Lawyer Miguel Ángel Vázquez-González gives us an overview of the national tax allowances applied to inheritance tax, which rule all over Spain.
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Article copyrighted © 2019. Plagiarism will be criminally prosecuted.
By Miguel Ángel Vázquez-González
Associate at Larraín Nesbitt Lawyers
8th of July 2019
In today’s article we are going to focus on the national tax allowances, applied nationwide, for Spanish Inheritance Tax. I will not be mentioning regional tax allowances, which further expand and improve upon national ones. It is important to take note that, depending on which of the 17 autonomous regions in Spain inheritance tax is due, the results and conclusions reached will vary significantly in favour of taxpayers.
1.- Dispelling false myths
Multiple people claim that as they have a nationality other than Spanish, they are under no obligation to submit this tax. This is a mistake that can only lead to steep fines being levied and even assets being impounded as a result of non-payment. The general rule is to take the habitual residency in Spain into account to calculate this tax; however, also those taxpayers with habitual residency in third countries, other than Spain, who inherit rights or assets located within Spanish territory must pay inheritance tax in Spain.
2.- If you do not request it, you lose it
Spain’s Tax Office is not as lenient as Mahatma Gandhi, in fact, it is a minefield, specifically devised so that multiple requisites are missing and may not be claimed upon to take advantage of them. Tax procedures in Spain remind me of the famous Asterix comic by renown Belgians Goscinny & Uderzo, “The 12 tasks of Asterix”, where our heroes are subjected to run around in circles in a Roman burocratic labyrinthian nightmare that sees no end in pursuit of getting tax form A-38 rubber-stamped. The golden rule is that each taxpayer must expressly request the application of the tax allowances that apply to his case, as the Administration will never apply them by default. Self-complacency, on not claiming the allowances, may result in taxpayers overpaying taxes, and potentially losing thousands of euros in their tax bill. Hence the importance of good and professional advice on Spanish tax matters.
This may lead to some cheeky taxpayers ticking off ALL tax allowances and let the Administration do the work, sorting out which ones apply or not. Needless to say, this only leads to hefty fines. Some criteria are subjective and open to discussion. Yet in other cases it is black or white i.e. you cannot apply a tax allowance as if you had inherited from your father when you are in fact inheriting from a friend.
Unfortunately, the Administration has a criteria very close to its own interests (read to maximize revenues as much as possible) and law courts may have a different take (leaning closer to the taxpayer); in such cases it must be determined if the amount to save in taxes warrants a fight between David and Goliath.
3.- Reduction types
It is normal that non-specialized lawyers are unaware of the myriad requirements, for there are many and varied, both legal and jurisprudencial. Which is why it is very important to instruct a specialized lawyer who keeps abreast of the ever-changing legal requirements.
3.1.- Reduction as next-of-kin
Depending on their age and kinship with the deceased a beneficiary may enjoy a tax allowance ranging from €0 (i.e. you inherit from a neighbour with no family ties) up to a maximum of €47.858,59 for a toddler.
3.2.- Physical and mental disabilities, or legally incapacitated
The disability must be equal to or over 33%, it is also necessary that at the time of the death there is an administrative resolution not subject of appeal acknowledging the degree of disability. The allowances for this concept range from €47.858,59 to €150.253,03.
3.3.- Mortis causa (death) estate transmissions
If within a period of 10 years the same assets are bequeathed in favour of descendants, in a second transmission the taxpayer can deduct the inheritance tax already paid on the first transmission. E.g. Mr Smith aged 95 years old passes away bequeathing to his eldest son a garage space in Marbella. If his son should die within the next 9 years and he in turn bequeaths it to his own children, the grandsons of Mr Smith can reduce their inheritance tax bill in the same amount already paid by their late father.
3.4.- Acquisition of family company
This reduction is feared by the Spanish Tax Office, as it allows the taxpayer to reduce by as much as 95% of the taxable base. In other words, the tax office could only tax you on the 5% of the company assets. Only this single allowance is so extraordinarily complex and varied, that it would allow me to write hundreds of pages on this topic alone. E.g. a son inheriting a restaurant, hotel or estate agency. EDIT: Miguel specializes in this type of family company taxation.
It is absolutely necessary to study, prepare and revise that every year the requirements are met as the tax Administration will do its utmost to challenge and disprove its application, going out of its way in every step.
We can apply this incredible tax allowance as long as the beneficiary is the spouse, descendant (or adopted), they must be assets necessary for the business activity. It is also possible to apply for this tax reduction if you are a stakeholder as long as the finality is not to own assets as a holding company but rather to develop a business activity.
E.g. Mrs. Sweeney is the owner of the shares of a company that exploits three restaurants on the Costa del Sol, her two children are also stakeholders of said company. The value of the total assets amounts to €1.500.000. We can study her case so that her two sons inherit their late mother’s company shares benefitting from a tax reduction of 95%. They would only pay tax on the remaining 5%.
3.5.- Acquisition of main home
This applies to the spouse, ascendants, descendants or even collaterals (the latter to an extent). As a general rule the property must be kept (without being sold) for a minimum number of years. The allowance is capped at €122.606,47, per inheritor.
3.6.- Rural exploitations and assets belonging to historic heritage
As these are only applied residually, I will only mention them not going into any detail.
Conclusion.- Plan ahead for your demise, don’t wait until it is too late
Some of the above-mentioned allowances are not flexible and cannot be graduated. But have you considered gifting some assets to your children during your lifetime (please read our new tax article Andalusia, now a tier one region for low taxation in Spain)? Are you aware that making some minor changes to the Company Statutes is all the difference it takes between being able to benefit from the lenient 95% tax allowance for family companies or not? Only this tiny difference translates into having to pay several million euros extra to the taxman that you could have saved your beneficiaries from paying on inheriting the family company had you taken proper legal counsel, planning ahead.
Forward tax-planning is key and fundamental; this is likely the best advice we can give you. As there are multiple parameters at play, that give way to tax savings of thousands of euros, planning ahead ensures you optimize your tax bill.
Remember, the tax office has no qualms and will go out of its way, so taxpayers pay as much as possible. Do not grow complacent and make it easy on them to overtax your loved ones, make it difficult on them! Talk to us.
“If you fail to plan, you plan to fail.” – Benjamin Franklin.
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Article originally published in Spanish Property Insight: How to mitigate your inheritance tax bill in Spain
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