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

Raymundo LarraĆ­n Nesbitt, July, 4. 2019

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

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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. You should request specialized tax advice from us before you do anything rash like setting up a trust or holding company to include your Spanish estate.

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.

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

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