximate amount of inheritance tax liability... it is less complicated, but you might find the problem that after 10 years paying the monthly quotes, once you reach the age of X, the insurance company says that they do not renew it any more, and you have been paying 10 years...for nothing!
e.- if the problem is the divorce, well, an agreement covering this possibiity - such us in point b above- could be fine. However, I would need to check with a UK based lawyer or solicitor if such agreement can be rendered as illegal under British Family Law.
There are more alternatives, but the above - or a combination of those (i.e. a company where the right of use of the shares is granted to the parents where the children keep the naked ownership) - are the most usual ones.
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