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Andalusia, now a tier 1 region for low taxation in Spain

Raymundo Larraín Nesbitt, July, 4. 2019

Marbella-based lawyer Raymundo Larraín keeps us abreast of the sweeping changes in Inheritance & Gift tax law in Andalusia.

Marbella-based Larraín Nesbitt Lawyers has over 16 years' taxation & conveyancing experience at your service. We offer a wide range of 40 legal and corporate services. Our team of native English-speaking lawyers and economists have a long track record successfully assisting expats all over Spain. You can review here our client’s testimonials.

Article copyrighted © 2019. Plagiarism will be criminally prosecuted.

 

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
8th of July 2019

We had already covered in previous articles and blogs (Andalusia to abolish inheritance tax in 2019 and  Andalusia to slash Inheritance tax for inheritances under 1 million euros) the landmark tax changes set in motion in Andalusia as from the 11th of April 2019 as a result of political changes in the regional government (read pro-low taxation). These changes have effectively catapulted Andalusia in the span of a few months from the back of the band wagon to leading the pack, becoming the de facto most tax-friendly region in all of Spain; even surpassing liberal Madrid in multiple aspects in inheritance and gift matters.

In this post we want to focus specifically on the tax changes on Gift tax, which have gone completely unnoticed to most being largely outshone by those in inheritance tax. Or at least we have not read any taxation articles published on the matter. We will then close the post publishing the changes in inheritance tax as a gentle reminder.

The gist of these tax novelties is that to most people, but particularly for HNWI and UHNWI, they translate into paying significantly less taxes, whether inheritance or gift tax, or even no tax at all. These changes open the door to a new era of wealth tax planning for affluent taxpayers and normal people alike.

All comments below apply only to those beneficiaries classified in Groups I and II, for tax purposes:

Group I: Natural and adopted children under 21.
Group II: Natural and adopted children over 21, spouse, registered civil partnerships, parents, adoptive parents, grandparents and great-grandparents.

I. Gift tax

 

  • Giftee/taxpayer needs to be EEA/EU-resident.*

 

The taxable base benefits from a tax relief of 99%. This is more clearly understood with a table of practical examples before and after the tax changes of 11th April 2019 (all numbers rounded off).

Gifted amount tax to pay pre-April tax to pay post-April
€500,000 €112,800 €1,100
€1,000,000 €281,160 €2,800
€3,000,000 €1,001,000 €10,100

 

E.g. Swedish father (giftor) living in Andalusia gifts a 2mn euro villa to his daughter, who is resident in Malmö (Sweden). The giftee (daughter) is the taxpayer of Gift tax, as she is EU-resident, she can take advantage of this new regional tax law paying a very low tax.

To focus on the third example set above, before these landmark changes, a grandmother gifting 3mn euros to her grandson would have resulted in a whopping tax bill of over 1 million euros for the giftee! Which is why lawyers generally did not recommend gifting assets to next-of-kin in Andalusia over a certain amount. This has now changed, opening up new tax-mitigation venues.

Post-April, the grandson only stands to pay slightly over 10,000 euros! In other words, her grandson will now pay 100 times less tax on being gifted 3 million euros. If paying 10,000% less tax is not a game-changer, then frankly, I don’t know what is.

To benefit from this lenient regional gift taxation, you must contact a law firm, such as us, too arrange both drafting a Gift deed witnessed by a Spanish Notary Public as well as submitting a Gift tax return. If a lawyer is not instructed to follow the correct procedure, very steep taxes are to be expected of up to 88% and the tax benefit sought will be negated. Bottom line, to pay less tax (or almost no tax) you must contact a lawyer to arrange the signing of a Gift deed before a Spanish Notary Public.

II. Inheritance tax

 

In a nutshell, inheritance tax is as follows in Andalusia:

Requirements to benefit from this tax allowance

  • Inheritor/estate beneficiary/taxpayer needs to be EEA/EU-resident.*

 Inheritance Tax in Andalusia

  • Pre-existing wealth nil-rate band raised to €1,000,000 (per inheritor).
  • Estates equal to or below €1,000,000 will go untaxed (per inheritor).
  • Estates over €1,000,000 will benefit from a 99% tax relief (per inheritor). Meaning you only pay 1% over what exceeds the 1mn threshold.

 

*for full disclosure, there are some interesting recent tax developments on the works, but we won’t go into detail on them as it exceeds the purpose of this short post.

The following chart is an example of a 25 year old beneficiary (taxpayer) who inherits from his father and is resident in the European Union/European Economic Area.

Inherited amount tax to pay pre-April** tax to pay post-April
€500,000 €0 €0
€1,000,000 €0 €0
€3,000,000 €646,160 €6,460

 

**There was a significant tax change back in January 2018 that slashed inheritances under 1 million euros. More on this here: Andalusia to slash Inheritance tax for inheritances under 1 million euros – 21st September 2017. The new tax change from April 2019 now also affects inheritances over 1 million euros, slashing succession tax altogether in Andalusia.

As we can see from the above chart, if the son inherits one million euros, or less, he would pay no inheritance tax whatsoever. If he inherited 3 million euros, he would only pay slightly over six thousand euros, which is negligible compared with how it was before.

To benefit from this lenient regional inheritance taxation, you must contact a law firm, such as us, to both arrange drafting an Acceptance of Heirs deed witnessed by a Spanish Notary Public as well as submitting an Inheritance tax return (even if there is no tax to pay). If a lawyer is not instructed to follow the correct procedure, very steep taxes are to be expected of up to 88% and the tax benefit sought will be negated. Bottom line, to pay less tax (or no tax) you must contact a lawyer to arrange the signing of an inheritance tax deed before a Spanish Notary Public.

Conclusion

This is as positive as taxation news get. Inheritance and Gift taxation had traditionally been Andalusia’s Achille’s heel holding it back; no more. It now turns out it will become one of its main selling points!

Some holding structures incorporated with the sole purpose to mitigate or negate IHT liability will now become redundant in Andalusia following the approval of this change in regulation.

In my article of March 2016 (Spanish Inheritance Tax for Non-Residents (Part II)) I had classified the region of Andalusia as a tier two region, for tax purposes. With all the recent changes in taxation, specifically those in Inheritance and Gift tax law, I need to revise this and upgrade it now to a tier one tax-friendly region. Andalusia now stands at the forefront, leading other autonomous region in Spain, with great allowances and tax breaks on Inheritance and Gift tax law.

If you are a British national, and UK-tax resident, you may want to look into this before Brexit is triggered on Halloween’s eve. Post-Brexit, British nationals (acting either as giftees or as beneficiaries of a Spanish inheritance) will likely no longer qualify to take advantage of these exceptionally low tax rates in Andalusia, as they will no longer be members of the European Union (which is one of the main requirements to take advantage of the ultra-low regional taxation). Bottom line, don’t procrastinate and seek tax council from our law firm before this option ends October 2019. I stress UK nationals may have only a limited window of opportunity before this tax option precludes, plan ahead and act now before it is too late. More on this subject in our taxation article: Brexit and Inheritance & Gift tax in Andalusia.

Needless to say, the profound impact these tax novelties will have over the mid to long run, when word of mouth finally spreads, is that they will act as a beacon, strongly attracting affluent individuals who will flock from all over the world to the Costa del Sol and Sotogrande. With ever-changing tax laws, wealthy individuals are always on the prowl seeking low-taxation areas, ready to relocate and settle down with their families to preserve and increase their wealth.

There is no better place for money to be in than in a taxpayer’s pocket.

 

If you fail to plan, you plan to fail.” – Benjamin Franklin.

Founding Father of the United States of America. Exceptionally gifted scientist, inventor, diplomat, writer, printer, postmaster and political theorist. Even politician in his spare time; nobody’s perfect.

Article originally published in Spanish Property Insight: Andalusia, now a tier 1 region for low taxation in Spain

Tax & legal services available from Larraín Nesbitt Lawyers

 

Inheritance-related tax articles

 

Please note the information provided in this blog post is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2.019 © Raymundo Larraín Nesbitt. All rights reserved.

 

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Last Blog Entry:

How to mitigate your inheritance tax bill in Spain

Raymundo Larraín Nesbitt, July, 10. 2019

Lawyer Miguel Ángel Vázquez-González gives us an overview of the national tax allowances applied to inheritance tax, which rule all over Spain.

Marbella-based Larraín Nesbitt Lawyers has over 16 years' taxation & conveyancing experience at your service. We offer a wide range of 40 legal and corporate services. Our team of native English-speaking lawyers and economists have a long track record successfully assisting expats all over Spain. You can review here our client’s testimonials.

Article copyrighted © 2019. Plagiarism will be criminally prosecuted.

By Miguel Ángel Vázquez-González
Associate at Larraín Nesbitt Lawyers
8th of July 2019

 

In today’s article we are going to focus on the national tax allowances, applied nationwide, for Spanish Inheritance Tax. I will not be mentioning regional tax allowances, which further expand and improve upon national ones. It is important to take note that, depending on which of the 17 autonomous regions in Spain inheritance tax is due, the results and conclusions reached will vary significantly in favour of taxpayers.

 

1.- Dispelling false myths

Multiple people claim that as they have a nationality other than Spanish, they are under no obligation to submit this tax. This is a mistake that can only lead to steep fines being levied and even assets being impounded as a result of non-payment. The general rule is to take the habitual residency in Spain into account to calculate this tax; however, also those taxpayers with habitual residency in third countries, other than Spain, who inherit rights or assets located within Spanish territory must pay inheritance tax in Spain.

2.- If you do not request it, you lose it

Spain’s Tax Office is not as lenient as Mahatma Gandhi, in fact, it is a minefield, specifically devised so that multiple requisites are missing and may not be claimed upon to take advantage of them. Tax procedures in Spain remind me of the famous Asterix comic by renown Belgians Goscinny & Uderzo, “The 12 tasks of Asterix”, where our heroes are subjected to run around in circles in a Roman burocratic labyrinthian nightmare that sees no end in pursuit of getting tax form A-38 rubber-stamped. The golden rule is that each taxpayer must expressly request the application of the tax allowances that apply to his case, as the Administration will never apply them by default. Self-complacency, on not claiming the allowances, may result in taxpayers overpaying taxes, and potentially losing thousands of euros in their tax bill. Hence the importance of good and professional advice on Spanish tax matters.

This may lead to some cheeky taxpayers ticking off ALL tax allowances and let the Administration do the work, sorting out which ones apply or not. Needless to say, this only leads to hefty fines. Some criteria are subjective and open to discussion. Yet in other cases it is black or white i.e. you cannot apply a tax allowance as if you had inherited from your father when you are in fact inheriting from a friend.

Unfortunately, the Administration has a criteria very close to its own interests (read to maximize revenues as much as possible) and law courts may have a different take (leaning closer to the taxpayer); in such cases it must be determined if the amount to save in taxes warrants a fight between David and Goliath.

3.- Reduction types

It is normal that non-specialized lawyers are unaware of the myriad requirements, for there are many and varied, both legal and jurisprudencial. Which is why it is very important to instruct a specialized lawyer who keeps abreast of the ever-changing legal requirements.  

3.1.- Reduction as next-of-kin

Depending on their age and kinship with the deceased a beneficiary may enjoy a tax allowance ranging from €0 (i.e. you inherit from a neighbour with no family ties) up to a maximum of €47.858,59 for a toddler.

3.2.- Physical and mental disabilities, or legally incapacitated

The disability must be equal to or over 33%, it is also necessary that at the time of the death there is an administrative resolution not subject of appeal acknowledging the degree of disability. The allowances for this concept range from €47.858,59 to €150.253,03.

3.3.- Mortis causa (death) estate transmissions

If within a period of 10 years the same assets are bequeathed in favour of descendants, in a second transmission the taxpayer can deduct the inheritance tax already paid on the first transmission. E.g. Mr Smith aged 95 years old passes away bequeathing to his eldest son a garage space in Marbella. If his son should die within the next 9 years and he in turn bequeaths it to his own children, the grandsons of Mr Smith can reduce their inheritance tax bill in the same amount already paid by their late father.

3.4.- Acquisition of family company

This reduction is feared by the Spanish Tax Office, as it allows the taxpayer to reduce by as much as 95% of the taxable base. In other words, the tax office could only tax you on the 5% of the company assets. Only this single allowance is so extraordinarily complex and varied, that it would allow me to write hundreds of pages on this topic alone. E.g. a son inheriting a restaurant, hotel or estate agency. EDIT: Miguel specializes in this type of family company taxation.

It is absolutely necessary to study, prepare and revise that every year the requirements are met as the tax Administration will do its utmost to challenge and disprove its application, going out of its way in every step. 

We can apply this incredible tax allowance as long as the beneficiary is the spouse, descendant (or adopted), they must be assets necessary for the business activity. It is also possible to apply for this tax reduction if you are a stakeholder as long as the finality is not to own assets as a holding company but rather to develop a business activity.

E.g. Mrs. Sweeney is the owner of the shares of a company that exploits three restaurants on the Costa del Sol, her two children are also stakeholders of said company. The value of the total assets amounts to €1.500.000. We can study her case so that her two sons inherit their late mother’s company shares benefitting from a tax reduction of 95%. They would only pay tax on the remaining 5%.

3.5.- Acquisition of main home

This applies to the spouse, ascendants, descendants or even collaterals (the latter to an extent). As a general rule the property must be kept (without being sold) for a minimum number of years. The allowance is capped at €122.606,47, per inheritor.

3.6.- Rural exploitations and assets belonging to historic heritage

As these are only applied residually, I will only mention them not going into any detail.

 

Conclusion.- Plan ahead for your demise, don’t wait until it is too late

Some of the above-mentioned allowances are not flexible and cannot be graduated. But have you considered gifting some assets to your children during your lifetime (please read our new tax article Andalusia, now a tier one region for low taxation in Spain)? Are you aware that making some minor changes to the Company Statutes is all the difference it takes between being able to benefit from the lenient 95% tax allowance for family companies or not? Only this tiny difference translates into having to pay several million euros extra to the taxman that you could have saved your beneficiaries from paying on inheriting the family company had you taken proper legal counsel, planning ahead.

 Forward tax-planning is key and fundamental; this is likely the best advice we can give you. As there are multiple parameters at play, that give way to tax savings of thousands of euros, planning ahead ensures you optimize your tax bill.

Remember, the tax office has no qualms and will go out of its way, so taxpayers pay as much as possible. Do not grow complacent and make it easy on them to overtax your loved ones, make it difficult on them! Talk to us.

If you fail to plan, you plan to fail.” – Benjamin Franklin.

Founding Father of the United States of America. Exceptionally gifted scientist, inventor, diplomat, writer, printer, postmaster and political theorist. Even politician in his spare time; nobody’s perfect.

Article originally published in Spanish Property Insight: How to mitigate your inheritance tax bill in Spain

Tax & legal services available from Larraín Nesbitt Lawyers

 

Inheritance-related taxation articles

 

Please note the information provided in this blog post is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2.019 © Raymundo Larraín Nesbitt. All rights reserved.

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Rental Act Amended: It is now essential there is no tenant when you buy

Survey Spain, June, 21. 2019

Survey Spain is a reputable and independent firm of Chartered Surveyors managed by Campbell Ferguson. It is governed by the Royal Institution of Chartered Surveyors (RICS) and works to UK standards.

Survey Spain kindly used as source one of our articles: Rental Act Amended: It is now essential there is no tenant when you buy.

Original article can be found published in our website: Spain's new rental laws in 2019 – 8th March 2019

 

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