Inheritance tax in Spain: regional tax reliefs to benefit ALL non-residents in the future (even outwith EU/EEA)

Raymundo Larraín Nesbitt, August, 26. 2019

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

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

The following taxation article has been summarised to avoid unnecessary tax technicalities. The information and tax rates supplied are in line with current tax laws in Spain, which are subject to change. Seek professional tax & legal advice on your matter – see disclaimer below.

Article copyrighted © 2019. Plagiarism will be criminally prosecuted.

 

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
26th of August 2019

On Thursday last week a new binding consultation from the Spanish Tax Office was released. Binding consultations are queries raised by taxpayers to the tax office and its reply binds its performance on a given matter. It is now the third one of its kind, and this one in particular is very well argued. With three like-minded binding consultations marking a new ground-breaking trend, I am forced to write a tax article on the matter.

Leaving aside any esoterics, what these consultations imply is that the due to the landmark ruling of the European Court of Justice of 3rd September 2014, ALL non-residents, including those with residence outside the European Union and the EEA, are entitled to lenient regional tax reliefs in equal footing as residents. As explained in previous taxation articles on inheritance law, regional tax reliefs in Spain for the most part suppress or even negate inheritance tax (as opposed to the national tax reliefs which do not and are found wanting).

Before anyone cracks open the champagne, I need to throw in a damper. For this change to operate affecting ALL non-residents (the world over), Spain’s Inheritance Act from 1987 must first be amended. And in so far it has not. So right now, you need to be resident in the EU or in the EEA to benefit from regional tax reliefs on inheriting or being awarded a gift in Spain.

No one should realistically expect these changes within the short-term; they will likely take several years. This is because EU non-residents cannot vote, the tax office will push back on losing a lucrative source of taxation and a hard-left wing government is not ideologically aligned to implement tax reliefs which would almost completely negate inheritance tax. With the new change in government in Spain, this will be done presumably at some point in the future. But I stress right now it is not the law.

I had previously foreshadowed in our article of last 4th of July these changes in progress (Andalusia, now a tier 1 region for low taxation in Spain): “for full disclosure, there are some interesting recent tax developments on the works, but we won’t go into detail on them as it exceeds the purpose of this short post.”

Meaning, for example, a Canadian resident would in the future be able to inherit real estate located in Andalusia from his mother, benefitting from Andalusia’s 99% tax relief, paying almost no IHT, or even none at all.

I do not have to explain just how incredibly positive this news is for taxpayers in general. The fact that ANYONE stands to benefit from incredibly lenient regional tax reliefs (in the future) paying little to no inheritance & gift tax is something I thought I would never see during my lifetime. But here we are.

The legalities

Spain’s current tax laws must be construed as breaching article 63 of Europe’s Foundational Treaty (freedom of movement of capital) which not only affects EU non-residents but also non-residents of third countries. So says the ECJ in its landmark ruling of 3rd September 2014 as covered in detailed in previous tax articles (Changes to Spain’s Inheritance and Gift Tax Law – 21st February 2015).

As this is one of the Union’s core tenets, any regulation of a member state that breaches it must be revoked. As a result, Spain is forced to amend its tax laws in the future, particularly its Inheritance Act from 1987, so it is in line with the ECJs views; this would translate into  regional tax reliefs being applied unfettered to ALL non-residents, benefitting everyone, including those  residing outside the sphere of the Union and the EEA.

Spain’s Supreme Court, which hierarchically is under the ECJ, is bound by it and forced to uphold its rulings. It has in fact done so on three separate matters, within the last year, which clearly reflect the ECJ’s 2014 criteria: STS 550/2018, STS 1098/2018 and 1099/2018.

The risk-takers

Because binding consultations are precisely that – binding – some lawyers take the view that all these changes could be applied as of right now; even with retroactive effects as from the 1st of January 2015, when tax laws were first amended in Spain to fall in line with the ECJ’s key ruling of 3rd September 2014.

Personally, I find this a very risky and bold approach given how the Spanish Authorities have had 5 years to change the laws and have been reluctant to do so (on this concrete point). And that was with a centre right-wing government in power, which ideologically is pro-low taxation (well, at least so goes the theory). A left-wing government is far less inclined to adopt such tax changes, as it clashes frontally with its self-imposed ideology.

All these Supreme Court rulings and binding consultations pile a lot of pressure on lawmakers to amend exiting tax laws. But until this is done, in my personal view alone and take it with a pinch of salt, I think trying to exercise these tax reliefs is a bit of a gamble. It may pay off in some cases but in others it will backfire.

To quash the legal uncertainty, all that needs to be done is to amend Spain’s Inheritance Act and draft it in line with the ECJ’s ruling, allowing everyone to benefit from regional tax reliefs, resident or not.

Conclusion

These changes are a work in progress, not to be expected any time soon (years); but undeniably they mark a future trend that lawmakers can no longer ignore.

Spain’s lawmakers have no option other than to embrace and uphold in the future the ECJ’s key ruling of 3rd September 2014 and implement all its conclusions, amending national tax laws where necessary (they had already done so in several other aspects but have remained reluctant to also implement this change holding back for several years now); Spain’s Supreme Court recent three like-minded rulings – all within the last year – coupled with the three binding consultations from the Spanish Tax Office  – also from within the last year – all call for this change in line with the ECJ’s views on non-tax discrimination towards non-residents.

Exactly when this will take place is anybody’s guess.

In the meantime, to benefit in Spain from the ultra-high regional tax reliefs on inheritance & gift tax, you must be EU or EEA resident as this is what our laws demand, at present.

For those affected by Brexit, these changes will not come in time. Brexit will be long done and dusted by the time lawmakers amend existing tax laws to adapt them to this key ECJ ruling. It is strongly advised UK residents inheriting in Spain pre-empt Brexit as explained in our taxation article: Brexit and Inheritance & Gift tax in Andalusia.

At some point in the future, ALL non-residents, including those from outside the EU, will benefit from these generous regional tax reliefs, such as those offered by Andalusia of 99% that suppress inheritance tax.

When the time comes, in all but in name, Inheritance & Gift tax will be truly abolished throughout Spain, for everyone (in Groups I & II); rich, poor, resident or non-resident.

 

 "As men, we are all equal in the presence of death.”Publilius Syrus

 

Publilius Syrus (85–43 BC). Born into slavitude, he would be freed and formally educated by his master due to his outlandish wit and innate talent. He would become renowned in his time for his Sententiae, or moral maxims. He was awarded by Julius Caesar himself a prize in a contest where he outwitted all his competitors.

 

Loosely translated as: “Three amended words from lawmakers turn into dust whole legal libraries.”

Article originally published in Spanish Property Insight: Inheritance tax in Spain: regional tax reliefs to benefit ALL non-residents in the future (even outwith EU/EEA)

Tax & legal services available from Larraín Nesbitt Lawyers

 

Inheritance-related tax articles

 

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

2.019 © Raymundo Larraín Nesbitt. All rights reserved.

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Brexit and Inheritance & Gift tax in Andalusia

Raymundo Larraín Nesbitt, July, 26. 2019

Marbella-based lawyer Raymundo Larraín keeps us abreast of the sweeping changes in Inheritance & Gift tax law in Andalusia. The following taxation article is intended only for UK residents beneficiaries of an inheritance or gift in the region of Andalusia.

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

 

The following taxation article has been summarised to avoid unnecessary tax technicalities. The information and tax rates supplied are in line with current tax laws in Spain, which are subject to change. Seek professional tax & legal advice on your matter – see disclaimer below.

Article copyrighted © 2019. Plagiarism will be criminally prosecuted.

 

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

We published an article earlier on this month (Andalusia, now a tier 1 region for low taxation in Spain) where we gave a brief overview on the sweeping changes in Andalusia in 2019 on Inheritance and Gift tax. The tax changes from April 2019, coupled with those from January 2018, are so eventful they have ushered in a new era of wealth planning in Andalusia.

One of the main requirements to benefit from the regional ultra-high tax relief of 99% is that the giftees or beneficiaries of an inheritance in Andalusia need to be resident in the European Union. Please note that I’m not talking about your nationality, I’m discussing tax residence. For example, a Canadian national, who is resident in the EU, could benefit from this ultra-low regional tax. Conversely, a German national who is resident in Singapore may not benefit from it. Bottom line, what matters is your tax residency, not your nationality (which is irrelevant) to take advantage of Andalusia’s new Inheritance & Gift tax laws.

This begs the question on how Brexit will impact these heirs and giftees. The goal of this article is to highlight a limited window of opportunity available to some UK taxpayers who can take advantage of it if they are pro-active before Brexit closes in on us.

All comments made below only have in mind specifically the region of Andalusia and as beneficiaries the following groups of family members, for tax purposes:

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

To close my introduction, I'd like to point out that although the scope of this tax article deals specifically with Andalusia, the same pervading idea would apply throughout the rest of Spain. Meaning, for example, a British owner of a property located in Madrid, which has an incredibly lenient regional inheritance law, could - and should - take advantage of generous regional inheritance & gift laws pre-empting Brexit before time runs out. Post-Brexit, this Madrid expat owner will likely no longer be able to benefit from the generous ultra-high regional tax reliefs and will only be able to resort to the national tax relief scale which is nothing short of appalling (compared on how good the regional ones are that almost suppress or negate IHT completely). Our law firm can act for you nationwide.

I’m British, how does Brexit affect my rights to inherit in Andalusia?

Brexit casts a long shadow of uncertainty over everything, specifically on tax matters. Regardless on which side of the fence you are on, leaver or remainer, the fact is that Brexit will have a serious impact in our life’s.

Although no one knows for sure what will happen on Halloween’s eve in 2019, the fact is that if everything goes according to plan, the United Kingdom will break away from the Union this fall. One of the main requirements of Andalusia’s 99% tax relief on succession is that the beneficiary must be resident in the European Union (i.e. United Kingdom) or in the European Economic Area (EEA) compromised additionally by Iceland, Liechtenstein and Norway.

Although at this point in time we cannot rule out completely that post-Brexit UK tax residents will be able to take advantage from Andalusia’s lenient tax relief, it is within reason to think they will not; unless something specific is agreed which seems most unlikely. Meaning that in all likelihood after Brexit is triggered on the eve of the 31st October, UK tax residents will no longer be able to benefit from regional tax reliefs such as those generously offered by Andalusia. This would translate into UK beneficiaries of an inheritance, or gift, in Andalusia paying a punitive tax bill post-Brexit.

This is because as the UK would no longer be a member state of the Union, lenient regional tax reliefs, such as those offered by Andalusia, would no longer apply. Only the national tax relief scale would apply which, as I’ve often criticized over the years, is found wanting. You can find a full list of national tax relief here:

 

Succession planning is key for UK nationals pre-Brexit

 

The whole point of this taxation article is to garner attention on the limited window of opportunity open to some UK tax residents allowing them to pay no tax, or almost no tax, before Brexit is triggered. Take heed of our advice, the difference in tax to pay post-Brexit is nothing short of brutal.

I. INHERITANCE

As we have no control over who lives or dies before Brexit, it really makes no sense to publish a chart on inheritance tax. However, for completion’s sake, I will include it. The following chart is for a deceased that lived in the UK, beneficiaries of his estate are UK resident and are included in Groups I and II. Inherited estate is located in Andalusia.

In the third example below, inheriting €3mn, a UK heir will pay 146 times more tax in a post-Brexit world. That’s a 14,600% increase in tax to pay!

 

Inherited

Tax to pay

 

Pre-Brexit

Post-Brexit

€500,000

€0

   €106,000

€1,000,000

€0

€262,600

€3,000,000

€6,460

  €942,600

 

II. GIFT

However, we can exert control over gifting assets during our lifetime to our spouse and/or children. The following chart illustrates just how little Gift tax a beneficiary (or giftee) needs to pay in Andalusia before Brexit is activated. It also shows us the humongous difference in tax to pay in a post-Brexit world.

To focus on the second example, on gifting one million euros now to your spouse or children (giftees) they would pay almost no Gift tax whatsoever (under three thousand euros). If the giftor decides instead to wait until after Brexit, his child (or wife) would have to pay over a quarter of a million euros! In other words, if the giftor acts now pre-empting the tax change he would save his children or spouse from paying 96 times more tax. That is a 9,600% difference in tax to pay!

The following chart applies to gifting next-of-kin or spouse (subject to a pre-existing net wealth). The gifted money, or assets, must have been located in Andalusia over the previous 5 years.

Gifted amount

Tax to pay pre-Brexit

Tax to pay post-Brexit

 

 

 

€500,000

€1,100

€110,768

€1,000,000

€2,800

€268,122

€3,000,000

€10,100

€948,122

Example one: gifting real estate. Mrs Blackwood wants to gift her son and daughter (both UK residents) in equal shares her Andalusian villa worth 2 million euros; meaning they would be gifted one million euros each. Her two children (giftees) would be liable to pay Gift tax in Andalusia. As they are both UK tax residents, they qualify to benefit from Andalusia’s ultra-high tax relief and would each pay €2,800 in Gift tax (nada). Mrs Blackwood would be liable for both CGT and plusvalia tax (which can be greatly mitigated, or even negated, as explained below in the next section).

Example two: gifting money. Mr Waller, who works in Andalusia, gifts his loving wife Eleanor (who is UK tax resident) 3 million euros. Eleanor would only pay slightly over €10,000 euros in Spain. Mr Waller would pay no tax.

Applicable taxes on gifting assets

Depending on whether money or real estate is gifted, different taxes apply.

  • When you gift money, only the giftee pays Gift tax, which is currently negligible in Andalusia. Giftor is not liable for any tax.
  • When you gift real estate, a giftor is liable for both capital gains tax and plusvalia tax. Giftee is liable for gift tax, which is almost negligible in Andalusia.

 

Regarding the second bullet point, a giftor can apply and benefit from all the tax reliefs available to greatly mitigate or completely negate his CGT liability on gifting (or selling) real estate. More on this in our taxation article: Capital gains tax mitigation on selling (or gifting) your property – 8th May 2019.

 

The following chart (attempts to) summarise it:

 

Giftee

Giftor

Gift

Gift tax

CGT

Plusvalia tax

 Money

X

Real estate

X

X

X

Double taxation treaties on Inheritance & Gift tax

Unfortunately, Spain has only signed such treaties with three countries: France, Greece and Sweden.

There is no treaty in place between Spain and the United Kingdom. Meaning that although you would pay no tax, or almost no tax, in Spain you may be liable to pay some tax in the United Kingdom. Traditionally the HMRC gives tax breaks on paying tax in Spain.

How can Larraín Nesbitt Lawyers assist you?

We can offer you a Spanish Inheritance Tax Assessment Report (SITAR). The SITAR is a tax report written in plain English tailored for each taxpayer that clearly lays out the taxes you would be liable for in a pre and post-Brexit world. As every matter will be different, it requires we study it case-by-case. We can offer you this tax service for a very competitive fee: Spanish Inheritance Tax Assessment Report (SITAR)

If you decide to go ahead gifting money, or an asset, to your spouse or children located in Andalusia we can arrange drafting and signing a Gift deed that needs to be witnessed by a Spanish Notary Public.

We will also calculate and submit the associated taxes (even if there is no tax to pay, it must still be done). And finally, we change over at the Land Registry the ownership of the assets over to the new beneficiary. If you are simply gifting money, you can skip the Land Registrar phase altogether.

Conclusion

You will often hear tax advisors stating that planning ahead on tax matters is crucial. This has never been truer than now. Pre-empting Brexit will allow some shrewd taxpayers to legally avoid their loved ones paying huge tax bills, walking away scot-free.

The following four months may offer some privileged UK taxpayers a once-in-a-lifetime opportunity to vastly reduce their inheritance and gift tax bill in Andalusia, even paying no tax at all in Spain. A lot of money will be at stake for many people, which is why we urge you to plan ahead and take legal advice on your tax matters. In the unlikely event Brexit is called off, this generous tax relief of 99% on Inheritance & Gift tax will be available permanently for UK residents.

Post-Brexit all these ultra-generous regional tax reliefs will disappear overnight for non-EU residents which is why we advise UK residents do not sleep on this and be pro-active, seizing the opportunity while it is available to them. It is a certainty they can benefit from it now; it is uncertain they will be able to benefit from it post-Brexit.

We've had to wait over 40 years in Andalusia to have such great inheritance and gift tax reliefs. Can you afford to wait so long? Talk to us, we will be delighted to review your tax matter and offer you a cross-border solution, assisted by our UK partners, which gives you peace of mind and works best for you and your family in both countries.

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

 

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

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

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

Larraín Nesbitt Lawyers is a law firm specialized in conveyancing, inheritance, taxation and litigation. 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 to book an appointment.

Article originally published in Spanish Property Insight: Brexit and Inheritance & Gift tax in Andalusia

 

Tax & legal services available from Larraín Nesbitt Lawyers

 

Inheritance-related tax articles

 

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

2.019 © Raymundo Larraín Nesbitt. All rights reserved.

 

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How to mitigate your inheritance tax bill in Spain

Raymundo Larraín Nesbitt, July, 10. 2019

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

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

Article copyrighted © 2019. Plagiarism will be criminally prosecuted.

 

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

 

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

 

1.- Dispelling false myths

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

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

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

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

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

3.- Reduction types

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

3.1.- Reduction as next-of-kin

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

3.2.- Physical and mental disabilities, or legally incapacitated

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

3.3.- Mortis causa (death) estate transmissions

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

3.4.- Acquisition of family company

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

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

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

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

3.5.- Acquisition of main home

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

3.6.- Rural exploitations and assets belonging to historic heritage

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

 

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

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

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

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

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

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

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

Larraín Nesbitt Lawyers is a law firm specialized in conveyancing, inheritance, taxation and litigation. 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 to book an appointment.

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

Tax & legal services available from Larraín Nesbitt Lawyers

 

Inheritance-related taxation articles

 

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

2.019 © Raymundo Larraín Nesbitt. All rights reserved.

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

Raymundo Larraín Nesbitt, July, 4. 2019

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

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

Article copyrighted © 2019. Plagiarism will be criminally prosecuted.

 

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

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

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

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

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

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

I. Gift tax

 

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

 

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

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

 

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

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

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

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

II. Inheritance tax

 

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

Requirements to benefit from this tax allowance

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

 Inheritance Tax in Andalusia

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

 

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

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

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

 

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

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

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

Conclusion

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

Some holding structures incorporated with the sole purpose to mitigate or negate IHT liability will now become redundant in Andalusia following the approval of this change in regulation. You should request specialized tax advice from us before you do anything rash like setting up a trust or holding company to include your Spanish estate.

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

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

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

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

 

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

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

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

Larraín Nesbitt Lawyers is a law firm specialized in conveyancing, inheritance, taxation and litigation. 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 to book an appointment.

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

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

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Seven Advantages of Making a Spanish will

Raymundo Larraín Nesbitt, May, 1. 2018

Marbella-based Lawyer Raymond Nesbitt explains the advantages of making a Spanish will.

Article copyrighted © 2009. Plagiarism will be criminally prosecuted.

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
8th of May 2018

 

 

 

Ideally foreigners should make two wills; one in their home country ruling on their national assets and a second Spanish will drawn up in Spain which will rule exclusively on their Spanish estate.

Recent European legislation (Brussels IV) has rendered some old Spanish wills made by British void. In such cases it is highly recommended a lawyer drafts a new one to safeguard your heirs' interests. Any will witnessed before the 17th of August 2015 should be revised by a Lawyer to ensure it is fully compliant. More details in our article: Spanish Wills and Probate Law in light of European Regulation 650/2012.

Our law firm can draft a Spanish will (in English and Spanish). More on this: Will-writing service.

 

  1. A Spanish will only affects your Spanish estate. It does not affect any assets or preclude any prior will witnessed in your home country.
  2. Drawing up a Spanish will help your heirs mitigate their tax bill. There’s a deadline of 6 months as from the time of the testator’s demise to file and pay Spanish Inheritance Tax (IHT). Late payment of IHT attracts surcharges, penalties and delay interests. A Spanish will cuts through the red tape streamlining the succession procedure so tax is paid on time within the deadline (without attracting penalties and interests on top).
  3. Drawing up a Spanish will saves both money and hassle. If you only make an English will, your beneficiaries will have to follow a Grant of Probate in the United Kingdom (over £1,200). You'll need to translate into Spanish by a sworn translator all legal documents, notarise them and affix to each of them the Apostille seal of The Hague Convention. All this greatly increases the expenses for your beneficiaries, as well as significantly delaying the whole procedure of transferring your Spanish estate which will attract surcharges, penalties and delay interests (point two above). However, if you make a Spanish will, the above becomes redundant.
  4. Spanish wills are stored safely at no extra charge. On making a Spanish will, you will be given only a “copia simple” (simple copy) or “copia autorizada”. The original is stored by the Notary in his files for record. Should you lose your copy, don’t panic. All Spanish wills' details are safely stored at Madrid’s Central Registry of Last Wills. One can always request a copy and if you believe you are a beneficiary, they will let you know before which Notary it was witnessed.
  5. Spanish wills drawn up before a Notary public add security. Making a will is a personal act. A Notary is a highly qualified law professional who witnesses the signing of a will. He will highlight any incorrection or illegality.
  6. The content of a Spanish will is governed by your own national laws. This means that you are not constrained by Spain’s forced heirship rules. Additionally, if you are a British or Irish national, you have free testamentary disposition in Spain. Meaning you can make a will exactly the same as you would in the United Kingdom or in the Republic of Ireland, albeit with all the additional advantages for your loved ones that I’ve highlighted above.
  7. A Spanish will can be worded in English. Spanish wills can be drafted in double barrel, English-Spanish, so you know at all times what you are signing at a Notary public.

 

We offer the most competitive fees in the market.

Will writing service 

We are specialized in inheritance

 

Intelligence is the ability to adapt to change.” – Stephen Hawking.

Stephen William Hawking (1942 - 2018). English theoretical physicist, cosmologist, writer, and director of research at the Centre for Theoretical Cosmology at the University of Cambridge. Former Lucasian Professor of Mathematics at the University of Cambridge and author of A Brief History of Time. Likely the world’s smartest man. Despite his serious physical condition from a young age, he sported a brilliant sense of humour that humbled all and made him appear no less than four times in The Simpsons show as himself - no one else holds this record to date. Given his physical disability and the severe adaptation he endured, if we are to go by his own quote, his mind must have been touched by God.

 

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.

Article also published in Spanish Property Insight: Seven Advantages of making a Spanish will

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

2.009 © Raymundo Larraín Nesbitt. All rights reserved.

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Inheritance Tax Novelties in Andalusia & FAQ on IHT in Spain

Raymundo Larraín Nesbitt, September, 8. 2016

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of September 2016

 

 

 

 

 

Introduction

I have split my article in two sections.

The first one deals with the recent legal changes to IHT in Andalusia brought about by the Junta. I had written an inheritance tax article earlier on this year where I classified the IHT ‘tax friendliness’ of regions in Spain. Andalusia was a tier 2 region (IHT-unfriendly). In my article I explained in detail the ongoing trend in Spain to reduce the IHT burden championed by some political parties. Following the newly introduced batch of positive changes in IHT in Andalusia I may now have to go back and review my classification, moving Andalusia to a tier 1 region (IHT tax-friendly).

The second part of my article is a straightforward FAQ on what to do when someone passes away in Spain. Lots of questions arise when a loved one dies; the purpose of this short FAQ is to – hopefully – address the most common ones.

 

IHT Changes in Andalusia

 

There are two batch of laws. The first one came into force last August and the second one will be effective as from the first of January 2017. I will only focus on IHT changes that affect the majority of residents and non-residents.

  1. August's changes:

  • Main (family) home: Inheritance tax threshold increased. Before this change there was a blanket maximum (national) reduction in value per inheritor of €122,606. Any amount above was taxed. Applies only to beneficiaries which were already living in the family home at the time of death (all year round). This has now been replaced by a sliding scale:

 

Main home value up to €123,000 (always per inheritor) are now 100% IHT exempt.

Main home values > €123,000 < €242,000 follow a sliding scale with an exemption that varies between 99 and 96%.

Main home values > €242,000 will have a flat 95% IHT exemption.

As can be gleaned from above, this translates into a 95% IHT exemption for main homes over €242,000 (per inheritor) which is a much welcome respite for inheritors.

  • The above only applies if beneficiaries do not sell the property within the next three years from the death. The timeframe has been reduced as it was five years before.

 

To benefit from the above you must be one of the following:

  • 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.

 

2. Legal changes as from the 1st of January 2017:

  • Nil rate band increased. Before this change the inheritance tax-free allowance (per inheritor) in Andalusia was < €175,000. No IHT was charged below this threshold. As from next year, this allowance is increased to €250,000 per inheritor.
  • Another positive change, related to the one above, has been introduced on inheriting estates up to €350,000. There is now a blanket allowance on the first €200,000. The significance of this is better understood with an example. On inheriting say €300,000, the first €200,000 are exempt. You would only pay IHT on the remaining 100k.

 

This is a welcome respite as before you had to pay the full IHT on any excess over the threshold. This created serious tax anomalies i.e. if the excess over the tax-free allowance was as little as by only one euro, the Tax Office made you pay the IHT liability on the full amount (on the whole €175,000) as you did not qualify for the tax exemption – which was bonkers.

This new change strives to correct this much criticized injustice allowing for a greater degree of flexibility. It will greatly reduce the inheritance tax bill for all those inheriting above the tax-free allowance of €250,000 (new ‘soft’ threshold) but below the €350,000 cap (new ‘hard’ threshold).    

 

Spanish Inheritance Tax FAQ

 

  1. Is it feasible to do any of the admin ourselves or will we have to hand it all over to a solicitor?

Inheritance in Spain is a convoluted process that requires the input of tax experts. This is further compounded by the fact that besides a national law each of Spain’s 17 regions have devolved competencies on the matter and have passed their own laws creating a legal labyrinth.

What you can do on your own is to collate all the required legal paperwork that will be asked by your appointed expert e.g. notarised copy of last will, original death certificate etc.

  1. My father passed away. Can I simply change the (Spanish) deeds over to my name? How long does this take?

No, you cannot.

You first need to appoint a legal expert who will handle the Spanish side of the inheritance. Once Spanish inheritance tax has been filed and paid can you then change the ownership in the deeds over to your own name.

On average you are looking at six to twelve months overall until the deeds are in your name; providing a Spanish will was made. If no Spanish will was made then in all likelihood the whole procedure will be in excess of a year.

  1. How do we arrive at a probate value, is there a state website with guide prices based on the square footage or yearly tax paid, or is it done by an estate agent?

There is no national website and no, estate agents do not assess the value for IHT purposes. It is actually the Tax Office that does this.

If the beneficiary is resident in Spain, it will be the regional tax office where the majority of the estate is located that does this. If the beneficiary is non-resident, then this assessment is carried out in Madrid.

  1. Can you tell me how the value of a property is assessed for inheritance tax purposes? Is it what you paid for it or is it the market value at the time of death?

 

The value of the estate for the purpose of calculating the IHT liability, is the net value acquired by each inheritor. All charges and liabilities must be deducted first.

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

  • Cadastral value of the property (revised).
  • Acquisition value of the property (what you paid for it).
  • Tax Office’s assessed fiscal property value.

 

In practice it will be close to the market value but usually (well) below it.

  1. I am skint. Can Spain’s IHT be paid in instalments? Can it be paid off the estate itself?

Yes, Spanish inheritance tax can be paid in instalments. You must request it within the first six months as from the time of the death.

No, Spanish inheritance tax cannot be paid off the estate itself. You must first pay IHT and only then can you change the ownership to your name and dispose of it as you see fit.

Conclusion

Succession in Spain is a complex matter. I strongly recommend appointing a Spanish expert to help you wade through the admin minefield.

To get you started, I advise you read some (or all!) of my related articles below. This will give you a leg up when you start your dealings with a tax expert as the legal jargon will already be familiar.

 

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.

 

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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.

2016 © Raymundo Larraín Nesbitt. All rights reserved.

 

 

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Spanish Inheritance Tax for Non-Residents (Part II)

Raymundo Larraín Nesbitt, March, 8. 2016

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
8th 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.

 

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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.

... Read more

Spanish Inheritance Tax for Non-Residents (Part I)

Raymundo Larraín Nesbitt, February, 21. 2016

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
21st 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).

Up to 3 months 5%
Up to 6 months 10%
Up to 12 months 15%
+12 months 20%

 

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.

Up to amount (in Euros) Tax rate (%)
7,993.46 7.65
15,980.91 8.50
23,968.36 9.35
31,955.81 10.20
39,943.26 11.05
47,930.72 11.90
55,918.17 12.75
63,905.62 13.6
71,893.07 14.45
79,880.52 15.30
119,757.67 16.15
159,634.83 18.70
239,389.13 21.25
398,777.33 25.50
797,555.08 29.75
Over 797,555.08 34.00
 
 

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).

Pre-existing Net Wealth in Spain
(in Euros)
Groups I&II Group III Group IV
0 up to 402,678.11 1.0000 1.5882 2.0000
402,678.11 up to 2,007,380.43 1.0500 1.6676 2.1000
2,007,380.43 up to 4,020,770.98 1.1000 1.7471 2.2000
Over 4,020,770.98 1.2000 1.9059 2.4000

 

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. 

 

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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.

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Dispelling Spanish Inheritance Tax Myths

Raymundo Larraín Nesbitt, August, 8. 2015

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
8th 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

 

Related articles

 

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.

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Changes To Spain’s Inheritance And Gift Tax Law

Raymundo Larraín Nesbitt, February, 21. 2015

Regular legal-contributor Raymundo Larraín Nesbitt examines the legal impact in Spain on matters such as non-resident taxation and inheritance tax brought about by the key ruling of the European Court of Justice (ECJ) from last 3rd of September 2014 (Case C-127/12).

By Raymundo Larraín Nesbitt
Lawyer – Abogado
21st of February 2015

 

 

 

European Court of Justice. Photo credit: Cédric Puisney

 

Introduction

Continuing the trend set out last month on Succession, I think it was long overdue I wrote an article on the ECJ’s landmark ruling of last 3rd of September 2014. The legal repercussions, on the wake of this ruling, have rippled wide and deep across Spanish law; particularly regarding non-resident taxation. For this article’s sake the most prominent change is Law 26/2014 of the 27th of November which amends, amongst other laws, the Personal Income Tax Act (I.R.P.F.), the Non-Resident Income Tax Act (I.R.N.R.) and the Inheritance and Gift Tax Law (Impuesto de Sucesiones y Donaciones, I.S.D. for short). These changes came into force on the 1st of January 2015. I had already referred to them fleetingly in December’s article Taxes on Selling Spanish Property.

Law 26/2014 adapts the decision taken by the ECJ amending internal Spanish national laws. In a nutshell, amongst many other changes that escape the goal of this article, it puts an end to (fiscal) discrimination between residents and non-residents in a wide array of matters; most notably on inheritance and gift taxation.

If you are looking for in-depth articles on Spanish Inheritance Tax please follow these links: 

 

For the purpose of this article, when I make reference to ‘non-tax residents’ I will always be referring to citizens which are either tax resident in another Member State of the European Union or else in the European Economic Area (E.E.A.). Just to clarify, the below-listed changes do not benefit tax residents outside of the EU or EEA.

I will now, as briefly as I can muster, highlight the major changes.

Succession – Situation Prior to the ECJs’ Ruling

To better understand the scope and wide impact of the legal changes it is necessary for me to digress and explain what the existing situation was prior to the ECJ’s ruling.

Basically there were two sets of allowances on inheritance tax; one set out by rigid state law, which is the common regime and is applied nationwide subsidiarily, and another more indulgent regional one set out by each of Spain’s seventeen Autonomous Communities. Broadly speaking, state law applied to non-tax residents by default in all cases. Regional tax laws applied to residents by default.

State law is hands down more unforgiving and decisively less lenient than regional tax allowances which only applied to (tax) residents. Non-tax residents were forced to follow state inheritance law regardless of where the estate was located in Spain.

Spain is divided administratively into seventeen Autonomous Communities. Each of these have devolved competencies on Inheritance tax matters up to a certain point and may apply generous deductions to the point that Inheritance and Gift tax is almost suppressed in some Autonomous Communities. Making a sweeping generalisation, and just to make things clearer to understand, Spain is divided broadly in communities ruled by centre-right and centre-left wing parties. Their ideological spectrum directly impacts on taxation.

On the one hand, Autonomous Communities ruled by centre-right wing parties (i.e. Partido Popular) have generous tax provisions in place almost suppressing inheritance and gift tax i.e. Madrid, Basque Country, Navarre, Valencia, Balearic and Canary Islands. You can read further in-depth on the matter in my article Making a Spanish Will from 2012.

On the other hand, you have autonomous regions led by centre-left parties (or left-wing) which, coherently with their ideology, not only do not apply generous regimes to succession but even penalise it furthermore as they firmly believe wealth ought to be ‘redistributed’.

This is the ideological trench warfare in which non-tax residents are parachuted in being caught in the crossfire. Non-tax residents were, until the ECJ’s ruling, unfairly barred from taking advantage from the generous regional tax allowances which were only reserved to residents and significantly improved upon those set out by state law.

A non-tax resident beneficiary of a deceased’s Spanish estate followed the general state law on inheritance and the inheritance was directly dealt with from Madrid (centrally as opposed to regionally in the case of tax residents). This was irrespective of in which of the seventeen Autonomous Communities had the deceased passed away or where the majority of his assets were held. In other words, non-tax residents were being discriminated as, unlike tax residents, they could not take advantage of the generous tax provisions which almost suppressed inheritance tax in some Autonomous Communities.

This was clearly incompatible with the founding principles and self-admitted goals of a European Union which vies to create a single economic and political space posed to compete in equal footing with the US, China and other major rising superpowers.

Post-ECJs’ Ruling – Changes to Spain’s Inheritance and Gift Tax Laws

The European Commission, through the ECJ’s ruling of 3rd of September 2014, ended all discrimination and forced Spain to amend its internal laws and accommodate the European principles on which the EU is based on.

As an example of such changes, Spain’s Constitutional Tribunal (Tribunal Constitucional) has annulled in March 2015 a part of Law 13/1997 relating to inheritance tax (ISD or IHT) from the Autonomous Community of Valencia when it states that only residents with habitual residency in said Autonomous Community can benefit from the lenient tax allowances on inheritance procedures (decisively more generous than state law as it allows an allowance of up to 99% for next-of-kin beneficiaries, Groups I and II). The Constitutional Tribunal has quashed this and stated that these allowances also apply to non-residents in the Community of Valencia (STC 3337/2013, from the 18th of March 2015). The effects of this ruling are ‘pro futuro’; going forward. It doesn’t affect closed matters.

Without further ado the changes brought about by Law 26/2014 (third final disposition):

 

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.

Consequences of the Changes in Inheritance and Gift Tax Laws

When one of the parties is non-tax resident in Spain 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 above with generous allowances on inheritance and gift taxation. In other words, for clarity’s sake, a beneficiary stands to pay much less now under this new law as from the 1st of January 2015.

For those who are non-tax resident in the E.U. or E.E.A. there are no changes. State law still applies to them unabated.

Changes to Spain’s Inheritance and Gift Tax Law – Conclusion

This is a welcome respite and much-needed change. Kudos to European lawmakers. It made little to no sense to discriminate against fellow EU-members. The previous regulation clearly undermined the principles in which the European Union is firmly grounded upon. Member States must all row as one if the Union is to stand. Or we all become one thing or all the other; but not both. Spain can’t have it both ways.

A house divided against itself cannot stand” – Abraham Lincoln.

American 16th US President (1809 – 1865). He resolutely ensured a pro-union victory and brought about the emancipation of slaves.

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

 

Related articles

 

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. Voluntas omnia vincit.

2.015 © Raymundo Larraín Nesbitt. All rights reserved.

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