It is important for anyone who owns property in Spain, or other Spanish assets, to familiarise themselves with Spanish succession tax on inheritances. It is different from UK inheritance tax and has a real top rate of nearly 82%! It is payable if the beneficiary resides in Spain or the asset being passed on is in Spain.
Inheritance tax in Spain
The most significant difference between UK inheritance tax and Spanish succession tax is that, unlike in the UK, in Spain there is no exemption between husband and wife. So, if you live in Spain with your spouse, on the first death the survivor can be liable for Spanish succession tax on worldwide assets.
In some of the seventeen Autonomous Regions in Spain there is a trend towards increasing the relief or abolishing succession tax between spouses and direct line relatives. The rules vary from region to region and will depend on certain conditions being met. Where the regional rules are not yet set or not met, the state rules will apply. The state rules also apply where the deceased is not resident in Spain – in other words, if you own property in Spain but do not live there, your heirs will be faced with the state rules regardless of what the rates and rules may be in the area your property is located.
There has been quite a bit of hype about the proposed changes to this tax but in fact it still has a long way to go and often amounts to less than expected. So far, only Andalucia and Murcia have introduced significant new reliefs and even then many people will not benefit because they do not meet all the requirements or because their taxable assets amount to more than the ceilings.
You therefore need to be familiar with the rules in the area where you are thinking of buying or have already bought. If there has been talk of new rules in the area but nothing concrete has happened yet, it may be wise not to assume too much, and to stick to estate planning with the existing rules in mind.
The state rules
The tax rates differ depending on the value of the amount inherited. These range from 7.65% on the first €7,933, up to 34% on €797,555 and over. Beneficiaries are graded into four different groups and the more remote the beneficiary’s relationship is to the deceased the lower the tax allowance and the higher the tax rates.
The four groups are:
Group 1 – natural and adopted children under 21
Group 2 – natural and adopted children aged 21 and over; grandchildren; parents; grandparents; spouses; unmarried partners registered as a pareja de hecho (registered couple) in Andalucía or Cataluña
Group 3 – in-laws and their ascendants/descendants; stepchildren; cousins; nieces/nephews; uncles/aunts
Group 4 – all others including unmarried partners unless registered under pareja de hecho
There is an allowance available between husband and wife, or direct line descendants and ascendants, which is a little under €16,000 – very low if you own Spanish property!
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.
For more distant relatives (e.g. those in Group 3) the exemption is €7,933. There is no exemption for beneficiaries who are not related, including unmarried couples unless they can be registered.
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. 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% in 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.
As mentioned there can be variations from the State rules in the different Regions.
UK inheritance tax
Even if you move to live in Spain you are still likely to be ‘UK domiciled’ and therefore liable to UK inheritance tax on your worldwide assets. Domicile is a longer term concept than residency and more akin to a person ‘belonging’ to a country. It is largely dependent on your father’s country of origin, but can be varied through life. To prove that you are not UK domiciled you need to have cut all ties with the UK and firmly put down roots in your new country of abode.
For anyone living in Spain who is UK domiciled, there is an inheritance tax liability in both countries. However, any tax paid in Spain can be offset against tax due in the UK and vice versa. If inheritance tax is paid in the UK and is higher than the Spanish succession tax liability, you will not receive a refund of the difference.
Spanish succession tax can be reduced if a ‘usufruct’ is created whereby a surviving spouse is left a ‘life interest’ in the property rather than the deceased’s half of the property outright.
To mitigate your succession tax further you might set up an offshore discretionary trust which can in the right circumstances protect your assets from inheritance tax both in Spain and the UK. Once you have lived in Spain for three years with the intention of staying there indefinitely and to shed your UK domicile status, a ‘Golden Trust’ can be set up where assets are outside of the estate for both Spanish and UK inheritance tax purposes, whilst you continue to benefit within your lifetime and your spouse’s. If eventually either of you return to the UK to live, the assets remain outside your estate indefinitely for the benefit of all your beneficiaries.
Inheritance tax can be a crushing tax wherever you live. It can have devastating effects on inheritors already in grief. To avoid your beneficiaries from having to suffer the consequences of bad planning or no planning at all, if and when you move to Spain, or you own property in Spain, forward planning is the answer.
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