Spanish succession tax update

Many readers own property in Spain representing a significant part of their life’s worth. Have you considered how much this will be taxed when you pass away? Spanish succession tax (SST) can be as high as 34%, and in some extreme cases it can be almost 82%! If you thought inheritance tax in the UK at 40% was bad enough, SST can be staggering too.

By Blevins Franks International

The tax will be paid by your beneficiaries, such as your spouse, children or grandchildren. The rules vary from Region to Region, although the less generous State rules will often apply by default, and a typical exemption on an inheritance might only be about Є16,000 (say £10,800) per beneficiary, with any amount above this liable to SST. This figure is much lower than the UK tax-free allowance of currently £300,000. The low tax-free amount means that virtually everyone who inherits in Spain is liable to SST under the State rules.

It is complex. SST is payable when the inheritor or recipient is resident in Spain, or the assets gifted or inherited, are Spanish. This means that if your beneficiaries live in Spain they will usually be liable to SST. If they live elsewhere, they will be liable if the asset being passed on is Spanish.

Unlike in the UK where IHT is paid by the deceased’s estate before it is distributed, in Spain each beneficiary pays SST on the value they have individually inherited or been gifted.

There are deductions available according to the closeness in relationship, and other exemptions and tax rates that vary according to the wealth of the donor and/or the recipient, and the Regional rules of the various 17 Autonomous Communities (AC) in Spain. If you have been habitually resident in an AC for at least three years the relevant Regional rules will apply. They might also apply to gifts in other circumstances. If the AC cannot be determined then the State rules will come into force.

In the Region comprising Alicante, Valencia and Castellon and in the Balearics there is virtually no tax between spouses or children as long as the heirs ordinarily live in the same Region at the date of death. If you live in one of these Regions but your beneficiaries live outside it, when you die, then they will be liable to SST unless you take appropriate measures to avoid this.

There can be a reduction in the value of the house in these and the other Regions (such as Andalucia, Cataluña and Islas Canarias) up to a certain amount. This is applicable provided that: a) the inheritor is a spouse, ascendant or descendant (or failing that, a relative over the age of 65 who lived with the deceased during the two years prior to his death) and b) the property is retained by the beneficiary for 10 years following the death, but does not need to be the main home of the beneficiary.  If the beneficiary dies within 10 years, the succession tax is not clawed back. The maximum deduction available is €122,606 (approximately £83,281) inheritance per beneficiary.

In some Regions the relief is slightly higher if it was also the main home of the beneficiary.

The complexities of the SST rules and the various calculations that have to be made can be a real headache and at the end of the day most beneficiaries will have to pay some, if not a lot, of SST. How can you avoid this?

If your beneficiaries are not resident in Spain, or they are, but there are not enough reliefs in your Region, a considerable amount of SST can be saved with the right sort of scheme such as a Lifetime Loan, whereby equity is released from your property, reducing its taxable value. You could choose to invest the proceeds for income, in which case the investments would need to be placed in a suitable offshore discretionary trust. Thousands of Euros in SST can be avoided in this way.

Is it worth borrowing to save tax?

It partly depends on your age and life expectancy, the value of your estate and any available tax allowances. The older and wealthier you are, the more it will make sense.  If you have a short life expectancy due to a medical condition, then borrowing and investing offshore to save SST may be a very sensible thing to do.

You could take out a Lifetime Loan and invest ‘onshore’ to generate income, but in this case the money would remain liable to SST (and other taxes). On the other hand, transferring your capital into suitable structures offshore can give you outstanding SST savings.  Any investment returns could improve your retirement and/or benefit your estate in the future as you wished.

To find out if it is worth borrowing in your particular circumstances, specialist advice should be sought and a personalised illustration obtained. The loan may not be suitable for you if your estate does not have much exposure to SST. You should never borrow solely to create investment income and returns.

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