This is the second of a two-part series in which lawyer Raymond Nesbitt explains the process for inheriting assets in Spain as a non-resident, and provides an outline on Spain’s Inheritance Tax (IHT).

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
8^th of March 2016

Introduction

The following article is my second part to my abridged article dealing with Spanish Inheritance Tax for Non-Residents (Part I) (IHT going forward). Because of the sheer length of the original article, I was forced to split my article into two parts. Not everyone is interested in this level of detail so it makes sense to remove content from my original article and create a second part with all the minutiae.

This second part deepens in the study of IHT focusing specifically on tax allowances and deductions; both at a national and regional level. Tax allowances are hands down the key to paying little to no Spanish Inheritance Tax for the majority of beneficiaries (including European non-residents).

Feel free to add inheritance tax-related queries below and I will do my best to address them. Please do NOT ask how much Spanish Inheritance Tax you stand to pay as the answer is not straightforward and often requires an elaborate study which escapes the purpose of this forum.

Value of Real Estate for Inheritance Tax Purposes

The Tax Office values inherited real estate according to the highest amount of the following three:

• Cadastral value of the property.
• Acquisition value of the property.
• Tax Office’s assessed fiscal property value.

The cadastral value is the assessed value local Tax Authorities give to a property. It is usually well below the market value (on average by 30% to 50% depending on when it was last revised). This rateable value is used as the taxable base to calculate a series of property-related taxes. You will find the cadastral value of a property in one of your local tax bills (i.e. IBI).

The acquisition value is the sales price of the property which is reflected in the Title deed (when it was bought). Under normal market conditions, real estate assets appreciate over time so this value should be below the current market price.

The Tax Office’s assessed fiscal value is attained by multiplying the cadastral value by a legal coefficient, which is updated every now and then, to bring it more in line with inflation.

Bottom line, all three values above are normally below the current market price; the price at which property actually sales in estate agencies. This translates in practice into paying less tax in real terms.

Testator’s Personal Debts

They are tax-deductible. They must be witnessed in a Notary Public deed or else in a private document (the latter is unadvisable for blatant reasons as it is very difficult to prove). Example: Mr. JC Denton acknowledges a debt of €10,000 by means of a Spanish Notary Public deed to a friend. This 10k can be deducted by Denton’s heirs offsetting it against their inheritance tax liability (they pay less tax).

Encumbered Property: Deductible Liens, Charges, Taxes

In my professional experience, as a conveyance lawyer, almost every property acquired by non-residents is mortgaged. The only exception is cash buyers, which are a frank minority.

The Tax Inheritance Act allows that charges, debts, taxes and mortgage liens against a Spanish property are deductible for tax purposes; it is only the free equity that is taxed. Examples:

• Community of Owners outstanding fees.
• Lender mortgages.
• Lifetime loans.
• Town hall taxes (i.e. IBI, rubbish collection).
• Regional taxes.
• State taxes.
• Social Security debts.

All the above are tax-deductible for the purpose of IHT.

Only this first measure vastly reduces a heir’s IHT liability.

So for example, on a property worth £300,000 with a £200,000 mortgage lien against it, only the free equity, the £100,000, would be taxable for inheritance purposes.

Deductible Expenses

Some expenses are tax-deductible such as: death-related medical fees, funeral and burial expenses (within reason).

Tax Categories

Giftees and inheritors are grouped into four categories for tax purposes. Depending on the relationship with the deceased, allowances are conceded. As a general rule, the closer the kinship, the more generous the allowance.

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.
Group III: Relatives in second and third degree: in-laws, brothers/sisters (siblings), nephews/nieces, aunts and uncles.
Group IV: Relatives in fourth degree, or without any relationship: a friend, common law partners.

State Allowances

Allowances are useful to reduce the taxable base (you pay less tax).

State allowances apply to both resident and non-residents.

Group I: there is an allowance available (between husband and wife, or direct line descendants and ascendants) which is a little under €16,000. A very far cry from the UK’s spouse exemption of over £300,000.
Group II: if an inheritor is a direct line descendant under the age of 21, there is an additional deduction of €3,990 for each year they are under 21. The total deduction is restricted to €47,858 per child or grandchild.
Group III: for more distant relatives the exemption is €7,933. There is no exemption for beneficiaries who are not related, including unmarried couples unless they can be registered.
Group IV: naught, nada.

A main home in Spain may be virtually exempt from Spanish succession tax provided the beneficiaries are either your spouse, parents or children and they continue to own the property for ten years from the date of death. ‘Main home’ is a legal term which implies you have lived in the dwelling for the previous three years. The exemption can also apply where the beneficiary is a more distant relative over the age of 65 and they have lived with you for at least two years before death.

Assuming that all the conditions are met, the value of the house can be reduced by 95% on calculating the tax base liable to succession tax, subject to a maximum reduction in value per inheritor of €122,606. This only applies to a principal private residence owned by a Spanish resident. To clarify: if you are non-resident, you cannot benefit from this allowance as, by definition, it must be your main home and therefore you must be resident in Spain.

Regarding life insurance covers, beneficiaries may deduct up to €9,195.

And last, not strictly a tax allowance, but always worth noting, is the often unfairly neglected art. 20.3 of the Inheritance Tax Act which states that if the same property is inherited twice, or more, within a time frame of ten years, the Spanish Inheritance Tax paid on the first transmission is fully deductible on the second, and subsequent, transmissions. Meaning almost no tax would be paid providing the second death is in the following ten years.

This is perhaps better understood with an example: husband and wife own a Spanish property jointly; they have two children. Husband passes away and bequeaths his 50% over to his surviving spouse. IHT has to be paid by his wife on the 50% she inherits from her late husband. If the wife should pass away within the next ten years, her inheritors (the children, presumably) do NOT have to pay Spanish inheritance tax on the 50% that belonged to their late father as the IHT that was paid by their mother is fully deductible.

Regional Tax Allowances

In addition to the above stingy state allowances, each of Spain’s’ 17 autonomous regions have ruled on their own tax allowances. It used to be the case until last year that only residents in Spain could benefit from these – which was an injustice I criticized in all my articles over the last decade. A landmark ruling of the European Court of Justice (ECJ, going forward) of 3rd of September 2014 overturned this. Regional allowances now apply to both residents and non-residents alike (but must be resident in the E.U. or E.E.A.). As a recap:

• EU/EEA-residents: (non-resident in Spain) may benefit from both state and regional allowances post ECJ’s ruling in equal footing to those who are resident in Spain.
• Non-EU/EEA residents (rest of the world): there are no changes. State law still applies to them unabated. They do not benefit from regional allowances.

In a nutshell, the ECJ’s ruling put an end to (fiscal) discrimination between residents and non-residents in a wide array of matters; most notably on inheritance and gift taxation. As a consequence of this key European ruling, the Kingdom of Spain was forced to grant non-residents the same lenient regional tax allowances that residents already enjoyed on taxation matters. For more details on this matter, please read my in-depth article: Changes to Spain’s Inheritance and Gift Tax Law.

This change translates in practice into paying fewer taxes. So in addition to the niggardly state allowances (European) non-residents may now also benefit of the much more generous regional allowances which in not few instances almost suppress the IHT liability bringing that tax bill to zero (with the support of a lawyer, of course).

When one of the parties is non-tax resident in Spain (but resident in EU or EEA) the above mentioned changes will bear a dramatic impact on the beneficiary’s taxation; significantly decreasing or even suppressing the tax altogether providing the estate is located in one of the Autonomous Communities outlined in this article’s introduction with lavish allowances on inheritance and gift taxation. In other words, for clarity’s sake, a EU-resident beneficiary stands to pay less tax now under this new law as from the 1st of January 2015. Take careful legal advice as these tax allowances differ significantly from one region to the next, allowing for some very interesting tax planning.

I am not even going to attempt collating the full list of all available allowances throughout the 17 regions in Spain as it is much too convoluted, subject to change from one year to the next and would add considerably to the length of an already long article.

I will only be listing the allowances on the six most popular regions in Spain where English like to buy property in (typically coastal areas). There is no point in me listing the remaining eleven regions as they garner little to no attention from non-residents. The only reason I am doing this is because regional tax allowances are hands down the key to paying little to no Spanish inheritance tax for the majority of beneficiaries (including European non-residents).

1. Andalusia.
2. Balearic Islands.
3. Canary Islands.
4. Catalonia.
5. Murcia.
6. Valencian Community.

As mentioned in this article’s introduction, I have split the six regions into two tiers depending on how accommodating they are with IHT exemptions:

Tier 1: IHT tax-friendly. They improve significantly on state allowances as well as introducing their own unique exemptions to the point of almost suppressing inheritance tax. Prototype region is Madrid.
Tier 2: IHT regional exemptions are found wanting. Prototype region is Murcia.

I have considerably abridged the below allowances for reasons of space constraint (there are plenty more I do not list). The allowances I quote below are always per inheritor (unless specified otherwise). So if there are more than two beneficiaries, each of them benefit individually from them

1. Andalusia (Tier 2)

EDIT 8th September 2016: New legal changes have updated this section for the region of Andalusia. Please read the following: Inheritance Tax Novelties in Andalusia. FAQ on IHT – 8th September 2016

EDIT 21st September 2017: new changes in inheritance tax suppress inheritance tax for 99% of taxpayers. Effective as from 1st January 2018. More on this here: Andalusia to slash Inheritance tax for inheritances under 1 million euros – 21st September 2017

EDIT 8th July 2019: New landmark changes in Inheritance and Gift tax law in the region of Andalusia have now made it a tier one region for tax purposes. More on this here: Andalusia, now a tier 1 region for low taxation in Spain – 3rd July 2019.

– No IHT paid on the estate itself on compliance with the following three requirements, per inheritor:

• Inheritance taxable base (per inheritor) < €175,000.
• Heir is classified in Groups I & II.
• Heir’s pre-existing net wealth in Spain < €402,678.

To clarify, if you inherit as much as one euro cent over the quoted €175,000 (per inheritor) you pay inheritance on the full amount (the exemption does not apply).

– Main (family) home: 99.99% exemption on deaths occurred since the 1st January 2003, subject to a maximum reduction in value per inheritor of €122,606. Applies only to beneficiaries which were already living in the family home at the time of death. Only applies if beneficiaries do not sell the property within the next five years from the death:

• Surviving spouse
• Descendants (natural or adoptive children, grandchildren)
• Ascendants (parents, grandparents)
• Exemption also applies where the beneficiary is a more distant relative over the age of 65 and lived the previous two years with the deceased.

– Beneficiaries are disabled:

• Groups I & II: physical disability >33%: no IHT paid on taxable base < €250,000.
• Groups III & IV: physical disability >33 % and pre-existing net wealth in Spain is <€402,678: no IHT paid on taxable base < €250,000.

– Further exemptions on acquiring family business, companies, company shares etc.

2. Balearic Islands (Tier 1)

– The following allowances improve upon the state ones:

Group I. Beneficiaries aged under 21 y.o.: €25,000. There is an additional deduction of €6,250 for each year they are under 21. The total deduction is restricted to €50,000 per child or grandchild.
Group II. Beneficiaries aged 21 y.o. or over, spouses or ascendants: €25,000.
Group III: €8,000.
Group IV: €1,000.

– Beneficiaries are disabled:

• Physical disability >33%, <65%: €48,000.
• Physical disability > 65 %: €300,000.
• Psychic disability > 33%: €300,000.

– Main home: up to €180,000 exemption per inheritor as long as they don’t sell the property within the next five years from the death. Applies to the following beneficiaries:

• Surviving spouse
• Descendants
• Ascendants
• Exemption also applies where the beneficiary is a more distant relative over the age of 65 and lived the previous two years with the deceased.

– Life insurance cover: exemption capped at €12,000.

– Further exemptions on acquiring family business, companies, company shares etc.

3. Canary Islands (Tier 1)

– The following exemptions improve upon the state allowances:

Group I. Beneficiaries aged:

•    <10 y.o. = 100% capped at €138,650.
•    >10 y.o.; <15 y.o.= 100% capped at €92,150.
•    > 15 y.o.; < 18 y.o.= 100% capped at €57,650.
•    > 18 y.o.; < 21 y.o. = 100% capped at €40,400.

Group II.

• Surviving spouse: €40,400.
• Natural or adoptive children: €23,125.
• Remainder of descendants: €18,500
• Ascendants or adoptive parents: €18,500.

Group III: €9,300.

Group IV: nil.

– Beneficiaries are disabled:

• Physical disability >33%; <65%: €72,000.
• Disability (physical or psychic) > 65 %: €400,000.

– Group II (i.e. surviving spouse) beneficiary is aged 75 years old or over: exemption of €125,000 (incompatible with the above disability allowances).

– Life insurance cover: 100% exemption capped at €23,150.

– Main home: 99% exemption capped at €200,000 pro rata per each inheritor. Applies to the following beneficiaries:

• Surviving spouse
• Descendants (natural or adoptive children, grandchildren)
• Ascendants (parents, grandparents)
• Exemption also applies where the beneficiary is a more distant relative over the age of 65 and lived the previous two years with the deceased.

– Further exemptions apply on acquiring family business, companies, company shares etc.

4. Catalonia (Tier 1)

– The following exemptions improve upon the state allowances:

Group I. Beneficiaries aged under 21 y.o.: €100,000. There is an additional deduction of €12,000 for each year they are under 21. The total deduction is restricted to €196,000 per child or grandchild.
Group II.

• Surviving spouse: €100,000.
• Natural or adoptive children: €100,000.
• Remainder of descendants: €50,000
• Ascendants or adoptive parents: €30,000.

Group III: €8,000.
Group IV: nil.

– Beneficiaries are disabled:

• Disability (physical or psychic) >33%; <64%: €275,000.
• Disability (physical or psychic) > 65 %: €650,000.

– Group II (i.e. surviving spouse) beneficiary is aged 75 years old or over: exemption of €275,000 (incompatible with the above disability allowances).

– Life insurance cover: 100% exemption capped at €25,000. Only applies if beneficiary is surviving spouse, descendants or ascendants.

– Further exemptions on acquiring family business, companies, company shares etc.

– Main home: 95% exemption capped at €500,000 of property value pro rata per inheritor, maximum exempt is capped at €180,000 per inheritor. Subject to the house not being sold within the next five years as from the death of the deceased. Applies to the following beneficiaries:

• Surviving spouse
• Descendants (natural or adoptive children, grandchildren)
• Ascendants (parents, grandparents)
• Exemption also applies where the beneficiary is a more distant relative over the age of 65 and lived the previous two years with the deceased.

– Further exemptions on acquiring family business, companies, company shares etc.

5. Murcia (Tier 2)

None worth mentioning!

Exemptions centred on acquiring family business, companies, company shares etc.

6. Valencian Community (Tier 1)

– Improvement on state allowances:

Group I. Beneficiaries aged under 21 y.o.: €100,000. There is an additional deduction of €8,000 for each year they are under 21. The total deduction is restricted to €156,000 per child or grandchild.
Group II.

• Surviving spouse: €100,000.
• Natural or adoptive children: €100,000.
• Remainder of descendants: €100,000
• Ascendants or adoptive parents: €100,000.

Group III: nil.
Group IV: nil.

– Beneficiaries are disabled (per inheritor):

• Disability (physical) >33%: €120,000.
• Disability (physical) >65 %: €240,000.
• Disability (psychic) >35%: €240,000.

– Main home: 95% exemption, capped at €150,000 per inheritor. Subject to the house not being sold within the next five years as from the death of the deceased. Applies to the following beneficiaries:

• Surviving spouse.
• Descendants (natural or adoptive children, grandchildren).
• Ascendants (parents, grandparents).
• Exemption also applies where the beneficiary is a more distant relative over the age of 65 and lived the previous two years with the deceased.

– Further exemptions on acquiring family business, companies, company shares etc.

Taxation Example

Mr. Geralt Rivia and wife Triss Merigold jointly own a summer holiday property in the Community of Valencia valued at €400,000. They have two children, aged 16 and 25. They have Spanish mirror wills leaving their assets to their two children (beneficiaries). The house has an outstanding mortgage of €180,000. All four live in England (tax domiciled in the UK), so they are non-residents for Spanish tax purposes. Mr. Rivia passes away.

He bequeaths his 50%, which amounts to €200,000, to his two children. First of all we must deduct half of the mortgage (€90,000). That leaves €110,000 split between the two children. Once we apply all the above listed deductions, allowances and exemptions the IHT liability is (European non-residents benefit from lenient regional allowances in addition to state allowances):

• Child aged 16: nil.
• Child aged 25: nil.

You may wonder, would the outcome have been the same if the mortgage was fully paid up? Answer is yes.

What about if both children were over 21 y.o.? Answer is still yes, the IHT bill for both would still be nil.

Regardless, even if no IHT is due, a Spanish lawyer must still be hired to file and lodge with the Tax Office Spanish Inheritance Tax so as not to be fined and change 50% of the property ownership over to the two children at the Land Registry.

The case is real. I have made up the names of the two parents. In real life they were duped into incorporating a UK Limited Company to “shield” 100% their two beneficiaries (the children) against Spain’s IHT. They paid £5,000 in legal fees to a UK-based company for the ‘privilege’. This is a clear case of being mis-sold a legal service. The truth is this couple did not need a UK Limited Company; they only needed to prepare two Spanish mirror wills, period.

Furthermore, from a Spanish perspective this structure would not be exempt from IHT. Moreover, I do not claim to be an expert in UK tax law, God forbid, but this scheme would see to assume that the UK’s IHT does not tax the change of ownership of shares in a UK Limited Company. A company that is not actually trading as it has no real activity; it is just a single property investment company.

Had the property been worth substantially more or had the property been located elsewhere in Spain, in what I call a ‘tier 2’ region, then indeed it may have been worth considering a holding company or else exploring other (legal) options to mitigate the IHT exposure of their two children.

Bottom line, corporate structures are a legal tool that may or may not be beneficial depending on each individual case – they are not a universal tax panacea to be sold to everyone. Request a tailored estimation of what your appointed beneficiaries stand to pay for IHT before you act rashly setting up companies or else taking on complex equity release schemes. More on these matters further below and also in my conclusion to this article.

I. Inheritance Rules

a) Deceased is non-tax resident.

If the deceased was resident in a Member State of the European Union or else in the European Economic Area (non-tax resident in Spain) the beneficiary will now benefit from:

• The regional tax allowances where the majority of the assets of the deceased are located in.
• If there are no assets in Spain, the rules of the Autonomous Community where the beneficiary lives apply.

b) Deceased is tax resident and beneficiary is non-tax resident.

If the deceased was resident in Spain and the beneficiary is resident in a Member State of the European Union or else in the European Economic Area (non-tax resident) he will benefit from:

• The regional tax allowances where the deceased lived.

II. Gift Rules

a) Immovable property located in Spain (i.e. real estate). If a non-tax resident is donated an immovable asset (located in Spain) he will now be entitled to the regional tax allowances of the Autonomous Community where it lies.
b) Immovable property located outside of Spain (i.e. real estate). If a tax resident is donated an immovable asset located in a Member State of the European Union or else in the European Economic Area, other than Spain, he will be entitled to the tax allowances of the Autonomous Community where he lives in Spain.
c) Movable property located in Spain (i.e. a painting). If a tax resident in a Member State of the European Union or else in the European Economic Area is gifted a movable asset located in Spain he is entitled to apply the tax allowances and gift rules of the Autonomous Community where that asset spent most of the days during the previous five years.

“In this world nothing can be said to be certain, except death and taxes.” – Benjamin Franklin.

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

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in inheritance, taxation, litigation and conveyancing. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

Legal services Larraín Nesbitt Lawyers can offer you

• Making a Spanish will
• Spanish Inheritance Tax Assessment Report (SITAR)
• Probate and Succession
• Death Certificate
• Land Registry Search (Nota Simple)

Related articles

• New EU Regulation to be Passed on Succession and Wills –18th May 2010
• Non-Residents: Six Advantages of Making a Will in Spain – 8th August 2012
• Buying and Owning Spanish Property through Companies: Pros and Cons – 7th March 2014
• Taxes on Selling Spanish Property – 8th December 2014
• Spanish Wills and Probate Law in Light of European Regulation 650/2012 – 8th January 2015
• Changes to Spain’s Inheritance and Gift Tax Law – 21st February 2015
• Dispelling Spanish Inheritance Tax Myths – 8th August 2015
• Spanish Inheritance Tax for Non-Residents (Part I) – 21st February 2016
• Spanish Inheritance Tax for Non-Residents (Part II) – 8th March 2016
• Inheritance Tax Novelties in Andalusia. FAQ on IHT – 8th September 2016
• Which beneficiaries are hit worst by Spanish Inheritance Tax (IHT)? – 2nd June 2017
• Non-Resident: Why you need to make a Spanish will – 24th June 2017
• Holiday Home Taxation in Spain – 8th of July 2017

Please note the information provided in this article 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. No delusional politician was harmed on writing this article. VOV.

2.016 © Raymundo Larraín Nesbitt. All rights reserved.

This is the first of a two-part series in which lawyer Raymond Nesbitt explains the process for inheriting assets in Spain as a non-resident, and provides an outline on Spain’s Inheritance Tax (IHT).

By Raymundo Larraín Nesbitt
Lawyer – Abogado
21^st of February 2016

Inheritance tax is one of two taxes (the second one being plusvalia tax, if you inherit property in Spain) that beneficiaries need to pay on inheriting an estate in Spain.

Introduction

Death and taxes are uncomfortable matters that most people loath to think about and put away at the back of their minds. I understand and share this reluctance to some extent but at some point, sooner or later, it affects us all. If you own assets in Spain, you should plan ahead for your demise which will make things considerably easier on your appointed heirs at a time of bereavement. The following article supplies tips on how to streamline the succession procedure in Spain saving your heirs time, money and hassle. My article is tailored to cater to British and Irish nationals but may also apply to other nationalities.

The initial idea behind it was to keep it short and simple; unfortunately over time it grew considerably longer than I anticipated so I apologise in advance for the wall of text. I have split my original article into two parts; the second article deals with state and regional tax allowances: Spanish Inheritance Tax for Non-Residents (Part II). As it is a long winding article I strongly advise readers to skip through sections they can’t be bothered with and focus only on what may interest them. This article was not written expecting people to read through it entirely, as would normally be the case, but rather to focus on specifics.

This article does not provide Spanish inheritance tax avoidance strategies – which doesn’t mean there are plenty. I simply don’t want to get ahead of myself and wander off topic. I’ll leave these strategies for another article.

The topic of inheritance tax in Spain is a fairly complex and technical one, allowing for multiple articles on the matter (see my full list of inheritance tax-related articles at the bottom). Besides a national legal framework (Inheritance Tax Act of 1987 and Regulation 1629/1991), which acts as a backbone, each of Spain’s 17 regions (Autonomous Communities) are also empowered to rule on some aspects enacting their own laws i.e. on applying their own tax allowances, which differ significantly from one region to the next, or else on applying their own tax rates (within limits).

There’s an ongoing trend to abolish Spanish Inheritance Tax (IHT, going forward) fostered by Spain’s conservative party. These trends are always very popular amongst voters. Many Autonomous Regions have jumped onto the band wagon and are now applying reductions on IHT to such an extent which in practice translates to almost suppressing it i.e. Madrid, Basque Country, La Rioja, Navarre, Catalonia, Valencia, Balearic and Canary Islands.

As examples of this tendency the Canary Islands have just approved with effects as from the 1st of January 2016 a drastic cut to inheritance tax for non-residents which will result in taxpayer’s saving over €30 million per annum. You can read further in English here. You can also read here how some political groups have been campaigning collecting signatures throughout February 2016 to suppress inheritance tax in Andalusia. EDIT: 8th September 2016. New regulation has recently been passed in Andalusia which greatly reduces the inheritance tax burden. More details in my article.

Other regional communities, despite not having suppressed IHT, apply their own tax allowances in addition to those set by the Government in the above laws. We can glean from the above there are two tiers of regions in Spain when it comes to inheritance tax; some are more tax-friendly than others (to the point of suppressing this tax). In a section further below (under the heading “Regional Tax Allowances”) I give a full breakdown of these exemptions in the six most popular regions with English expats (coastal areas).

For those individuals holding large estates in Spain, it is your responsibility to contact a Spanish lawyer and do some careful tax planning to mitigate your heir’s tax bill (or even suppress it). I strongly advise that beneficiaries, on inheriting assets in Spain, appoint a Spanish lawyer to oversee the succession procedure and file IHT on their behalf. You cannot realistically attempt to do this on your own as it is overtly intricate (even for seasoned experts).

Feel free to add inheritance tax-related queries below and I will do my best to address them. Please do NOT ask how much Spanish Inheritance Tax you stand to pay as the answer is not straightforward and often requires an elaborate study which escapes the purpose of this forum.

IHT Frequently Asked Questions

What is Spanish Inheritance Tax (IHT)?

The full name of this tax in Spanish is ‘Impuesto de Sucesiones y Donaciones’ (you will often see it abbreviated as ‘ISD’). I will simply call it IHT, in line with English terminology, for the sake of this and other articles. This tax actually rules on both inheritance and gift tax. So anyone who inherits an asset in Spain or else is gifted one is personally liable to pay for this tax. This article will focus almost exclusively on the inheritance side to keep it simple and not be lead astray. But it should be noted that the same tax rates listed below apply to both.

Who is Liable for Spanish Inheritance Tax?

Broadly anyone who inherits assets or rights in Spain is liable to pay Spanish Inheritance Tax; regardless if they are resident or non-resident.

• Residents: are liable for IHT under personal obligation (taxpayer’s fiscal residency is in Spain).

• Non-Residents: are liable for IHT under real obligation (location of assets or rights bequeathed/inherited is in Spain).

What Law Applies?

This is a tricky question. In general, both the state law and the regional law (in Spain) where the deceased had his residence over the previous five years or where the majority of the assets are located apply. So both state law and regional laws apply in tandem.

Where is IHT Filed?

This depends on whether the deceased, or the beneficiaries, are tax resident in Spain.

If both the deceased and beneficiaries are non-residents, IHT needs to be filed in Madrid.

If either the deceased or the beneficiaries are tax resident, IHT can be filed at the local Tax Office. Each of Spain’s 17 autonomous regions has one.

Due to a legal change last year, brought about by a ECJ’s landmark ruling, non-resident Europeans will be taxed by the Autonomous Community tax rate of the place where the higher value property inherited is located.

Deadline to File IHT

The deadline to file and pay Spanish Inheritance Tax (IHT) is six months as from the time of death of the testator.

Fines, Penalties and Surcharges for Late Payment

Payment after the six-month deadline will attract fines, penalties (delay interests) and surcharges (which mount over time).

Surcharges are 5%, 10% and 15% if paid in the next 3, 6 and 12 months as from the six-month deadline. If you pay after 12 months you have a flat surcharge of 20% plus delay interests which mount exponentially. Additionally there are fines for not submitting the right amounts inherited (under-declaring).

Extension to File IHT

You can request a one-time extension, within the first five months, for a further six months. So in total, you would have 12 months as from the death of the testator to file and pay inheritance tax.

You can also request to pay the tax in instalments.

Does Drawing up a Spanish Will reduce Heir’s Inheritance Tax Burden?

Categorically no.

I am unsure where the rumor mill originated but I repeat for the avoidance of doubt that making a Spanish will means not one iota to the amount of inheritance tax payable, nada.

That said, making a Spanish will is highly advisable and I repeat this advice throughout this article like a mantra. It is worthwhile because it streamlines the inheritance procedure in Spain and avoids attracting all the following under normal circumstances (by that I mean filing IHT within the six-month deadline) thus saving time, money and hassle:

•    Avoids fines for late payment of filing IHT.
•    Avoids surcharges for late payment of IHT.
•    Avoids delay or penalty interests for late payment of IHT.
•    Avoids paying for two sets of legal fees.
•    Avoids expensive sworn translations.
•   Avoids your heirs wasting unnecessary time following redundant legal procedures which could have easily been avoided altogether.
•    Avoids them extra hassle at a time of bereavement.

All the above points are detailed below so I will not go into them just now. Be very wary of any company or individual that advises you not to make a Spanish will. You can read further in my blog post: Non-Resident: Why you need to make a Spanish will – 24th June 2017.

In my professional experience (over a decade) people that give this flawed advice have vested interests of their own in selling you a legal or financial service which may not be above board (i.e. tax evasion which is a criminally pursuable offence in Spain for amounts defrauded in excess of €120,000). There are good reasons why Spanish registered professionals (lawyers, accountants, economists) strongly advocate non-residents to make Spanish wills (exclusive to their Spanish assets).

Frozen Spanish Assets

It is important to note that all Spanish assets belonging to the testator are frozen legally at the time of his death. This means that Spanish bank accounts cannot be accessed (you cannot withdraw funds) nor can you sell his house for example.

In order to release these assets and rights, inheritors must first settle the death duties (file and pay IHT). Only then, as described below, will heirs have unfettered access to bank accounts and be able to sell on the property.

Can you Inherit Debts in Spain?

Yes. On inheriting assets and rights you may also acquire all the debts the deceased had in Spain; in which case you become personally liable with all your assets. Which is why your Spanish lawyer must ensure your liabilities do not outstrip the assets and rights, in which case it is advisable to refuse the inheritance altogether as a heir would be making a loss on accepting it.

Inheritance Scenarios: Step-by-Step Guide

Three inheritance scenarios unfold dependent on whether a Spanish will was made, or not, by the deceased.

I. Deceased made a Spanish Will.

This is the best, or most advantageous scenario, from a beneficiaries’ point of view as it saves them considerable time, money and hassle. More on the perks of drafting a Spanish will in my article: Non-residents: Six Advantages of Making a Spanish Will.

A. A beneficiary/heir must first gather the following three documents:

• Original Death Certificate. If the death took place in Spain there should be no problem attaining it. If the testator died in the United Kingdom then this document needs to be translated into English by a sworn translator and have the Apostille seal of the Hague Convention affixed.
• Certificate of Last Will. This document can be attained from the Ministry of Justice in Madrid. It will normally be your lawyer who will procure it (takes a couple of weeks). This document basically confirms there is no other Spanish will. A full explanation in English on what this document is and how to attain it here.
• Notarised copy of the testator’s Spanish will.

B. The Spanish lawyer – Deed of Inheritance Acceptance

Once you have all three documents above, your lawyer in Spain can now draft what is known as a Deed of Inheritance Acceptance (‘Escritura de Aceptación de Herencia’) which is witnessed by a Spanish Notary Public. Getting a lawyer involved from the outstart is essential as you cannot possibly hope to complete this procedure on your own. This deed is basically a formal acceptance that appoints you officially as heir to the testator’s assets in Spain.

With this deed you are now able to file, pay and lodge the death duties.

C. Filing and paying IHT

Anyone who had the good sense of making a Spanish will, ensures his heirs will file IHT on time in Spain thus avoiding fines, penalties and surcharges for late payment. Anyone who did not make a Spanish will (see two sections below) will in all likelihood force his inheritors into paying all three (besides many more expenses detailed below). Bottom line: make a Spanish will if you own assets in Spain, you will save your heirs much time, money and hassle.

As from the time of signing the Deed of Inheritance Acceptance you have 30 working days to file and pay inheritance tax (tax model 650). Depending on which region in Spain the assets are located, non-residents now benefit from lenient regional tax allowances besides state allowances (see below section on Tax Allowances).

Once IHT has been paid you now have unfettered access to the deceased’s bank accounts (they will request a copy of the Deed of Inheritance Acceptance as well as prove of having settled IHT).

You may now also change the ownership of property at the Land Registry (takes one month plus). Likewise, they will also request a copy of the Deed of Inheritance Acceptance plus a copy of having settled IHT. The change of ownership at the Land Registry enables you to sell on the property (more on this in my article Taxes on Selling Spanish Property).

Be aware that you have now officially become the new owner of the Spanish property and are therefore liable for the following annual Non-Resident Taxes in Spain.

II. Deceased has only a UK Will (no Spanish will).

This is a scenario you categorically want to avoid for your heirs at all costs. It entails for your loved ones spending greater time, money and hassle. It has no associated advantage and numerous drawbacks.

The reason being is that Probate, in my experience, will exceed the six-month deadline to file IHT. Moreover it will exceed 12 months. This means that your beneficiaries (the people you name in your will to inherit your assets) will attract penalties and surcharges for late payment from the Spanish Tax Office on top of the Spanish Inheritance Tax which will add greatly to their tax bill. The translation of an English will into Spanish costs more than if the deceased had made a Spanish will in the first place…

But it gets worse, because heirs will also need to follow an expensive legal procedure in England & Wales, Scotland or Ireland that could have been easily avoided had the testator made a Spanish will. This is because a solicitor must be hired in the United Kingdom (or Ireland) to follow probate besides a Spanish lawyer; so you are effectively forcing your heirs to pay for two sets of legal fees when only one was required! I am sure the lawyers involved are indebted to your boundless generosity (and lack of judgement).

As can be gleaned from my explanation, on completing step A below, you will now have to follow exactly the same steps as if the deceased had made a Spanish will in the first place. The only difference is that you have added a redundant extra step (A) to your heirs which will prove extremely time-consuming, expensive and will attract penalties and surcharges on the Spanish side for late payment of IHT – not a smart choice any way you look at it.

A. Grant of Probate (England) or Confirmation (Scotland).

You must first obtain what is known as a Grant of Probate (England & Wales, Northern Ireland) or Confirmation (Scotland). You will require the assistance of a UK solicitor to act on your behalf. This document requires to be officially translated into Spanish by a sworn translator (or at a Spanish consulate) and requires the Apostille seal of the Hague Convention affixed for it to be valid in Spain.

B. Same steps as outlined above in section “I” for a Spanish will.

III. Intestacy – Deceased Dies without a Will.

A. If the deceased is English, Welsh or from Ireland (north or south) his heirs must appoint a solicitor, who will need to obtain a Grant of Letters of Administration.

If the deceased is Scottish, his heirs must appoint a Scottish solicitor, who will need to obtain Confirmation in Scotland.

Once you have this document, it must have affixed the Apostille seal of the Hague Convention affixed. This document then needs to be translated into Spanish, by a Spanish consulate or by an official translator (‘traductor jurado’), for it to be valid in Spain.

B. Same steps as outlined above in section “I” for a Spanish will.

 Spanish Inheritance Tax (IHT)

The following points provide an overview on how much inheritance tax you stand to pay.

Tax Categories

Giftees and inheritors are grouped into four categories for tax purposes. Depending on the relationship with the deceased, allowances are conceded. As a general rule, the closer the kinship, the more generous the allowance.

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.
Group III: Relatives in second and third degree: in-laws, brothers/sisters (siblings), nephews/nieces, aunts and uncles.
Group IV: Relatives in fourth degree, or without kinship: a friend, common law partners, mistress.

Tax Allowances (National & Regional)

Please follow this link to the second part of my article on Spanish Inheritance Tax dealing specifically with tax allowances:

Spanish Inheritance Tax for Non-residents (Part II)

Not everyone is interested in this level of technical detail, so to keep this article short and snappy it makes sense to remove the content from this article and post it in a separate article. Tax allowances are hands down the key to paying little to no Spanish Inheritance Tax for the majority of beneficiaries (including European non-residents).

National Tax Rate

Once we have deducted the above tax allowances, national and regional, which reduce the taxable base we then apply the corresponding tax rate. Bear in mind the following is the national tax rate. If an Autonomous Community in Spain has exercised its competence over the matter they will have their own tax scale which will differ slightly from the one shown below. The tax rate follows a sliding scale; the more you inherit, the more you stand to pay.

Multiplicand

The above applicable tax rate must then be multiplied by a multiplicand depending on which group a beneficiary is classified in as well as his pre-existing net wealth (in Spain).

What beneficiaries are likely the worst off with Spanish Inheritance Tax (IHT)?

Beneficiaries included in one or more of the following categories below will likely be landed with a hefty IHT tax bill:

•    Beneficiaries classified in Groups III & IV for IHT purposes (distant relatives or else with no family ties i.e. friends, mistress, common law partners).
•    Large estate inherited. It is difficult to give a precise number as it is in relation with multiple factors.
•   Pre-existing net wealth in Spain of the inheritor is large (see multiplicand table above for the minutiae). The worst-case scenario is an inheritor classified in Group IV who already has a pre-existing net wealth in Spain of over €4,020,770.98 (over £3,000,000) and who inherits over €797,555. In such a case, the inheritor would be applied an extreme tax rate of 81.6% (34%*2.4). This is clearly a problem that only affects someone who was already a multimillionaire before inheriting; not exactly a problem that affects us all (unfortunately!).
•    The assets or rights inherited are located in what I label as a ‘tier 2’ region for IHT purposes; meaning the regional exemptions are negligible or non-existent.
•     Aged between 21 and 65 years old (because multiple lavish exemptions would not apply to that age group).
•    Beneficiaries are non-resident in the EU or EEA (this is because lenient regional tax allowances do not apply to those resident outside the European Union or European Economic Area).

If you plan to leave an estate in Spain to your loved ones, and your appointed beneficiaries qualify for a combination of one or more of the above then you (NOT the beneficiary!) should consider contacting a lawyer to do some serious estate planning to mitigate their inheritance tax exposure – they will be forever grateful.

Double Taxation Treaty and Inheritance Tax Relief

Absurdly neither the United Kingdom nor Spain have included this matter in article two of their double taxation treaty when it affects thousands of British citizens every year. British nationals alone account for almost 800,000 residents in Spain (source: BBC). Spain is the second most popular destination worldwide for British to settle in after Australia (minus the white sharks).

For some bizarre reason (only privy to politicians) Spain has only signed such a treaty with the following three countries: France, Greece and Sweden.

Which indeed makes perfect sense because – as we all know – Spanish costas are crawling with Greek, French and Swedish nationals, not. I’ll leave that bullet for politicians to dodge.

This translates in practice into having to pay for inheritance tax both in the UK and Spain. My article only covers the Spanish side of succession.

Dispelling Spanish Inheritance Tax Myths

Over the last eight years a few rogue companies have been set up with the sole purpose of putting the fear of God into British to entice them to incorporate corporate structures on top of the Spanish real estate or else buy into obscure equity release schemes to avoid Spain’s IHT (the latter led to hundreds of senior citizens losing their homes to these cunning predators). Truth is most people didn’t even need them in the first place. On average inheritors pay 15% on Spanish Inheritance Tax, a far cry from what’s been shouted from the rooftops.

For a full comprehensive list of IHT-related tax myths peddled by unscrupulous non-regulated outfits or IFAs (Independent Financial Advisors) with a vested interest to coax fellow British into incorporating expensive (and often unnecessary) corporate structures, or else set up devious equity release schemes, to elude Spanish Inheritance Tax please read my article Dispelling Spanish Inheritance Tax Myths which debunks them.

Before you hire an IFA in Spain make sure it is registered by the CNMV (Spain’s equivalent to the UK’s Financial Conduct Authority; what used to be the FSA). Just follow the link I provide and you can find out if they are registered in English. Regulated IFAs have mandatory professional indemnity cover. If the IFA is not registered at the CNMV, steer well clear from them.

Some of my all-time favourite IHT sales pitch poppycock:

•    “Spanish Inheritance Tax legal fees can be at least 40 to 50%”.
•    “Your heirs will be hit by a 40% plus Inheritance Tax Bill.”
•    “Heirs will be forced to sell the property in Spain (to pay off Spain’s extreme inheritance tax).”
•    “The financial debt of your heirs is maybe as much as 50% of the value of your property.”
•    “Want to avoid Spanish Inheritance Tax extreme 82% tax rate?”
•    “If you incorporate a UK Limited Company and place the Spanish real estate inside you will be 100% shielded against Spain’s ISD/IHT. After death, only the shares are reorganised, the company owns the asset, and so it doesn’t change hands. This falls outside Spanish Inheritance Tax.”

Ten Key Points to Keep in Mind on Spanish IHT

• Non-residents should make two wills; one in their home country ruling on their national assets and a second Spanish will which will rule exclusively on their Spanish estate. Making a Spanish will has a number of advantages which saves your heirs time, money and hassle at a time of bereavement (for a full list of perks please read my in-depth article: Seven Advantages of Making a Spanish will).
• Preparing a Spanish will does NOT avoid nor reduce heirs paying Spanish Inheritance Tax; this is a widespread misconception that should be cast away. It does however significantly reduce the overall succession expenditure burden for heirs, as it avoids attracting: penalties, fines, surcharges, paying for two sets of legal fees, paying for unnecessary sworn translations as well as streamlining the whole procedure, as explained above.
• The Statutory limitation on IHT in Spain is 4 years, six months and one day (sic). It is not four years as many people mistakenly post on internet.
• From the moment of death, heirs have a maximum of 6 months to pay the death duties. You may however request a one-time extension of a further 6 months, in writing, within the first five months. So the total deadline to file and pay IHT would be 12 months. If you file IHT after the above deadline you will incur in penalties and/or surcharges that add up considerably to your tax bill. Those who do not make a Spanish will force their beneficiaries to pay additional fines, penalties and surcharges, increasing their tax bill, which could have been easily avoided with some careful tax planning (i.e. on making a Spanish will). You can request to pay IHT in instalments.
• Residents and non-residents are liable to pay Spanish Inheritance Tax.
• There is no blanket exemption between husband and wife, or spouses.
• Unlike the UK, where it is the estate that is taxed, in Spain it is the appointed beneficiary who is liable to pay and settle IHT.
• Until the death duties are settled, all Spanish assets belonging to the deceased will be ‘frozen’ i.e. money cannot be withdrawn from bank accounts, houses or other assets cannot be sold on (as they officially still belong to the deceased). Heirs cannot bank on the Spanish estate itself to foot the tax bill – won’t happen.
• Any document signed by a foreign public official, needs the Apostille of the Hague Convention of 1961 affixed before it is valid in Spain.
• Any document written in English (or any other language) needs to be translated by a sworn translator into Spanish before it is valid in Spain.

Conclusion

Ideally non-residents should make two wills; one in their home country ruling on their national assets and a second Spanish will which will rule exclusively on their Spanish estate. As explained above, preparing a Spanish will – exclusive to your Spanish assets – will save your heirs considerable time, money and hassle at a time of bereavement.

Spanish wills can be drawn up in Spain (Notary Public) or else at a Spanish consulate in the United Kingdom. A Spanish lawyer can assist you making one, double-column, in English and Spanish. Make sure your Spanish will is fully compliant with the new European Regulation 650/2012 if you have an old Spanish will. More on this in my article: Spanish Wills and Probate Law In Light Of European Regulation 650/2012.

I stress that all actions to mitigate IHT exposure must be carried out in life by the person who will die and leave assets and/or rights to his heirs. The ones who will pay IHT are the heirs, as they are personally liable, NOT the person who dies nor his estate (as in the UK). Beneficiaries can do next to nothing to mitigate their tax bill; it must be the one leaving the assets who must do the brunt of the work to reduce his heir’s tax bill. And this may require planning ahead.

Appointed heirs or beneficiaries must retain a Spanish lawyer to act on their behalf. This is not a legal procedure one can realistically attempt to achieve on his own.

For large estates, I recommend tax planning is carried out well in advance (even before buying a property in Spain) to significantly mitigate your tax bill. I only advise corporate structures, for tax mitigation purposes, on amounts on or above €600,000 (£500,000) threshold as company incorporation and running expenses may be high even negating any potential fiscal advantage sought. In any case these require a case-by-case approach as there are no one-size-fits-all solutions.

Inheritance tax planning in Spain is a complex matter, so please seek legal advice from a qualified lawyer and be suspicious of anyone advocating property ownership through corporate structures is “always beneficial” – not the case and in fact may be even be counterproductive and a complete waste of money. Be wary of foreign non-regulated companies selling one-trick ponies to circumvent Spanish Inheritance Tax offering bespoke “100% protection” against it.

If you fear Spain’s Inheritance Tax (IHT/ISD) you should first ask for an estimation from a law firm before you do anything rash such as setting up a Spanish company or a UK Limited Company to place it on top of the Spanish real estate. You may be (pleasantly) surprised to learn how little you have to pay given the rampant scaremongering going on. Inheritance tax varies widely within Spain’s seventeen Autonomous regions (in some it’s not even taxed!). Truth is that corporate structures are neither needed nor recommended for the vast majority of people.

“In this world nothing can be said to be certain, except death and taxes” – Benjamin Franklin.

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

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in inheritance, taxation, litigation and conveyancing. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form. 

Legal services Larraín Nesbitt Lawyers can offer you

• Making a Spanish will
• Spanish Inheritance Tax Assessment Report (SITAR)
• Probate and Succession
• Death Certificate
• Land Registry Search (Nota Simple)

Related articles

• New EU Regulation to be Passed on Succession and Wills –18th May 2010
• Non-Residents: Six Advantages of Making a Will in Spain – 8th August 2012
• Buying and Owning Spanish Property through Companies: Pros and Cons – 7th March 2014
• Taxes on Selling Spanish Property – 8th December 2014
• Spanish Wills and Probate Law in Light of European Regulation 650/2012 – 8th January 2015
• Changes to Spain’s Inheritance and Gift Tax Law – 21st February 2015
• Dispelling Spanish Inheritance Tax Myths – 8th August 2015
• Spanish Inheritance Tax for Non-Residents (Part I) – 21st February 2016
• Spanish Inheritance Tax for Non-Residents (Part II) – 8th March 2016
• Inheritance Tax Novelties in Andalusia. FAQ on IHT – 8th September 2016
• Which beneficiaries are hit worst by Spanish Inheritance Tax (IHT)? – 2nd June 2017
• Non-Resident: Why you need to make a Spanish will – 24th June 2017
• Holiday Home Taxation in Spain – 8th of July 2017

Please note the information provided in this article 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. No delusional politician was harmed on writing this article. Voluntas omnia vincit.

2.016 © Raymundo Larraín Nesbitt. All rights reserved.

Lawyer Raymundo Larraín Nesbitt explains the new regulations governing holiday rentals just introduced in Andalusia. He gives us an overview of the Decree in force, the requirements landlords must meet, how to register your holiday rental in Andalucia and explains the steep sanctions for non-compliance.

Register through us in only 24 hours: Registration of Holiday Homes (Andalusia)

Marbella-based Larrain Nesbitt Lawyers has over 16 year’s taxation & conveyancing experience at your service. 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.

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
8th of February 2016

Introduction

Since 2013 I have highlighted the ongoing trend in all regions of Spain to pass legislation on private holiday rentals:

• New Measures to Bolster Spain’s Ailing Rental Market
• Holiday Rental Laws in Spain

Anyone who has read my articles here will know I am not in favour of these tourist rental laws because they have not been drafted with consumer’s best interests in mind, but rather with those of the hotel industry that fought tooth and nail to regulate this sector, and thwart what they call “unfair competition”.

Spanish politicians, and particularly those in Andalusia, have taken a string of controversial decisions in the last few years in the face of an anemic post-crisis recovery (i.e. the infamous worldwide asset declaration requirement (Model 720), stringent regional Holiday Rental Laws in various Spanish regions, the empty home expropriation decree for ‘social reasons’, a disappointing ‘Golden Visa’ residency investor scheme, draconian anti-money laundering laws etc.). These laws are proving to be highly unpopular with expatriates to the point of driving many away. Unsurprisingly many town halls are reporting of late that foreign population has taken a sharp dip in their census over the last few years (for example, the Marina Alta region of Valencia has lost a third of its foreign population). Maybe some expats have chosen to live under the radar to avoid complying with Tax Model 720 worldwide asset declaration, others have simply had enough and packed their things and gone back to their home country.

If Spain had truly a modern diversified economy these unpopular laws wouldn’t be such a big deal after all, and we could shrug it off. But the sad fact is that Spain’s GDP is unhealthily over-reliant on the Tourism and Construction sectors (over 20%), and this fact, coupled with huge unemployment levels that reach alarming all-time highs in Andalusia, make for a bleak picture. Perhaps regional politicians would do well to ponder carefully on the far-reaching consequences of decisions taken on the hoof. In my humble opinion there are many countries out there that are doing a sterling job at attracting foreign investments by adopting superb fiscal measures (chiefly Portugal). Spain should take a good hard look at itself and abandon its self-complacent attitude and start embracing competitive measures that would renew the market’s interest (especially amongst British, traditionally our largest market by far). Spain has all the makings to become the hotspot; all it requires is competent down-to-earth politicians passing tax-friendly laws that attract foreign investments. Is this too much to hope for?

In February 2016, after a long struggle, Andalusia finally passed its own regional holiday rental law in the wake of much upheaval. This article serves as a gentle reminder on this new law to all those landlords who are currently letting out property in the region of Andalusia or intend to in the near future. I strongly advise to heed the guidance I provide below and not to ignore this new piece of legislation. The fines for non-compliance are very steep (ranging from £1,500 to £115,000).

Anyone who thinks the Junta de Andalucía will not hound infractors and fine them harshly is deluding himself. The whole purpose of this legislation was geared from the outstart towards sanctioning offenders as those behind it had an axe to grind. Moreover in other parts of Spain town halls are already levying substantial amounts on the back of similar new laws. They are using new technology (‘web crawlers’) that methodically and relentlessly trawl internet to come up with non-regulated rentals that are advertised over the web. Authorities cross-reference this information against their public records and unregistered properties are brought to light as a result. Not to mention that at a time where Administration’s coffers are bereft post-crisis this represents a golden opportunity to hunt, apologies, I meant raise taxes and prop up politicians’ dwindling coffers (because gold statues and palaces don’t pay for themselves you know). God bless them all.

In Barcelona, for example, in two unrelated recent cases they have levied fines of £24,000 (source) and £70,000 on the same token (source).

A positive side effect of this law will be to bring into the open all the undeclared tourist rentals. So if after reading my article you become a law-abiding citizen registering your properties to rent them out as tourist accommodations make sure you are filing and paying your Non-Resident Taxes in Spain as well! It would be a faux pas to register them and not declare and pay tax on your rental income in Spain. EDIT 11th April: newspaper article from El País:  Taxman turns attention to hidden internet property rentals.

Let this article act as a stern warning to all landlords in Andalusia: The Taxman Cometh!

Andalusia’s Holiday Rental Decree

Andalusia approved on the 3rd of February this new decree which had sparked much controversy and debate. The final version has dropped some of the more contentious points but still retains many which are highly questionable in my humble opinion. Andalusia’s Holiday Rental Law was officially published in the BOJA on the 11th of February. Link to the new law:

Andalusia’s Holiday Rental Law.

The official name is Decree 28/2016, of 2nd of February of Tourist Holiday Rentals (viviendas con fines turísticos). The best way to go around it is simply analysing point by point what it establishes.

Obligation to Register your Property: as from the 11th of May 2016

In compliance with this Decree, and with Law 13/2011, of Tourism in Andalusia, landlords may register as from the 11th of May 2016 onwards, day on which this new Decree will come into force. Mr. Rafael Salas Gallego, Malaga’s Tourism Director, has confirmed the registry will not be operative before the 11th of May. So landlords now have a three-month deadline to gather all their paperwork and may start registering themselves as from the 11th of May onwards before Andalusia’s Tourist Registry (or ATR going forward). The Junta de Andalucía has promised public awareness campaigns to clarify on this new law.

You can download and fill in the form supplied by the ATR called ‘Declaración Responsable’ and hand it over at one of the ‘Delegaciones Territoriales de Turismo‘ once completed. Registration is free unlike in other regions of Spain.

If your command of Spanish is low, you can hire a lawyer to do this on your behalf in exchange of a reasonable fee.

Excluded Properties

The following properties are excluded from being regulated by this decree:

• Properties which are lent to friends or family without an exchange of money (free).
• Properties that are let to the same individual for a continuous period of time exceeding two months. In which case it will be regarded as a standard rental agreement subject to Spain’s Tenancy Act. More details in my in-depth article: Spain’s Tenancy Act (LAU).
• Rural properties, located in what is legally classified as rural land, are expressly excluded as they are subject to their own legislation: Decree 20/2002. I have covered this in an in-depth article: Andalusia’s Holiday Rural Rentals.
• Landlords, or property management companies, that own or rent three or more properties, personally or through corporate structures, each located within a radius of 1 km from the reception office in the same unit (i.e. building, urbanization, condominium) will be excluded from this new decree (this is very bad news). They will be subject to the much harsher Decree 194/2010 (Apartamentos Turísticos) which basically equates these properties to a hotel. This has very serious restrictions on use i.e. landlords cannot use the property themselves for more than two months a year, they must cede the management of the units to a professional company for a minimum period of ten years etc.

Definition of Holiday Rental – What Properties are Included

The decree is rather vague on this point. Any property that complies with the following points will fall under the remit of this new regulation:

• The property is located in land classified as ‘residential’ (in other words, rural and tertiary land are excluded as they are each subject to their own legislation on rentals).
• The property is rented out to tourists regularly on a short-term basis (days, weeks, months).
• Reservation system is enabled. Reservations can be made.
• The property will be regarded to be rented out touristically when the landlord advertises it using specialized media. By specialized media it is understood companies who intermediate between landlord and tenant in exchange of a commission such as: travel agencies, real estate agencies, holiday rental websites (i.e. Airbnb, HomeAway, Tripping, Tripadvisor, Flipkey, VRBO etc.).

Examples of Private Holiday Rentals

All the following landlords fall under the remit of this new law and must comply with its terms or face hefty fines.

1. Mr. Raistlin Majere, and loving wife Claire, own a duplex in a beachside urbanization in Estepona and rent their property out three months a year advertising through HomeAway and similar niche websites.
2. Mr. Aedan Cousland owns a luxury villa in Benahavis, Marbella, which he rents out to affluent Arabs only during the summer season for a substantial return. He advertises only through upscale real estate agencies.
3. Mrs. Morrigan Flemeth and husband Alistair own and live in a Guest House in Fuengirola renting out rooms to tourists all year round. They advertise over internet.
4. Mr. Loghain McTir, UK resident, owns and rents three high-end properties through a management agency. Two of the properties are located frontline in Puerto Banús and the third one in the prestigious Sierra Blanca estate.

Rental Types

Properties can be let as a whole or else by rooms (like in a Guest House).

If it’s the whole property that is being rented out, no more than 15 lodgers will be allowed simultaneously at any time (think of a large villa).

If the property is being rented out by rooms, it is mandatory the landlord lives in the property himself. No more than 6 vacancies can be offered and each individual room cannot exceed four lodgers.

Lodging Requirements

Some requirements from the draft decree have been dropped i.e. wi-fi; which is now a moot point as it is no longer required.

• The property must have attained what is known as a Licence of First Occupation (LFO, for short). It is also known in some parts of Spain as First Occupancy Licence, Habitation Certificate, Habitation Licence, Licencia de Primera Ocupación, Cédula de Primera Habitabilidad, Cédula de Habitabilidad or Cédula de Ocupación. A LFO is a licence issued by the town hall (ayuntamiento) once the building works have been completed, which allows the purchaser to dwell in the property legally. The property developer is responsible for applying for this licence, once the Certificate of End of Construction has been issued. It ensures the property is above board complying with all planning, health & safety and disabled access laws both at a national and regional level. It is also very important as it is required by utility companies to supply the property with water, electricity, gas and telephone connection.
• Rooms must be ventilated and have blinds or shutters to obscure them when necessary.
• Rooms will have the appropriate furniture required for use by lodgers and in proportion to the number of lodgers per room.
• Air conditioning unit affixed in every bedroom including living room (as a fixed fixture, not as a portable device unit) when the property is offered between the months of May and September (inclusive). Landlords will be given one year to adapt the rooms to this requirement as from the time this law is passed (11th of May 2017).
• When properties are let during the winter season (October through to April, inclusive) a heater must be made available in every bedroom including living room (as a fixed fixture, not as a portable device). Landlords will be given one year to adapt the rooms to this requirement as from the time this law is passed (11th of May 2017).
• First aid kit.
• Landlord must provide physical or electronic brochures of the closest amenities, medical treatment facilities, parking spaces, restaurants, shopping centres as well as plans that detail use of urban transport, map of the surrounding area and general tourist guides.
• A complaints book will be made available as well as installing a large visible sign informing lodgers that a complaint book is available. Sample complaints form click here.
• Mandatory cleaning service at the start and end of every new accommodation.
• Clean sheets and bed linen as well as supplying a spare set.
• Provide lodgers with a working contact phone number of person to be held accountable for any complaint or query raised so the situation is addressed immediately.
• Provide instruction booklets to use household and kitchen appliances.
• Inform lodgers on property use restrictions (such as no smoking areas or pet restrictions) as well as on Community of Owners internal bylaws.

Holiday Rental Agreement & Registration Form

i. Holiday Rental Agreement

• It will have the details of the landlord, including a working telephone number as outlined in the previous section above to address complaints, the property’s unique alphanumeric code on being registered at the Junta de Andalucia, the reservation dates (arrival and departure dates), numbers of lodgers and total price of the holiday rental.
• If the agreement does not specify it, it is presumed the rental starts at 16.00 and ends at 12.00pm.
• The landlord, or person designated by him, will show the lodgers around explaining how the kitchen and household appliances work as well as providing them with security cards and access codes to the premises. If the tourist accommodation is included in what is known as a Community of Owners, the landlord must supply his guest a copy of the internal bylaws ruling the community so he adheres to them during his lodging.
• A copy of the signed Holiday Rental Agreement will be stored by the landlord for up to one year to provide it for inspection by the relevant Authorities.

ii. Registration Form

• All lodgers, not just the one making the reservation, will be fully identified in compliance with current Security laws (popularly dubbed as ‘Gag’ Law). Lodgers will supply a copy of their personal ID/passport. Like in hotels, all guests will be required to fill in and sign a registration form on entry. In compliance with art 7.2 this registration form must be then sent to the Police or Guardia Civil for every guest over the age of 16 years old within the next 24 hours of the accommodation following Security Laws from 2003 (Orden INT/1922/2003, de 3 de julio, sobre libros-registro) and from 2015. You can send a copy of the filled in and signed registration form personally, by fax or else by e-mail. Registration forms are standardized by law; click here for a sample copy.
• Online registration: follow this link to submit by e-mail to the Guardia Civil a copy of your completed Registration Form. Alternatively you can also use this other link (scroll down for the links).
• Registration forms must be stored by landlords for a period of up to three years for the inspection of the Security Forces.

Price and Reservation

• Price offered will be per night and all-inclusive. This means it must include all the following: utility consumption (water, electricity, heating, A/C), cleaning of (bed)room at the start and end of every new lodging, clean bed linen, taxes. The bill will give a detailed breakdown of all expenses including any extras requested by the guest (like in hotels).
• It is compulsory for a landlord, or person designated by him, to hand invoices to a guest for every payment made including the initial reservation fee (even if it is just for one night’s accommodation).

Following article 8.2, and for the avoidance of doubt, landlords can decide freely upon the rental terms on the following points (so long as the tenant agrees): price, bookings, reservation deposit and cancellations.

If a landlord does NOT word these terms in a short-term tenancy agreement then by default the following rules will apply:

• Unless agreed otherwise, the maximum reservation fee is 30% of the total price.
• If cancellation of the reserve is done over ten days in advance the landlord can pocket 50% of the reservation fee in compensation.
• If the cancellation is done under 10 days then the landlord is entitled to pocket the full amount of the reservation fee.
• If it’s the landlord that cancels he may do so without penalty over ten days in advance.
• If the landlord cancels under ten days he must pay a compensation to his guest of 30% of the final agreed total price.
• If the cancellation is due to a force majeure, then both landlord and guest are exempt of awarding compensation. Examples of such admitted by law courts are flash floods, earthquakes, strong winds, general strikes.

How to register your holiday rental in Andalucia – Inscription before Andalusia’s Tourism Registry (ATR)

All landlords that wish to rent out their properties in Andalusia must register their property before the ATR.

You can self-register here (as from the 11th of May 2.016 onwards):

Enrolment at Andalusia’s Tourism Registry.

Download, print and fill in the form supplied by the ATR called ‘Declaración Responsable para el acceso o ejercicio de la actividad‘; specifically the annex on page 7. Once done, hand it over physically at one of the ‘Delegaciones Territoriales de Turismo‘ in the region where your property is located. It can also be completed online if you have a digital certificate enabled. Unlike in other regions of Spain registration is free in Andalusia.

You will need to supply the following details:

• Property details, cadastral reference, number of potential guests according to its Licence of First Occupation.
• Landlord’s personal details and an address for official notifications.
• Details of management agency or designated person if landlord appoints someone to act on his behalf. Any change in details must be communicated so the ATR remains accurate at all times.
• Details of this inscription will be passed on to the local town hall.
• Once the property is duly registered before the ATR each dwelling will be assigned a unique alphanumeric code which – by law – must appear in all publicity offering the property to let (art. 9.4) i.e. internet webs, estate agency brochures, glossy magazine rental advertisements etc.

You will then be assigned a unique alphanumeric code i.e. VFT/MA/00001.

It goes without saying that any property let in Andalusia that does not sport said unique ATR code will be easy to spot and may result in heavy fines.

Fines and Sanctions

They are divided into three categories:

a.- Light offence. Can be either a written warning or a sanction with fines up to €2,000.
b.- Serious offence. Sanctioned with fines ranging from €2,001 up to €18,000. The premises may be shut down temporarily at the authority’s discretion (for periods less than 6 months), the rental licence may be revoked temporarily.
c.- Very serious offence. Sanctioned with fines ranging from €18,001 up to €150,000. The premises may be shut down temporarily at the authority’s discretion (for periods spanning between 6 months to 3 years), the rental licence may be revoked indefinitely.

If the landlord is sanctioned two or more times for very serious offences within a three-year period, the property will be struck off the ATR indefinitely.

Statutory Limitation of Sanctions

• Light offences: six months.
• Serious offences: one year.
• Very serious offences: two years.

The statutory limitation starts as from the time the sanction is imposed by the Administration. The time can be interrupted by the initiation of legal proceedings. If the administrative procedure is paralyzed for more than one month for reasons unrelated to the offender, the statutory limitation will be renewed once again (eventually time-barring the sanction).

Clandestine Activity

If the Authorities catch you red-handed renting out a non-declared property (that is not registered at the ATR) this will be regarded as a serious offence attracting fines ranging from £1,500 up to £14,000.

Conclusion

If you own property in the region of Andalusia and plan to rent it out as a tourist accommodation make sure your property is first registered before the ATR. Do not chance it thinking they won’t catch you as one of the requirements to advertise rentals is to publish the unique alphanumeric code supplied by the ATR in all advertisements (article 9.4). Any offering made going forward that lacks said ATR code and you will be done for. Let alone the unbridled use of web crawlers to hound non-compliers which is proving most effective.

Bottom line, always be on the right side of the law. Hire a lawyer to ensure your property is registered to let and fully compliant with all the minutiae. Ensure you acquire all the gadgets the Andalusian law requires for each room listed above (A/C units, first aid kits etc) to avoid sizeable fines. And to close, do not forget to declare and pay tax in Spain on your rental income (you can read my article Non-Resident Taxes in Spain for more information on your tax liabilities as landlord).

“Politics: the art of creating new problems where none existed.”

Registration fees (per property): on application

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in conveyancing, taxation, litigation and inheritance. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

Legal services Larraín Nesbitt Lawyers can offer you

• Registration of Holiday Homes (Andalusia)
• Holiday Rental Accounting Service
• Land Registry Search (Nota Simple)
• Rentals
• Fiscal Representation (Non-Resident Income Tax)

Related articles

• Renting in Spain: Top Ten Mistakes – 8th of June 2011
• Let-to-Buy in Spain: The Smart Choice – 8th of April 2012
• Letting in Spain: The Safe Way – 10th of October 2012
• New Measures to Bolster Spain’s Ailing Rental Market – 8th of July 2013
• Tenant Eviction in Spain – 8th of June 2014
• Holiday Rental Laws in Spain – 8th of March 2015
• House Hunting in Spain – The New York Times. June 2015
• Resurgent Spain: Málaga Sees Strong Sales – Mansion Global (The Wall Street Journal). December 2015
• Non-Resident Taxes in Spain – 8th December 2015
• Holiday Rental Laws in Andalusia (Decree 28/2016) – 8th of February 2016
• Decree 20/2002: Andalusia’s Holiday Rural Rental Decree – 8th of April 2016
• Urban Rental Law in Spain – Spain's Tenancy Act – 8th May 2016
• Renting in Spain - Landlord´s Taxation – 8th of January 2017
• Renting in Spain: Non-Resident Landlord's Rental Tax Relief – 14th of January 2017
• Holiday Home Taxation in Spain – 8th of July 2017

Please note the information provided in this article 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. No delusional politician was harmed on writing this article. VOV.

2.016 © Raymundo Larraín Nesbitt. All rights reserved.

THE VIEWS EXPRESSED ARE THE AUTHOR’S ALONE

Solicitor Raymond Nesbitt explains the legal consequences of animal cruelty in Spain.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8^th of January 2016

Photo credit: Joachim S. Müller via Foter.com / CC BY-NC-SA

Introduction

This has been a pet article of mine (pun intended) that I have wanted to write for quite some time now. Unfortunately, I haven’t been able to do so until Spain’s Criminal Code was amended last year by Law 1/2015 punishing animal cruelty, for the first time, with jail terms.

Spain’s historical disposition towards animal’s rights has been, let us say, somewhat hazy at best; to put it mildly and avoid ruffling feathers. This situation has changed dramatically post-Constitution as new open-minded generations, imbued by democratic ideals, seize power to shape laws in line with the core values that behove a modern society.

Animal Cruelty – Laws

There are three tiers of laws in Spain:

1. National level: common to all 17 autonomous regions, which make up Spain, is the Criminal Code (article 337 explained below).
2. Administrative level: each of Spain’s 17 autonomous regions has (schizophrenically) also passed its own legislation on animal cruelty.
3. Local level: Spain has over 8,000 town halls. Each town hall is also empowered (did you even doubt it?) to pass its own regulation on the matter (ordenanza municipal). EU residents, which are ‘empadronados‘ or registered at the municipality’s census, can vote to elect mayors which can pass such laws. Just saying…

Ideally, as in it’s a matter of common sense and not rocket science, we should have a common law that works throughout the whole nation so people don’t lose the plot on choosing from umpteen million laws – I’ll await with bated breath.

Criminal Code – Article 337

Punishment ranging from three months up to one year in prison for those found guilty of mistreating animals unjustifiably in any manner or else inflicting them injury or submitting them to sexual abuse (sic).

Animals object of protection are:

1. Domesticated or tamed animals.
2. Animals that are normally domesticated i.e. stray cats and dogs.
3. An animal that temporarily or permanently lives under human control.
4. Any animal that does not live in wilderness.

The criminal punishment will be significantly aggravated when one of the following concurs:

1. The use of weapons or instruments harmful to an animal’s well-being.
2. Viciousness concurring in the offender.
3. If the animal loses an extremity or vital organ as a consequence of the torture inflicted.
4. The animal abuse takes place before an underage.

Death of an animal can lead to serve a sentence of up to 18 months in jail.

Abandoning Domesticated Animals

This is a despicable spectacle that takes place every summer break. Many of those animals that were gifted during the height of the Christmas season are abandoned to their own devices by their masters during the summer holidays.

Spain’s Criminal Code now punishes those that purposely abandon domesticated animals to their own luck with fines ranging from one to six months.

A Note on Jail Terms

It should be noted that a judge, at his sole discretion, may commute a prison sentence when the offender has no prior felony record and the sentence is two years or less. Normally the defendant is ordered to perform community service instead. Historically there has been only one exception to this rule which involved a popular folk singer. On analysing animal cruelty it can be surmised from the above that most sentences will be for less than two years. So it is unlikely first-time offenders will be jailed unless they have a previous criminal record (which hasn’t been struck off).

Administrative Sanctions

Spain, being Spain, has 17 autonomous regions which legislation on animal cruelty varies considerably from one to the next. The most advanced one is that of Catalonia with Madrid’s being the oldest (1990).

Fines, for animal cruelty, vary significantly ranging from a few thousand euros in Navarre up to over a hundred thousand euros in Aragon.

Local Town Hall

You can acquaint yourself with your local regulation on animal cruelty on visiting your town hall.

How to Report Animal Cruelty

Just make a police report (denuncia), either physically or over the phone, in the territory over which the police force is competent. It doesn’t have to be the SEPRONA (Guardia Civil); although they are normally more sensitive towards these reports as they are tasked to protect and overview wild nature and I know for a fact they are fond of animals.

Evolution of Animal Rights

It is clear to those that practice law that lawmakers are gently, albeit relentlessly, nudging the idea of equating the protection of animal rights to closely resemble that of human rights. Even the circumstances which aggravate punishment closely mimic those that deal with humans in other sections of the Criminal Code. It is truly commendable that the sensitivity has gradually shifted to encompass the protection of animal rights to the point of awarding jail terms to human offenders.

In October 2.015, for the first time ever, an individual was charged, found guilty and convicted of beating to death his own racehorse after losing a competition in what now constitutes a landmark case. Not a stranger to breaking laws, he had been previously convicted for DUI. He is now serving his sentence in jail. Source: El Pais daily.

Conclusion

The amendment of article 337 is a great leap forward that reflects modern’s society gravitational shift towards animal’s rights. However, the law focuses only on domesticated animals and purposely excludes animals in wilderness.

There is still much work to be done to lobby and push hard for an agenda that extends jail terms to those few who would abuse wild animal life. In any case, to my mind, it is a clear victory that animal’s rights in Spain have (finally) become a tenet of our society which can now be upheld legally. Ah, so many laws to choose from; you will be spoilt for choice!

So next time you spot a miserable git torturing some poor defenceless animal, know that YOU can make a difference.

“The greatness of a nation and its moral progress can be judged by the way its animals are treated.” – Mohandas Karamchand Gandhi. AKA Mahatma (‘Great Soul’) Gandhi.

Father of the modern Indian Nation. Led the country to a peaceful independence from the rule of the British Empire. Author, journalist, editor, staunch human rights activist and founder of the non-violent movement that influenced so many others to follow (Martin Luther King). Even career politician and lawyer in his spare time; nobody’s perfect. Arguably the 20th century’s most towering historical figure.

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in conveyancing, inheritance, taxation, and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

Please note the information provided in this article 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. No animal, or politician, was harmed on writing this article. VOV.

2.016 © Raymundo Larraín Nesbitt. All rights reserved.

Solicitor Raymundo Larraín Nesbitt explains which property taxes non-residents face on buying property in Spain (Non-Resident Taxes in Spain).

Article copyrighted © 2015. Plagiarism will be criminally prosecuted.

The following article has been summarised to avoid unnecessary tax technicalities. The quoted tax rates are subject to change from one year to the next. Seek professional legal advice on your matter – see disclaimer below.

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
8th of December 2015

Introduction

Unbeknownst to most non-residents, on buying property in Spain, you automatically become liable for a series of property-related taxes. No one will give you the heads up on them, so it is up to you to find out how much you owe and comply with the Tax Authorities.

Resident: to be or not to be – that is the question.

This article deals only with non-resident taxes. To ascertain whether you qualify as resident or non-resident the Spanish Tax Office applies the following criteria:

• You spend more than 183 days in a calendar year in Spanish territory.
• Your centre of financial interests is located in Spain.
• Your spouse and/or underage children live in Spain.

If any, or all three, above apply you will be regarded as resident for tax purposes which escapes the purpose of this article.

Are you married or in a joint property ownership?

For tax purposes couples or joint owners will be treated as separate taxpayers and be required to file separate tax returns. Property tax will therefore be split among co-owners.

Cadastral Value

Is the assessed value local Tax Authorities give to a property. It is usually well below the market value. This rateable value is used as the taxable base to calculate a series of taxes. You will find the cadastral value of your property in one of your local tax bills (i.e. IBI). Be aware that a store room or garage space may be regarded legally as a distinct separate entity from your main home and therefore subject to their own individual cadastral values.

Non-Resident Taxation Overview

I review below six taxes. Before anyone frets, in truth most non-residents on buying property in Spain will only be liable for the first three on an annual basis:

I. Non-Resident Income Tax (applies once a year regardless on whether you let your property out or not)
II. IBI tax.
III. Rubbish Collection Tax.

However, for completion’s sake, I have added a further three:

IV. Wealth Tax: this will be paid by a small minority of people.
V. Special tax levied on real estate: this will be paid by even fewer people as it relates to offshore holding structures domiciled in tax havens.
VI. La Complementaria or ‘bargain-hunter’ tax: strictly speaking this is not even a separate tax. It is a consequence of today’s low-priced property in Spain. It is actually supplementary Property Transfer Tax. It is explained below.

I. Non-Resident Income Tax

The overview of this first tax is split depending on whether you rent the property out or not – either way you are going to pay it. It is strongly advised you hire a lawyer to file this tax on your behalf. Lawyers are covered by professional indemnity insurance in case of malpractice or negligence. Make sure that whoever files taxes on your behalf has insurance in place from which to claim from.

Calculation: the taxable base is 2% of the cadastral value of your property or 1.1% if the cadastral value was revised after the 1st of January 1994. This taxable base is then multiplied by the appropriate tax rate. The tax rate varies depending on whether a taxpayer is resident or not in the European Union or European Economic Area (Norway and Iceland):

•    Resident in E.U. or E.E.A.: 20% (19% as from 2016).
•    Non-resident in E.U. or E.E.A. (rest of the world): 24%

In truth on the 10th of July 2015 Royal Decree 9/2015 was passed reducing the tax rate for EU/EEA residents down to 19.5% as from the 12th of July onwards till the 31st of December 2015. From the 1st of January through to the 11th of July it remains set at 20%. The idea behind this article is to keep it short and simple so I will choose to ignore this amendment to avoid overcomplicating the examples below.

Worth noting is that EU/EEA residents now qualify for tax relief on renting out their Spanish property as from 2015 onwards. This is a result of a recent landmark ECJ ruling of 3rd September 2014 which forced the Kingdom of Spain to amend various key laws to put an end to discrimination between residents and non-residents on taxation matters. For a full comprehensive list of available landlord rental allowances, please read my article Spain’s Holiday Rental Laws (under the heading “II. Changes in Taxation Brought About by European Legislation”).

1. Not renting out property

“Hang on, does that mean I get taxed on Income despite not renting out my Spanish property?”

Yes. This is a frequent question. It is a legal fiction whereby it is surmised that you derive some form of financial benefit from your Spanish home; that is why it is called non-resident imputed income tax as it is deemed. Spanish Authorities take the view an owner derives a benefit in kind from owning property irrespective of whether it is true or not and taxes it accordingly. It is a fixed annual fee.

i) Resident in E.U. or E.E.A.

Tax rate: 20%
Tax relief: not applicable.
Dates: to be paid before the 31st December of each year. If you buy a property mid-year, you are only liable to pay in proportion to the months you have owned the property (pro rata).
Tax form: 210.

Example E.U./E.E.A. resident: Mr. John Shepard owns property in Spain with a cadastral value of €100,000.

· Non-revised cadastral value: 2% = €2,000; 20% * €2,000 = €400. He will be liable for €400 as Non-Resident Imputed Income Tax.
· Revised cadastral value: 1.1% = €1,100; 20% * €1,100 = €220. He will be liable for €220 as Non-Resident Imputed Income Tax.

ii) Resident outside the E.U. or E.E.A.

Tax rate: 24%
Tax relief: not applicable.
Dates: to be filed and paid before the 31st December of each year. If you buy a property mid-year, you are only liable to pay in proportion to the months you have owned the property (pro rata).
Tax form: 210.

Example Non-E.U./E.E.A. resident: Mr. Salhadin ibn Ayyub owns a villa in Spain with a cadastral value of €100,000.

· Non-revised cadastral value: 2% = €2,000; 24% * €2,000 = €480. He will be liable for €480 as Non-Resident Imputed Income Tax.
· Revised cadastral value: 1.1% = €1,100; 24% * €1,100 = €264. He will be liable for €264 as Non-Resident Imputed Income Tax.

2. Renting out property (without permanent establishment)

i) Resident in E.U. or E.E.A.

Tax rate: 20% on rental income for 2015 (19% as from 2016).
Tax relief: Yes, physical persons may deduct, for example, home insurance, mortgage loan interest payments, property maintenance expenses etc. Legal persons may also deduct rental related expenses.
Dates: collected annually or quarterly.
Tax form: 210.

ii) Resident outside the E.U. or E.E.A.

Tax rate: 24% on rental income.
Tax relief: no.
Dates: collected annually or quarterly.
Tax form: 210.

Rental related articles

Renting in Spain: Top Ten Mistakes – 8th of June 2011
Let-to-Buy in Spain: The Smart Choice – 8th of April 2012
Letting in Spain: The Safe Way – 10th of October 2012
New Measures to Bolster Spain’s Ailing Rental Market – 8th of July 2013
Tenant Eviction in Spain – 8th of June 2014
Spain’s Holiday Rental Laws – 8th of March 2015

II. IBI Tax (Impuesto sobre Bienes Inmuebles)

This tax applies to both residents and non-residents. In some parts of Spain, it is known as SUMA.

This is a local tax levied by the town hall where your property is located. It is paid once a year (normally due in August through to November). It is equivalent to the UK’s Council tax.  It varies from one town hall to the next. It is based on the rateable value of your property (0.4 – 1.1% of cadastral value per annum); for cheap properties it can be as low as a few hundred euros whereas posh pads, in sought-after areas, may command a couple thousand euros.

It is highly advisable you set this tax as a standing order. The reason is because failure to pay may lead to your property being seized and sold in a public auction. Town halls are becoming increasingly aggressive pursuing this local tax post-credit-crunch; particularly for high-end property.

More on IBI Tax in our in-depth tax article: IBI Tax Explained – 8th of November 2018.

III. Rubbish Collection Tax

This self-explanatory tax applies to both residents and non-residents.

It is a local tax levied by the town hall where your property is located. It is paid once a year. On average it is a few hundred euros a year. It is advisable you set this tax as a standing order.

IV. Wealth Tax

This tax had been suppressed but was reinstated because of the severe recession. It will likely be abolished – again – over the next years. More on its reintroduction in my blog post: Spanish Wealth Tax Reloaded. It applies to both residents and non-residents

If you own assets in Spain that exceed a net value of €700,000 you are liable for this tax. The first seven hundred thousand euros is a nil rate band and the excess is taxed following a sliding scale. If the property is mortgaged, this amount may be deducted as it is a liability. If you are liable for Wealth Tax, it is compulsory you appoint a fiscal representative in Spain. In truth, only a small minority of people qualify to pay it.

Tax rate: National scale is 0.2 – 2.5% of net assets. However, it varies from one region to the next in Spain as they have devolved competencies over it i.e. in Andalusia the scale is: 0.24 – 3.03%.

Tax relief: None for non-residents aside the nil rate band.

Dates: To be filed and paid before the 30th of June of each year.

Tax form: 714

More on Wealth Tax in my in-depth article: Spanish Wealth Tax.

V. Special Tax Levied on Real Estate (GEBI)

If you own property in Spain through a corporate offshore structure domiciled in a tax haven you are liable to pay 3% of the property’s cadastral value every year. A full list of what the Spanish Tax Office (Hacienda or A.E.A.T.) considers as tax havens can be found here. Appointing a fiscal representative is mandatory in this case for blatant reasons. Only a fraction of taxpayers is liable for it. Unbeknownst to many, a non-resident landlord may – exceptionally – offset this special tax to mitigate his own tax bill on, for example, renting out the property. A buyer will be held liable for a non-resident vendor’s tax liability going back four years.

Dates: To be filed and paid before the 31st of December of each year.

Tax form: 213

More on this in my article: Buying and Owning Spanish Property through Corporate Structures: Pros and Cons.

VI. La Complementaria or Bargain-Hunter Tax

Unlike the previous five taxes, this ‘tax’ is paid only once. In fact, it is not really an extra tax. It is more of a supplementary Property Transfer Tax on buying low-priced property in a rock-bottom market. Local Tax Offices make the (wrong) assumption that a buyer has under-declared the sales value to dodge taxes. So they tax the amount they believe was under-declared. It is highly unfair and should be put to an end. It applies to both residents and non-residents.

More on this matter and how to challenge it successfully in my article: La Complementaria or Bargain-Hunter Tax.

Frequently Asked Questions (F.A.Q.)

1. What happens if I don’t pay my property-related taxes?

You are breaking the law. Overdue taxes are lodged against the property at the Land Registry. Prior to the property being sold or bequeathed (inherited) these outstanding amounts must be settled. In addition late payment interests and penalties will be rolled up compounding the debt. You will not be allowed to change the name in the Title deed until any unpaid tax is settled in full. Additionally the Tax Office is empowered to seize your Spanish bank accounts securing the debt.

On selling, the 3% retention withheld by a buyer by law (on account of a non-resident seller’s Capital Gains Tax liability) will be used to offset any owed tax by a non-resident seller (tax model 211). Do NOT expect the Tax Office to refund you the difference on the 3%; if you owe property taxes the tax authorities will pocket the full 3%. To avoid this you must first pay in advance the owed property tax (up to the last 4 years, as the statute of limitation time-bars any tax exceeding the four-year limit) plus any penalties or surcharges for late payment. Only once the outstanding property tax is settled, will they refund you the 3% withheld in full. More on this topic: Taxes on Selling Spanish Property.

In some serious cases, i.e. non-payment of IBI tax, may lead to the property being embargoed and seized by the local authority (town hall). It will then be sold in a public auction to recoup the outstanding debt. This procedure is ‘surprisingly’ expedient in Spain (as in months). With the ongoing recession town halls are proving increasingly more resolute in pursuing this (aggressive) course of action. Pre-recession they were fairly lenient.

The statute of limitations for all taxes in Spain is four years and one day (notable exception is Spanish Inheritance Tax which is four years, six months and one day).

2. Can I be chased abroad for outstanding property taxes?

To be honest, I have never seen it happen nor have I heard of such a case over the past decade. As specified above, unpaid taxes will be lodged against the property at the Land Registry. You won’t be pursued abroad for them.

That said, there are scenarios in which Spanish creditors may chase you abroad (E.U. and E.E.A.) for outstanding debts on instigating European legislation: European Enforcement Order (E.E.O.). And vice-versa, British or Irish creditors may benefit from said legislation to pursue and secure assets held in Spain by a debtor (i.e. HM Courts & Tribunals Service EEO fact sheet). In practice Spanish creditors seldom chase you abroad unless the amounts are worth their while – but make no mistake, it can be done.

The following is an example list of scenarios where you may be pursued in the E.U./E.E.A. for money claims arising in Spain:

• Defaulting on Spanish Mortgage Loan instalments on a second home in Spain.
• Falling in arrears with your Community of Owners.
• Outstanding amounts owed to developers on Buying Off-plan Property in Spain (forced completion).
• Unpaid personal loans (Bad Debtor’s List).
• Pursuing negative equity abroad: post-auction shortfall on Spanish Bank Repossessed Property.

More on this matter in my in-depth article: Spanish Creditors Pursuing Debts Abroad.

3. Do I need to appoint a fiscal representative?

It is not compulsory (in most cases) but it is highly advisable that you do. This will assure tax compliance in a diligent manner and avoid nightmare scenarios like you losing your Spanish home because of non-payment issues or having your Spanish bank account frozen to secure pending debts. A frozen bank account means that any standing orders will bounce back compounding your problems i.e. unpaid utility invoices.

4. Do I get notified in my home country of any taxes/debts?

Sadly no. You will only be notified at your Spanish address. Which is why non-residents should seriously consider appointing a fiscal representative to be on the right side of the law and avoid incurring in late payment penalties or surcharges. Moreover, you could appoint the address of your fiscal representative to receive all tax notifications ensuring compliance and adding to your peace of mind.

What can a lawyer do for you?

Appointing a lawyer as your fiscal representative in Spain to file and pay on your behalf your Non-Resident Income Tax and Wealth Tax returns, if applicable, has the following advantages:

•    Mandatory Professional Indemnity Insurance which you can claim from in case of negligence or malpractice. Currently this cover stands at €800,000 with Larraín Nesbitt Lawyers.
•    Complete the tax forms in Spanish.
•    Ensure you do not overpay on calculating the tax due on your property based on its rateable value and the number of days you have owned it on a pro rata basis.
•    Apply for tax relief (where possible).
•    Submit the tax returns before the Tax Office in a timely manner (thus avoiding attracting penalties and surcharges on late payment).
•    Setting a fiscal representative’s address to deal with all tax-related correspondence generated throughout a fiscal year.
•    Reply to any tax notifications within the deadline ensuring tax compliance.
•    Appeal misunderstandings or material errors.
•    Up-to-date knowledge on fast-paced fiscal changes.

Conclusion

Lawyers are specially qualified to act as your fiscal representative in Spain ensuring all tax deadlines are met and complied with in time. This will avoid you falling foul of the law and making costly mistakes in the long run.

Blissful ignorance on which taxes you ought to be paying, on owning property in Spain, will not be accepted as an excuse to avoid payment (Article 6 of the Spanish Civil Code). Do not expect Tax Authorities to handhold you reminding or even explaining what your taxpayer responsibilities are. It is up to you to find out and comply with them.

If in doubt, just ask a lawyer to help you out – we don’t bite (usually).

“L’art de l’imposition consiste à plumer l’oie pour obtenir le plus possible de plumes avec le moins possible de cris.” – Jean Baptiste Colbert.

French economist and Finance Minister under King Louis XIV.

Translated as: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” Plus ça change, plus c’est la même chose!

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in taxation, inheritance, conveyancing, and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

Legal services Larraín Nesbitt Lawyers can offer you

• Fiscal Representation (Non-Resident Income Tax)
• Wealth Tax
• IBI Tax (Town Hall Rates)
• Tax model 720
• Land Registry Search (Nota Simple)

Related articles

• How to Buy Property in Spain – Advice by the Foreign & Commonwealth Office
• Buying Distressed Property in Spain – 8th August 2011
• Buying Resale Property in Spain – 21st February 2013
• Escritura – Title Deeds FAQ – 8th June 2013
• Nota Simple: What is it and how do you get one? – 8th June 2013
• Buying Off-Plan Property in Spain – 8th of June 2013
• Investor Guide to Spain’s Golden Visa Law – 8th November 2013
• Bank Repossessions in Spain – 21st February 2014
• Buying and Owning Spanish Property through Companies: Pros and Cons – 7th March 2014
• How to Buy Commercial Property in Spain – 4th July 2014
• How to Buy Rural Property in Spain – 8th August 2014
• How to Buy Property in Spain Safely – 10th October 2014
• Taxes on Selling Spanish Property – 8th December 2014
• La Complementaria or ‘Bargain Hunter Tax’ – 8th May 2015
• House Hunting in Spain – The New York Times. June 2015
• Taxes on Buying Spanish Property – 8th July 2015
• Dispelling Spanish Inheritance Tax Myths – 8th August 2015
• Resurgent Spain: Málaga Sees Strong Sales – Mansion Global (The Wall Street Journal). December 2015
• Non-Resident Taxes in Spain – 8th December 2015
• Buying Property in Spain – 10 Reasons to Hire a Lawyer – 8th November 2016
• Renting in Spain – Landlord´s Taxation Guide – 8th January 2017
• Renting in Spain: Non-Resident Landlord´s Rental Allowances – 13th January 2017
• NIE Number Explained – 8th May 2017
• Holiday Home Taxation in Spain – 8th July 2017

Please note the information provided in this article 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. No goose was harmed on writing this article. VOV.

2.015 © Raymundo Larraín Nesbitt. All rights reserved.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8^th of November 2015

Photo credit: Flickr.

Following up on last month’s article, Filing for Personal Bankruptcy in Spain (popularly dubbed as ‘Second Opportunity Law’), I have written this other one which aims to delve further on the matter and gives a few pro tips on how to limit one’s own personal liability should things pan out the wrong way.

The topic of this article will be the mitigation of personal liability on trading. I will gloss below over the main legal changes. I won’t include traditional legal solutions, such as traders incorporating limited liability companies, as they are more than covered elsewhere.

Introduction

After eight years of severe recession, which has left in its wake five million unemployed and an anemic economy, it has dawned on many that the road to recovery passes through self-employment. Madrid’s central government has smelled the coffee and is busy spreading the gospel on passing new laws to incentivize entrepreneurship.

To better grasp the extent and scope of the new reforms I am forced to sidetrack and make a brief historic recap on personal liability. Traditionally Spain’s legislation has been anything but lenient on self-starters. The outdated nineteenth-century regulation on personal liability is found in both Spain’s Civil Code (S.C.C.) and Mercantile Code and is punishing compared to the modern take of fellow EU countries.

Article 1911 of the S.C.C. stipulates the liability of a private person is personal and unlimited, liable with all his assets now and in the future. Put simply, it institutes unlimited personal liability. If to this you add that effectively (*) there are no statute of limitations on mortgage-backed loans (the most frequent type of asset-based loan employed to fund startups in Spain) you have a potent recipe for disaster as it allows creditors unfettered access to borrower’s assets (current and future). Article 6 of the Mercantile Code rules likewise on the liability of married sole traders.

(*) Whilst it is true the S.C.C. rules the statute of limitations is twenty years on mortgage-backed debts the fact is this time frame can be renewed at any point from scratch making it, in practice, non-time-barred. A pristine example of a nineteenth-century anachronistic bias in favour of lenders.

It is generally accepted that only 50% of businesses survive the first year and of these 90% fail within the following five years. Stigmatizing young entrepreneurs who fail by socially branding them as financial pariahs is obtuse and short-sighted. Failure is required to succeed and laws in Spain should exercise a higher degree of flexibility allowing businesspersons to recover financially from mistakes within a reasonable timeframe i.e. five years; life is not black or white. Failure and success are intimately entwined. Oftentimes only through multiple blunders does one achieve success as it follows a series of trial and errors. Success is a by-product of failure.

It is counterproductive to place a lifetime financial millstone on entrepreneurs who fail with rolled-up interests to boot creating a debt spiral of which there is no escape. A business failure in Spain means you won’t (normally) get a second chance as personal liability is unlimited and in most instances not subject to a statute of limitations. This creates a perverse incentive NOT to start your own business and rather play it safe by working for someone else. I simply cannot stress enough how wrong and detrimental this is to the broader economy. Lawmakers are sending out the wrong message: risk-taking is bad.

This goes on to explain why it comes as no surprise that most youngsters in Spain are reluctant to start their own companies (understatement). Speaking from personal anecdote, most of my foreign friends, especially American and British, had in mind setting up their own businesses early on from a young age. After having worked for others, learning the ropes of the trade, most took the leap of faith starting their own companies. In stark contrast, from all my Spanish acquaintances and friends only a small handful ended up setting a business. And of them, none went to college… One concludes grimly that the more educated you are in Spain, the less inclined you will be to start your own business out of fear of failing; which is simply crazy and a perfect good waste of human talent. Squandering talent is an opportunity cost a modern economy can ill afford if it wants to stay ahead in the game and be competitive.

What makes countries’ economies powerful and vibrant are young, and not-so-young, businesspeople willing to put at stake their own assets to create a new business venture in pursuit of a dream. It is in my opinion a risk-taking mentality which drives economies forward and make countries great in their own right i.e. U.S. or U.K.

To further this purpose, governments, politicians and lawmakers at large should enable this by paving the way, cutting through unnecessary red tape and streamlining procedures for entrepreneurs to succeed. For it is these who will create jobs and push the economy forward, not the state. Governments will then be able to reap the profits through non-confiscatory tax collection and reallocation of resources where necessary.

Governments should at no time undertake the responsibility of job creation which must be left to the private sector. Laws do not create jobs. Unfortunately in Spain, this has not been the case historically and regulation is heavily biased towards lenders which act detrimentally to those seeking to start their own business and who refuse to rely on government handouts. The majority of young people starting out in Spain unsurprisingly harbour no ambition of creating their own business and seek working for someone else; preferably in the public sector as civil servants (mainly because they cannot be dismissed and income is guaranteed).

A prolonged eight-year recession has – fortunately – managed to break the gridlock and change this herd mentality. Faced with bleak job perspectives qualified young Spaniards are migrating in mass abroad (the UK being the favourite hotspot). Those who have not flocked abroad have been ‘forced’ to set up their own business in Spain as it has dawned on them they can no longer afford to wait sine die to find a job.

Moreover, Spain’s central and regional governments have wisely taken this on board and are busy toning down the administrative maze by helping entrepreneurs cut through the red tape, removing legal hurdles, subsidizing them or even going as far as cutting their losses by means of limiting their personal liability on trading debts on approving new legislation.

It is in one of these new laws, and its impact on personal liability, I will now centre on.

Law 14/2013, of 27th of September, in Support of Entrepreneurs

Law 14/2013 goal is to incentivize and foster an entrepreneurial mentality on introducing a batch of measures. It has been popularly dubbed as the ‘Golden Visa Law‘.

For this article’s sake, I will only focus on the single measure which arguably mitigates personal liability following Art. 8: by creating a legal mesh on a trader’s main home shielding it against creditors.

This law also creates the figure of a ‘Limited Liability Entrepreneur’ or ERL for short.

An entrepreneur, or ERL, can now protect his main home from creditors in Spain providing all the following criteria are met (this is not an exhaustive list):

• Property must be his main home (therefore, by definition, an entrepreneur must be resident in Spain to benefit from this protection).
• Property’s value cannot exceed €350,000 or €450,000 in cities with over one million inhabitants. This value is attained by multiplying the cadastral value by the local Tax Office’s coefficient. More on how to calculate this in my article La Complementaria or Bargain-Hunter Tax (under the heading ‘Pre-Emptive Measures’). It should be noted that this value is effectively well below the market value of a property.
• Lodge ERL status at both Land and Mercantile Registries.
• Debt-protection wards only against credits linked directly to trading activities.
• Detailed accounting must be lodged at the Mercantile Registry year-on-year. Failure to comply (lodge the accounts) within a given deadline (seven months as from fiscal year end) causes immunity loss in favour of debt-collection agencies.

Extent of liability: fully discharged*. Main home cannot be subject to creditor action i.e. it is embargo-free. The Land Registrar will now turn down any application (derived from trading activities) to embargo a legally earmarked property.

*Exception: Non-trading debts. Debts in the hands of public authorities, such as the Tax Office or Social Security, are still subject of action on the designated property i.e. embargoes.

Effects: as from the 29th of September 2.013.

What does this mean?

Put simply, it means the law, for the first time in well over a century, allows businesspersons to protect their main house from business debts. If a trader fulfils the requisites laid out above he can effectively create a legal firewall that insulates his property against claims arising from trading debts. Creditors are barred from seizing his main home to auction it off and recoup their debts. This is a first-timer.

What can a lawyer do for you?

Following this new regulation, a lawyer can weave a protection on your main home cocooning it against creditors. A failing business venture no longer need translate to businesspersons losing their main homes to creditors.

Conclusion

This law is a step in the right direction. Its overarching effort is commendable as it manages to single-handedly dent a legal monolithic block (unlimited personal liability) which had been widely accepted as immutable for well over a century; perhaps in due time this crevice will be expanded upon by other modern laws. Although these changes, viewed from Main Street, may seem altogether trivial, from a legal perspective they are a huge leap qualitatively; nothing short of a legal breakthrough or inflection point on personal liability.

However, I feel compelled to level a few criticisms. For starters the benefits (strictly from a personal liability mitigation point of view) are paltry compared to the array of new obligations it sets forth to fulfil the law’s protection. In other words, it is jarringly one-sided as the protection offered is scant compared to the number of responsibilities one must comply with to take advantage of it. Almost to the point of much ado about nothing, but ultimately not quite.

Another obvious criticism, aside from having only one measure to mitigate personal liability, is that it sets a value on the main dwelling which, to top it off, is not that high for Spanish standards. Perhaps it would have been wiser not to establish any value at all on a main house or at the very least set a much higher figure i.e. €1,000,000.

Additionally, what happens in cases when the property is held under joint names? Does the law protect only the share on the property that belongs to the partner which trades or both? What happens in cases where partners do not have separation of assets but a community of goods (co-ownership)? Does the other partner need to expressly consent this benefit or else is it over understood as it benefits them too? Many questions arise that can only be replied to by judges through rulings.

Still, despite its flaws and shortcomings, this law is better than nothing and must be welcomed. Kudos to lawmakers. There is still a lot of work to be done by ironing out pesky regional inconsistencies and building upon this legal breach to widen the gap and help self-starters to be up on their feet sooner; and most certainly not to pillory entrepreneurs financially for the remainder of their lifetime on having tried and failed.

From a practical point of view, leaving esoterics aside, this law translates into entrepreneurs sleeping at night soundly in the safe knowledge that their main dwelling is legally ring-fenced and cannot be embargoed or repossessed on the back of trading debts; particularly assuaging to those with underage children or who are single parents.

“Failure is so important. We speak about success all the time. It is the ability to resist failure or use failure that often leads to greater success. I’ve met people who don’t want to try for fear of failing.” – J.K. Rowling.

British novelist best known as the author of the Harry Potter fantasy series. Single parent high-achiever.

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in inheritance, conveyancing, taxation and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

Related articles

• Lifetime Loans or Reverse Mortgages in Spain Explained – 21st February 2011
• Advice to Struggling Mortgage Borrowers in Spain – 8th March 2011
• Spanish Mortgage Loans: Beware of Abusive Clauses – 8th January 2012
• Spanish Mortgage Loans: An Overview – 21st February 2012
• Mortgage Collar Clauses Revisited (‘Cláusulas Suelo’) – 8th December 2013
• Bank Repossessions in Spain– 21st February 2014
• Bad Debtor’s List (‘Fichero de Morosos’) – 8th April 2014
• Spanish Creditors Pursuing Debts Abroad – 8th May 2014
• Dación en Pago Explained or How to hand Back the Keys – 8th December 2014
• Filing for Personal Bankruptcy in Spain (Second Opportunity Law) – 10th September 2015

Please note the information provided in this article 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. No delusional politicians or elephants were harmed on writing this article. VOV.

2.015 © Raymundo Larraín Nesbitt. All rights reserved.

Regular legal-contributor Raymundo Larraín Nesbitt explains the recent changes to bank guarantee legislation (Law 20/2015) that will affect people buying off-plan or under-construction property in Spain.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
21^st of September 2015

Introduction

Spain’s controversial law on bank guarantees, law 57/68, always the object of heated debates, will be abolished in 2016. This pivotal law in the off-plan buying procedure has been the focus of many of my articles:

• Bank Guarantees in Spain
• Supreme Court Rulings on Bank Guarantees
• Off-Plan Bank Guarantees and Supreme Court Rulings – Payback Time

Before anyone panics this pre-constitutional law has been replaced by a more modern law that is surprisingly almost identical with only a few tweaks that I care to highlight below.

The ironic in me cannot help but notice the convenience of its timing. As I highlighted in my above article, the Supreme Court rulings on bank guarantees were of late highly beneficial to consumers; to the point of awarding buyers astonishing automatic contractual resolutions. I believe a spanner may have been thrown in the works to curb the Supreme Court’s pro-consumer bias.

Only time will tell the tale.

Law 20/2015, of the Insurance Sector

Law 20/2015 amends, amongst other laws, Spain’s Building Act (Law 38/1999, Ley de la Ordenación y de la Edificación) which itself amended law 57/68.

In its third derogatory disposition it expressly abolishes law 57/1968. This new law will come into force as from the first of January 2016.

Novelties

The ‘new’ law closely resembles its forty-seven-year-old predecessor. The main slew of changes are as follows:

• Law 57/1968 relating to off-plan bank guarantees is abolished and superseded by Law 20/2015.
• The new law comes into force on the first of January 2016. All off-plan contracts signed before will still be governed by law 57/68.
• Bank guarantees (or insurance policies) securing off-plan deposits are now only valid as from the time a developer has attained a Building Licence. This is a key point I had defended in all my articles advising new-build buyers to withhold payment until a developer had secured a valid Building Licence from a town hall’s planning department.

E.g. Buying Off-Plan Property in Spain

As can be gleaned from the above it stands to logic that a conveyance lawyer must advise his client not to pay any deposit before a Building Licence is issued to a developer. Any interim payment you make prior to its granting will be unsecured and you will be left financially exposed with a risk of losing your deposits. I stress, your deposits are NOT covered by a bank guarantee or insurance policy prior to attaining a Building Licence under this new legislation.

• The amounts secured will now include the client’s staged deposits, plus legal interest, plus all associated purchase taxes i.e. VAT
• The legal interest will be as from the time the stage deposits are handed over as to the scheduled delivery date of the property outlined in the Private Purchase Contract (PPC).
• The stage deposits will be deposited in a specific bank account that is ring-fenced for the sole purposes of financing a development. Much like an escrow account.
• Tailored bank guarantees. They will now be individualized for every buyer. Collective bank guarantees will cease to exist not being acceptable going forward; a contentious point I had defended in my bank guarantee articles, highlighting just how problematic collective bank guarantees were in practice to execute. The details of the property being bought will be specified on the bank guarantees as well as the buyer’s personal details.
• It is the developer’s onus to take out this insurance policy or bank guarantee and obviously at his own cost. The beneficiary is the off-plan buyer always. A buyer will not pay a penny for it. This has now become a moot point, having sparked much controversy under the old legislation.
• A bank guarantee will still hold valid even if a developer fails to continue servicing the insurance premiums. The lender or insurance company will be legally compelled to refund in full the guaranteed amounts.
• Bank guarantee: validity. A bank guarantee is valid as from the time a developer attains a Building Licence from the town hall’s planning department up to completion before a Notary Public.
• If a buyer gives an extension to a developer, in writing, because completion is running behind schedule then the bank guarantee must be likewise extended to match the new scheduled delivery date of the new-build property.
• Direct recourse. If the development is stalled or else the development is not finished on time by the contractual (read binding) scheduled delivery date a buyer can send by recorded delivery to a developer a letter requesting full repayment of all stage payments, plus legal interest plus associated buying taxes. The developer has a deadline of thirty days to pay back said amounts. After this deadline a buyer (his lawyer) can claim these amounts (direct recourse) from the insurance company or lender itself who guaranteed the stage payments. In other words an off-plan buyer can skip the developer altogether and go straight for a lender which – presumably – will be in a healthy financial position to repay it. The lender or insurance company has a deadline of thirty days to repay said amounts in full as from the time it is legally notified by the conveyance lawyer.
• Bank guarantees: expiry date. They will now expire two years as from the time a developer is in breach of contract without the buyer exercising his rights to terminate the contract and apply for a refund. This is a major novelty as bank guarantees before had no expiry date.
• Contractual reference. All off-plan contracts will now make express reference to bank guarantees specifically mentioning which lender or insurance company is being held responsible for the safeguarding of a buyer’s stage deposits supplying contractual details for identification purposes. The escrow account will now be detailed in the Private Purchase Contract itself.
• Bank guarantees: handing over. Upon signing an off-plan contract a developer will hand over the bank guarantees. This is also a major novelty as before buyers were expected to pay and would then be handed a bank guarantee, one at a time, which could take one or two months as from each stage payment. Not an ideal situation to be in as the developer could file for bankruptcy in the interim. This risk has now been eliminated as ALL stage payments will be guaranteed ab initio. No longer will a buyer have to wait patiently to be given a bank guarantee at a time for each and every stage payment they make.
• Bank guarantee: refund limitation. Related to the above, despite being the full stage payments (plus legal interest, plus taxes) guaranteed in block a buyer can expect to be refunded only what he actually paid. Which is why it is very important that buyers on making use of foreign currency brokers safe keep copies of all overseas transfers.
• Bank guarantee execution. If the development is not finished on time a buyer, at his own choice, can either request a full refund or else give the developer an extension – in writing –.
• Bank guarantee cancellation. Same as before, bank guarantees only become null and void when two conditions are met:

1. As from the time a developer attains a Licence of First Occupation from the town hall’s planning department.

2. The developer makes the new-build property available to a buyer (as in physically handing it over to him).

A new third condition has been added:

3. If a buyer refuses to complete before a Notary Public when legally compelled to do so.

• Bank guarantees: publicity. Developers are now forced in their sales publicity to make explicit reference to being compliant with this new law 20/2015 even mentioning the name of the lender or insurance company as well as the bank account details of the escrow account where all staged deposits will be paid into.
• Bank guarantees: non-compliance. Developers are subject on non-compliance with up to 25% of the total amounts that should have insured or else the amount set by the Autonomous Community where the new-build is located.

Frequently Asked Questions

As this change will presumably elicit multiple queries I’ll do my best to address them in the below questions & answers section.

1. I have already signed an off-plan contract. How does this new legislation affect me?

It does not. This new law comes into force as from the first of January 2016. All off-plan contracts signed before said date are still ruled by law 57/68.

2. I plan to buy off-plan in 2016. Will my contract be ruled by the new law?

Yes. Every off-plan contract signed after the 01/01/2016 will be governed by law 20/2015.

3. I am litigating at present to recover my stage deposits. How does this new legislation affect me?

It does not. The law court will examine your case under the merit of the old law which is still in force.

4. If in 2016 I sign an off-plan contract and I’m handed a bank guarantee securing all my deposits but the Building Licence is delayed until 2018 am I still covered?

No. Under the new legislation you are only covered as from the moment a developer attains a Building Licence (BL).

Say, for example, you hand over the monies in 2016 and the BL is issued to the developer in April 2018. Should the developer file for bankruptcy any time before April 2018, even if you have a valid bank guarantee covering all your money, you would lose it all and have no recourse. The bank guarantee, even if legitimate, only becomes ‘active’ as from the time the BL is issued.

Bottom line, bank guarantees only secure your money going forward as from the time a Building Licence is issued by a town hall; not a moment before.

Conclusion

This new law addresses many of the criticisms that were leveled against its forty seven year old predecessor.

Law 57/68 needed a makeover. It had become outdated in many aspects. This new law leaves the door ajar to be detailed further in future regulation.

It is of paramount importance to restore confidence in overseas buyers by creating a clear steadfast legal frame in which to operate. The rules of the game must be known to all to level the playing field.

“Trust, like reputation, is hard to earn, but easy to lose.”

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in inheritance, conveyancing, taxation and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

Legal services Larraín Nesbitt Lawyers can offer you

• Conveyancing – Buying
• Conveyancing – Selling
• Property Litigation
• Rentals
• NIE Number (Tax Identification Number)
• Land Registry Search (Nota Simple)

Related articles

• How to Buy Property in Spain – Advice by the Foreign & Commonwealth Office
• Buying Distressed Property in Spain – 8th August 2011
• Buying Resale Property in Spain – 21st February 2013
• Escritura – Title Deeds FAQ – 8th June 2013
• Nota Simple: What is it and how do you get one? – 8th June 2013
• Buying Off-Plan Property in Spain – 8th of June 2013
• Investor Guide to Spain’s Golden Visa Law – 8th November 2013
• Bank Repossessions in Spain – 21st February 2014
• Buying and Owning Spanish Property through Companies: Pros and Cons – 7th March 2014
• How to Buy Commercial Property in Spain – 4th July 2014
• How to Buy Rural Property in Spain – 8th August 2014
• How to Buy Property in Spain Safely – 10th October 2014
• Taxes on Selling Spanish Property – 8th December 2014
• La Complementaria or ‘Bargain Hunter Tax’ – 8th May 2015
• House Hunting in Spain – Interview with The New York Times. June 2015
• Taxes on Buying Spanish Property – 8th July 2015
• Dispelling Spanish Inheritance Tax Myths – 8th August 2015
• Law 20/2015: Important new bank-guarantee legislation explained for offplan buyers – 21st September 2015
• Resurgent Spain: Málaga Sees Strong Sales – Interview with Mansion Global (The Wall Street Journal). December 2015
• Buying Property in Spain – 10 Reasons to Hire a Lawyer – 8th November 2016
• How to inspect an off-plan property overseas – Interview with The Sunday Times. July 2017

 Please note the information provided in this article 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.

2.015 © Raymundo Larraín Nesbitt. All rights reserved.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8^th of September 2015

Introduction

In 2003 law 22/2003, Ley Concursal or Insolvency Law, was passed which updated Spain’s outdated insolvency procedure. The previous laws, which were intended as ‘temporary’ were from 1885 and 1922. The timing of the law couldn’t have been better as shortly after its approval Spain’s economy would take a severe downturn driving thousands of companies into insolvency.

This new law has undergone over two dozen amendments in such a short span of time. Some of these have been major to assist it to adapt to reality as the law was not working as intended. In theory the mission statement of this law is to save companies that file for creditor protection helping them to exit receivership and trade again normally.

In practice it works out very differently. Whereas, for example, in the US 95% of companies that file for creditor protection manage to come on top within a three-year period, in Spain 95% of companies end up being liquidated within the same time frame. In Spain filing for creditor protection is almost a guaranteed corporate death sentence. This trend must be reversed.

Despite this well-meaning law the shortcomings are clear. The major culprit of Spanish companies going under, once they have filed for protection, are the privileged credits held by the Tax Office and the Social Security. These single-handedly strangle financially ailing companies forcing them into administration. It is clear to my mind that the iron grasp held by both institutions must be released if struggling companies are to continue trading successfully. Companies create wealth, jobs, services and products not to mention they contribute paying taxes. It is in Society’s best interest to protect and save them where possible. The failings of this law should be addressed by lawmakers assisted by professionals on the ground. 90% of Spanish companies are SMEs and find themselves unable to endure repayment of these privileged creditors should they file for insolvency.

Amidst these changes was February’s Royal Decree 1/2015 popularly dubbed as ‘Second Opportunity Law’. This law focuses on private individuals, not companies, filing for creditor protection (bankruptcy). The change was spurred in a conference of lawyers when a speaker pointed out that struggling borrowers in Spain echoed Sisyphus’ myth. Like the myth, some individuals face the daunting prospect of facing a mounting debt, with rolled-up interest, creating a ceaseless debt spiral of which there is no escape. The intention of this law was to put an end to the gridlock by cleaning the slate and allowing borrowers to restart anew. Or at least so goes the theory.

In practice however there are serious repercussions which borrowers ought to ponder which may even dissuade them from taking this route; at least until the law is amended.

Second Opportunity Law

The conditions to benefit from it are laid out in Art. 178 bis of Spain’s Insolvency Act. To file for (personal) bankruptcy one must do so before a Mercantile court in Spain. The procedure will be overseen by a Mercantile judge. A private individual must meet the following requirements:

1. Physical person.
2. Must have filed previously an insolvency procedure. The procedure concludes outstanding debts & liabilities outstrip assets.
3. The insolvency procedure must have concluded the borrower is not guilty or at fault. They must be borrowers in good faith. Good faith is the leitmotif that pervades throughout the Second Opportunity Law. Creditors will clutch at any crevice to overturn this principle and portray a borrower in a different light so as to disqualify him for this creditor protection.
4. The borrower must not have been convicted by a court ruling of a catalogue of economic related crimes within the previous ten years.
5. The borrower must have tried reaching an out-of-court settlement with its lender, creditors.

Options

Two options fan out at a borrower’s choice.

1.- Option A

The borrower pays the credits against the mass as well as all privileged credits. Those regarded as privileged are lenders (i.e. mortgages), Tax Office and Social Security. Note that privileged credits must be repaid in full regardless.

The upside is that ordinary credits, those held by family members or friends, only have to repaid up to 25%. The remaining 75% is condoned legally.

2.- Option B

The borrower submits himself ‘voluntarily’ to a draconian five-year repayment plan which takes into account the individual’s income and debt amount; it is a tailored plan.

• The first requirement is that the borrower proactively assisted in finding a solution.
• The borrower must not have attained this privilege previously.
• The borrower must have actively sought job placements (and be able to prove it).
• The borrower’s name will be lodged in a public insolvency registry for the next five years.
• The borrower must continue to pay alimony, where applicable.
• The borrower must continue to pay privileged creditors, as listed in the point above.

The result is that after the five years have elapsed all ordinary and subordinate outstanding debt will be cancelled.

However, debts owed to privileged creditors will remain outstanding in full:

• Mortgage debt (lenders).
• Unpaid taxes plus interests (Tax Office).
• Unpaid wages (Social Security).

Repeal

Both options can be jeopardized by a borrower on any of the following:

• Breach of any requirement. The observation of all and any requirements is stringent.
• Non-payment within the repayment time frame of any amount. This automatically invalidates the good faith requirement.
• Discovery by the court of concealed assets or non-disclosed sources of income i.e. working off-the-books when on the dole.
• Significant improvement of financial situation i.e. beneficiary of an inheritance.

Conclusion

Debt-laden borrowers may want to think twice before taking this route.

Despite the hype I have read in the press, hailing this new law as the perfect solution to many’s ongoing financial tribulations, the truth is far from it.

The key point is that the debts which are written off are those classified as ordinary or subordinate; which normally belong to friends and relatives. Meaning that those who trust and love you more are the ones that will bear the brunt for you.

In sharp contrast, privileged creditor’s debts (lenders, Tax Office, Social Security) remain as is. Not a cent will be condoned and will have to be repaid in full. This is what’s misunderstood at large.

In other words, to save your own financial situation you will be alienating yourself from those that love and care for you the most. Besides, on following this route your personal details will be listed at the Civil Registry for any to see. And these are not erased. You will become a financial pariah which consequences will last throughout your lifetime in Spain. Lenders will be highly reluctant to lend you money again, whether as a personal loan or to start a new business. So much for ‘second opportunity’.

Which is why in my opinion, and that of others more qualified than myself, filing for personal bankruptcy in Spain should be taken only as last resort when all other venues have been exhausted. In fact, only 1.65% of bankrupt people chose this path in so far this year (one in fifty).

Some privileged creditors (read lenders) are walking away scot-free when in many cases they were the culprits on creating this situation in the first place by offering recklessly loans to borrowers that clearly did not meet the minimum requirements in the heyday of the property boom. They directly contributed to the current situation and should be held co-responsible, sharing in the losses of their own making. Accountability shines for its absence.

For those that have reached a nadir in their financial situation, and seek a second opportunity, you may want to think twice before taking this option. Whilst I am a firm believer in giving people a second chance in life, you may want to sit this one out; at least until the law is amended and lenders bear too the consequences of the folly of the roaring 2000s.

“La elección no depende solo de la voluntad, sino de la posibilidad.” – Spain’s Supreme Court.

Loosely translated as: “Choice doesn’t hinge solely on one’s own will, albeit on opportunity.”

Acknowledgements

I am especially indebted to Ms Catalina Cadenas de Gea, Judicial Secretary of Málaga’s Mercantile Court Number Two, for her invaluable input on writing this article. Gracias.

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in litigation, conveyancing, taxation and inheritance. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

Related articles

• Lifetime Loans or Reverse Mortgages in Spain Explained – 21st February 2011
• Advice to Struggling Mortgage Borrowers in Spain – 8th March 2011
• Spanish Mortgage Loans: Beware of Abusive Clauses – 8th January 2012
• Spanish Mortgage Loans: An Overview – 21st February 2012
• Mortgage Collar Clauses Revisited (‘Cláusulas Suelo’) – 8th December 2013
• Bank Repossessions in Spain– 21st February 2014
• Bad Debtor’s List (‘Fichero de Morosos’) – 8th April 2014
• Spanish Creditors Pursuing Debts Abroad – 8th May 2014
• Dación en Pago Explained or How to hand Back the Keys – 8th December 2014
• Limiting Liability in Spain – 8th November 2015
• Personal Bankrutpcy in Spain: Second Opportunity Law – 8th September 2015

Please note the information provided in this article 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.

2.015 © Raymundo Larraín Nesbitt. All rights reserved.

Over the last eight years a few rogue companies have been set up with the sole purpose of putting the fear of God into British to entice them to incorporate corporate structures on top of the Spanish real estate or else buy into obscure equity release schemes to avoid Spain’s IHT (the latter led to hundreds of senior citizens losing their homes to these cunning predators). Truth is most people didn’t even need them in the first place. On average inheritors pay 15% on Spanish Inheritance Tax, a far cry from what’s been shouted from the rooftops.

For a full comprehensive list of IHT-related tax myths peddled by unscrupulous non-regulated outfits or IFAs (Independent Financial Advisors) with a vested interest to coax fellow British into incorporating expensive (and often unnecessary) corporate structures, or else set up devious equity release schemes, to elude Spanish Inheritance Tax please read my article below which debunks them.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8^th of August 2015

Introduction

Scaremongering, a time-proven sales tactic. Car and insurance salesmen, in my experience, have always been top of the game at this because they know exactly what makes a customer tick. You will read plenty of scary stuff on ex-pat newspapers and internet on inheritance taxation in Spain which aims to prey on the gullible and harp on people’s inbred prejudices. I will try to cast away some of these widely held misconceptions.

Examples of Widely Held Misconceptions

1. “Spanish Inheritance tax legal fees can be at least 40 to 50%.”

False

Fact: On average inheritors pay in Spain 15% in inheritance tax. Only in the most extreme cases would you pay such a high amount. To give an idea, a single beneficiary that inherits over €800,000 would stand to pay 34%. Normally there are multiple beneficiaries to an estate; it’s not just one person that inherits all. Also the beneficiaries of the bulk of the estate are normally children, not non-relatives (which do not qualify for tax allowances). The significance this has is that the taxable base (the 800k) would then be split amongst the heirs dramatically reducing the IHT liability as it follows a sliding scale. To this you must also add the legal and family allowances (both national and regional) which reduce the percentage to be paid even further. Also worth mentioning is the fact that the taxable base for property is well-below the true market value.

I’ll put this in perspective with the most common example on British nationals inheriting in Spain. In my experience expatriates have second homes in Spain worth on average €400k. This property is normally owned in joint names meaning each spouse owns 50% of the property. On average couples have two children. So when one parent passes away, his 50% (the €200,000) is normally inherited by his two children. Therefore the taxable base of each child would be €100,000 (as the €200,000 is split equally between them). The surviving spouse naturally still owns his 50%. The state inheritance tax on a taxable base of 100k would be approximately €10,000 (10%). Children are classified in Group I for inheritance taxation purposes. The state tax-free allowance amounts to almost €16,000 for each child. In other words, the state allowance completely offsets the inheritance tax liability (meaning they pay nothing on inheriting in Spain in this example). Additionally children under 21 years old have further annual reductions with a maximum cap of €48,000. On top of this there are autonomous regional allowances that children may benefit from. So in this particular example, which in my professional experience I dare say is the most common, each child would stand to pay zero on inheriting a taxable base of €100,000 each. When the surviving spouse passes away the same result will unfold again providing the laws are not changed. So basically each child will have paid almost nothing on inheriting €200,000 each when both parents are dead.

On the other side of the spectrum, we can imagine a parent passing away bequeathing a €3,000,000 property to a single child or to a friend. In this particular case the inheritance liability would indeed sky rocket (over a million). For this particular case I strongly advise obtaining an estimation on the inheritance tax the beneficiary stands to pay. In this example it is definitely worthwhile looking into corporate structures to mitigate exposure to ISD/IHT as much as possible.

2. “Heirs will be forced to sell the property in Spain to pay off Spain’s extreme inheritance tax”

False

Fact: Same as previous point. Selling a property would be exceptional. In fact I’ve never come across a single client in over a decade that has been forced to sell to pay Spain’s ISD/IHT on inheriting. Moreover, you cannot inherit anything until you have first paid inheritance tax. So no-one can sell the property they are inheriting to then pay off the tax as the property is technically not theirs to sell as it is still under the deceased’s name. Only once the tax duties have been settled and the property is lodged under the name of the beneficiary at the Land Registry is he free to sell on if he wishes as the property is now legally under his name to do with it as he pleases.

3. “The financial debt of your heirs is maybe as much as 50% of the value of your property”

False

Fact: Everyone inheriting in Spain would then be broke. Same as the previous two bullet points, on average inheritors (beneficiaries) pay 15% for IHT/ISD in Spain.

4. “Yours husband or wife will not be exempt from Spanish Inheritance Tax.”

Misleading

Fact: Spouses indeed are not exempt from paying inheritance tax in Spain but they qualify for legal tax allowances. If resident in Spain then the surviving spouse is entitled to further autonomous regional tax allowances. These allowances, both from the state and from the autonomous region where the property is located, may greatly reduce the burden. Additionally if the surviving spouse is resident in Spain they may qualify for a 95% reduction on the main home providing they have lived in it the previous two years and keep it the following ten years (with a maximum reduction of €122,000).

5. “Want to avoid up to 81% of Spanish Inheritance Tax?”

Misleading

Fact: Scaremongers love quoting the extreme 81.6% tax rate for IHT as if this were the norm on inheriting in Spain. While it’s true that Spain’s inheritance tax can be as high as 81.6 pc – in the most extreme case – this only applies to the following case:

a) the beneficiary inherits > €800,000
b) the beneficiary is already well-off (his pre-existing wealth before inheriting > €4,000,000 or £3,000,000)
c) is a non-relative of the deceased classified in Group IV (no family ties to him i.e. a friend)

Clearly a problem affecting only a privileged few. Not a problem that the vast majority of beneficiaries inheriting in Spain will have to contend with unless they are already multimillionaires.

6. “If you incorporate a UK Limited Liability company and place the Spanish real estate inside you will be 100% shielded against Spain’s ISD/IHT. After death, only the shares are reorganised, the company owns the asset, and so it doesn’t change hands. This falls outside Spanish inheritance tax. Win-win”

False

Fact: Resident beneficiaries are obliged to pay inheritance tax under article 17 of Spain’s Inheritance and Gift Tax Royal on inheriting real estate within Spanish territory; regardless on whether the property is locked up or not within a holding company structure and regardless of whether you inherit the property itself or the shares. Likewise non-resident beneficiaries of a property located in Spanish territory also stand to pay Spanish inheritance tax (ex art. 18 of same decree) regardless if it’s in a holding structure or not. Moreover, I believe in the latter you may even be liable to attract UKs IHT beside Spain’s if the beneficiary happens to be a UK national.

Additionally Spain’s Non-Resident Act 5, 2004 clearly states that any re-arrangement of company shares (regardless of company’s nationality) which main asset is real estate located in Spain is taxable in Spain (CGT).

Depending on how clumsily this tax avoidance scheme is carried out it may be labelled as tax evasion (criminally pursuable for defrauded amounts above €120,000 ex art. 305 et seq. Spanish Criminal Code).

And to close I would like to take the opportunity to dispel a malicious misunderstanding on misreading one of my articles: Non-residents – Six Advantages of Making a Spanish will. Making a Spanish will does not reduce or mitigate your beneficiaries’ inheritance tax bill in any way whatsoever (as highlighted in the article itself). But it is extremely useful to save your beneficiaries time, money and hassle at a time of bereavement.

Without a Spanish will a beneficiary will normally incur in penalties and surcharges for late payment on inheritance in Spain. The reason for this is because there’s a deadline of 6 months as from the time of the testator’s demise to file and pay Spanish Inheritance Tax. UK probate, in my professional experience, always exceeds the six months deadline if there is no Spanish will. In which case penalties and surcharges are accrued and added to the inheritance tax for late payment. So ‘in a way’, making a Spanish will helps to mitigate or reduce the inheritance tax bill by way of helping not to attract said surcharges and penalties as the beneficiary is able to pay in time within the six-month deadline thus avoiding a lengthy procedure. I hope this clarifies the misunderstanding.

Spain’s Statutory Four-Year Tax Limitation

Another matter is if Spanish authorities do not get wind on the death of an owner who holds company shares, property or other assets. The statutory limitation of 4 years on all taxes, including Spanish Inheritance Tax, may kick in timing out the obligation to pay inheritance tax altogether – there is nothing the Tax Office can do after said time has elapsed to claim payment of inheritance tax from the beneficiaries. It should be noted that – exceptionally – the statute of limitation for Spanish Inheritance Tax is 4 years, six months and one day. In the particular case of a non-resident in Spain it is extremely difficult for the Spanish Tax Office (understatement) to know if and when they have passed away; unless of course his beneficiaries take to pro-actively inform the Spanish tax authorities… (or for that matter their bank in Spain; which also has the legal obligation to disclose the death to the tax office).

Conclusion

Inheritance tax planning in Spain is a complex matter, so please seek legal advice from a qualified lawyer and be wary of anyone advocating property ownership through corporate structures is “always beneficial” – not the case and in fact may be even be counter-productive and a complete waste of money. Beware of companies offering bespoke one-trick ponies to circumvent Spanish inheritance tax by offering “100% protection” against it.

If you fear Spain’s inheritance tax (IHT/ISD) you should first ask for an estimation from a law firm (we offer a SITAR service) before you do anything rash such as setting up a Spanish company or UK limited company to place it on top of the Spanish real estate. Inheritance tax varies widely within Spain’s seventeen autonomous regions (in some it’s not even taxed!). Truth is that corporate structures are neither needed nor recommended for the vast majority of people.

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in inheritance, taxation, conveyancing, and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

Legal services Larraín Nesbitt Lawyers can offer you

• Spanish Inheritance Tax Assessment Report (SITAR)
• Making a Spanish will
• Probate and Succession
• Death Certificate

Related articles

• New EU Regulation to be Passed on Succession and Wills –18th May 2010
• Non-Residents: Six Advantages of Making a Will in Spain – 8th August 2012
• Buying and Owning Spanish Property through Companies: Pros and Cons – 7th March 2014
• Taxes on Selling Spanish Property – 8th December 2014
• Spanish Wills and Probate Law in Light of European Regulation 650/2012 – 8th January 2015
• Changes to Spain’s Inheritance and Gift Tax Law – 21st February 2015
• Dispelling Spanish Inheritance Tax Myths – 8th August 2015
• Spanish Inheritance Tax for Non-Residents (Part I) – 21st February 2016
• Spanish Inheritance Tax for Non-Residents (Part II) – 8th March 2016
• Inheritance Tax Novelties in Andalusia. FAQ on IHT – 8th September 2016
• Which beneficiaries are hit worst by Spanish Inheritance Tax (IHT)? – 2nd June 2017
• Non-Resident: Why you need to make a Spanish will – 24th June 2017

Please note the information provided in this article 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.

2.016 © Raymundo Larraín Nesbitt. All rights reserved.

This article, by lawyer Raymundo Larraín Nesbitt, summarises the taxes and fees a buyer can expect to pay when buying property in Spain today.

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
8th of July 2015

Introduction

The idea behind this article is to keep it short and simple. If you want details on a particular matter, just follow the blue links to delve further. I advise reading it in tandem with How to Buy Property in Spain Safely.

As a rule of thumb purchase costs add 10 – 15% over and above the purchase price. In some regions of Spain this figure may in fact be higher. I collate below the taxes and associated fees on buying.

I will split my article distinguishing between three property types for tax purposes:

I.     New-build (or off-plan).
II.    Resale.
III.   Commercial property.

Land Registry and Notary Public fees follow a sliding scale in relation to the declared value of a property, the number of pages in a deed and other factors I won’t go into. Examples:

• €100,000 property would attract Notary Public fees of €700 and Land Registry fees of €400.
• €250,000 property would attract Notary Public fees of €800 and Land Registry fees of €500.
• €1,000,000 property would attract Notary Public fees of €900 and Land Registry fees of €600.

Be aware there are minor discrepancies from one region to the next as Spain’s seventeen Autonomous Communities have competence, within limits, over some taxes i.e. Property Transfer Tax (ITP) and Stamp Duty (AJD).

Buyers should be aware of the Complementaria or ‘Bargain Hunter Tax’. It is a supplementary tax the seventeen regional Spanish Tax Offices levy on buying property as a result of today’s low real estate values.

Take tailored legal advice on the region where you intend to buy. Request a full breakdown of taxes, fees and associated expenses. The tables below are a simplified approximation.

I. New-Build or Off-Plan Property

You can read further in my article Buying Off-Plan Property in Spain.

II.    Resale Property

You can read further in my articles Buying Resale Property in Spain, Buying Distressed Property in Spain and How to Buy Rural Property in Spain.

III.    Commercial Property

This includes storage rooms (trastero) and car parks (plaza de garaje) sold individually and legally separate from a dwelling. You can read further in my article How to Buy Commercial Property in Spain.

Taxes on Selling Spanish Property

I refer to my in-depth article Taxes on Selling Spanish Property for details.

A seller is liable for two taxes: Capital Gains Tax and Plusvalía Tax. Additionally, following new regulation, a seller may be required to produce an Energy Performance Certificate (couple of hundred euros).

I.    Capital Gains Tax

•    Non-EU residents: 24%
•    E.E.A. or EU-residents: 20% (in 2016 this drops to 19%)

II.    Plusvalía Tax

In most cases it is not significant, usually amounting to less than €1,000 but can be more in the case of villas with large plots of land.

Post-Completion Taxes and Maintenance Upkeep

I refer to my in-depth article Non-Resident Taxes in Spain.

Once you have purchased, you will face the associated running expenses. Make sure you have budgeted these expenses carefully so as to avoid unpleasant surprises! Some of the luxury gated communities with lush tropical gardens and beautiful infinity pools that dot the Spanish coastlines have pretty steep maintenance expenses (tallying several hundred euros a month!).

1. IBI tax: 0.4 – 1.1% of cadastral value per annum.
2. Rubbish collection tax.
3. Community fees (if you buy into a Community of Owners).
4. Imputed Income Tax: 0.22% – 0.48% of a property’s cadastral value per annum (for 2015).

Distinction is made between EU and non-EU/EEA-residents as well as revised/unrevised cadastral values on calculating Imputed Income Tax. Revised cadastral values are those for properties acquired post 1994. The cadastral value of a property appears in your annual IBI tax invoice.

a. EEA/EU-residents

• Revised = 0.22%
• Unrevised = 0.4%

a. Non-EEA/EU-residents (rest of the world)

• Revised = 0.26%
• Unrevised =0.48%

Conclusion

Take thorough legal advice to budget your purchase carefully before you commit. Initial reservation contracts, that strike the property off the market, are normally non-refundable. So if finance fails the real estate agency and/or seller are entitled to withhold the initial reservation deposit unless specific wording is added to the reservation contract to safeguard against this event.

Attaining finance from a lender should not be taken for granted. Spanish lenders are risk-averse these days and expect a non-resident buyer to come up with a 30 to 40% deposit. This will likely change in the near future, as credit begins to flow again, requiring smaller down payments from borrowers.

I reiterate that buyers, in today’s market, should be mindful of the Complementaria or ‘Bargain Hunter Tax’ so they do not get caught out by owing extra taxes post-completion.

To close, we are in a buyer’s market. There is plenty of property to choose from so do not rush in or be pressurised to sign on the dotted line. Take your time to consider matters carefully and budget accordingly.

And last my shameless plug; hire a good lawyer.

“Lo bueno, si breve, dos veces bueno; y aun lo malo, si breve, no tan malo.” – Baltasar Gracián y Morales.

Loosely translated as: “The good, if short, twice as good; and even the bad, if short, not so bad.”

Baltasar Gracián y Morales, S.J., was a 17th century baroque prose writer and philosopher belonging to Spain’s Golden Age.

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in taxation, inheritance, conveyancing, and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

Legal services Larraín Nesbitt Lawyers can offer you

• Conveyancing – Buying
• Conveyancing – Selling
• Rentals
• Utilities Connection
• NIE Number (Tax Identification Number)
• Opening a bank account
• Fiscal Representation (Non-Resident Income Tax)

Related articles

• How to Buy Property in Spain – Advice by the Foreign & Commonwealth Office
• Buying Distressed Property in Spain – 8th August 2011
• Buying Resale Property in Spain – 21st February 2013
• Escritura – Title Deeds FAQ – 8th June 2013
• Nota Simple: What is it and how do you get one? – 8th June 2013
• Buying Off-Plan Property in Spain – 8th of June 2013
• Investor Guide to Spain’s Golden Visa Law – 8th November 2013
• Bank Repossessions in Spain – 21st February 2014
• Buying and Owning Spanish Property through Companies: Pros and Cons – 7th March 2014
• How to Buy Commercial Property in Spain – 4th July 2014
• How to Buy Rural Property in Spain – 8th August 2014
• How to Buy Property in Spain Safely – 10th October 2014
• Taxes on Selling Spanish Property – 8th December 2014
• La Complementaria or ‘Bargain Hunter Tax’ – 8th May 2015
• House Hunting in Spain – The New York Times. June 2015
• Taxes on Buying Spanish Property – 8th July 2015
• Dispelling Spanish Inheritance Tax Myths – 8th August 2015
• Resurgent Spain: Málaga Sees Strong Sales – Mansion Global (The Wall Street Journal). December 2015
• Buying Property in Spain – 10 Reasons to Hire a Lawyer – 8th November 2016
• Buying Property in Spain from a Private Seller – 21st of February 2017
• Holiday Home Taxation in Spain – 8th of July 2017

Please note the information provided in this article 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.

2.015 © Raymundo Larraín Nesbitt. All rights reserved.