Effect of Brexit on Spanish IHT for UK residents

This topic contains 15 replies, has 10 voices, and was last updated by Profile photo of Mark Roach - Spanish Tax Consultant & UK Limited Company Director Mark Roach – Spanish Tax Consultant & UK Limited Company Director 1 month, 2 weeks ago.

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  • #196727
    Profile photo of RayLewis
    RayLewis
    Participant

    My mother (86 years old, and becoming infirm) owns a property in the Balearics, with an “official” value of around €540k. She is resident in the UK – and is no longer fit enough to travel to Spain herself – so has granted me a Poder so that I can look after her interests in Spain on her behalf.

    I am an only child, and named as the sole beneficiary in her Spanish will.

    I understand that on my mother’s death, in addition to her estate’s liability for UK IHT, I will become liable for Spanish IHT. I also understand that in the Balearics, direct inheritors such as myself who are also EU residents are entitled to a large reduction in IHT.

    Clearly as a UK resident, I am an EU resident for now. However, after Brexit it seems that I will lose that status, and therefore be liable for the full amount of IHT on my mothers’ death. I am given to understand this will amount to around €120k.

    I have looked at obtaining Spanish residency, but that requires spending 183 days per annum in Spain for 5 years, and that is currently impractical for me. I have an entitlement to Italian Citizenship, for which I have applied – however that would not confer Italian residency without me living in Italy for at least 183 days per annum.

    I have discovered that Malta offers “Maltese Ordinary Residency” after just 3 months to any EU Citizen who maintains an address in Malta – without there being any minimum amount of time residing in Malta.

    I am therefore investigating this further. However two questions arise:  (a) If Brexit follows in the hard way it looks to, would I actually have the problem I foresee? and (b) Would this class of Maltese Residency count as EU-residency for Spanish IHT ?

    I look forward to a response

  • #196896
    Profile photo of Mark Stücklin
    Mark Stücklin
    Keymaster

    Ray, have you read these guides? They might help you understand the issue better, though nobody yet knows what Brexit will bring. I doubt anyone here can answer your question about Maltese Residency.

    Spanish Inheritance Tax for Non-Residents (Part I)
    Spanish Inheritance Tax for Non-Residents (Part II)

     

  • #196925
    Profile photo of Eghamhigh
    Eghamhigh
    Participant

    Why don’t you sell your mother’s property and just pay capital gains?

  • #196926
    Profile photo of RayLewis
    RayLewis
    Participant

    Thanks Mark for pointing these out to me, I had looked at both of these documents, although I had not read them in detail. I received detailed advice on the IHT situation for this property from a Spanish solicitor working in the UK about 12 months ago. I will look at these articles in detail, although at first sight it appears there may be discrepancies from the advice I was given – however I may be wrong.

    I understand that advice about Maltese residency would be unavailable here – but that was not what I was asking. I was asking about if (or more precisely: how I could find out if) the Spanish authorities would recognise this as EU residency. The Maltese advice I am getting cannot predict how this would be treated in Spain!

    Eghamhigh – Yes we had looked at selling it and paying the CGT. However there are three issues here:

    (a) the CGT would still be substantial, as the capital gain since the property was acquired in 1983 has been calculated as €490k.

    (b) there is an issue with the location of the garage within the plot, which has come to light in the last few months. This prevents a Cédula de Habitabilidad from being issued, and would therefore mean that we would find it extremely difficult to sell – or at least sell at a value close to it’s “official” value. We are currently looking at having the garage demolished and rebuilt in the correct location in order to get this resolved.

    (c) My wife, being an Italian citizen, and not being able to prove any right to UK residency may well have to leave the UK after Brexit. If this happens, then access to a property in Spain could be very helpful for us.

     

  • #197103
    Profile photo of Larquia
    Larquia
    Participant

    Spain has a program called the Golden Visa. If you own a property worth more than €500K you can get residence in a few months. May be worth it to investigate this route. Your mother can sell the property to you.

    • #197113
      Profile photo of RayLewis
      RayLewis
      Participant

      Thanks for this Larquia,

      We did look at the possibility of me buying the property from my Mum – but the tax payable made that unworkable: my solicitor worked out that at the point of sale, my Mum would have to pay tax on a capital gain of €490k – and I would have to pay the property transfer tax in addition. The total tax bill for this would be around €160k, if I recall correctly.

      We also looked at my Mum gifting the property to me – but that would would add in the complication of a gift tax, which would bring the total tax bill up to €200k!

      If I inherit before Brexit, my Spanish IHT would probably be around €7k – if I inherit after Brexit, under current rules, it would be around €125 – unless I can get residency in an EU country before I inherit.

  • #197455
    Profile photo of jp1
    jp1
    Participant

    If I were you I really would sell the property now and allow your mother to distribute the cash how she see fits. It is the simplest option and doesn’t require a whole host of para legals that will skim off their slice.

    Market the property at a price that will sell including the planning issue that it currently has.

    In so many cases, with family and friends I see a free asset (and that is what it is to you) being attempted to be disposed of at the highest price with all the additional complications that come with it. In so many cases it never gets disposed and external factors then mean that the beneficiary only get a fraction of what could have been obtained.

    Surely your Mother would want the satisfaction of seeing this asset being realised and her only child using the money to live life, before it is to late.

  • #197458
    Profile photo of RayLewis
    RayLewis
    Participant

    Many thanks, JPT for your suggestion.

    We have indeed looked at disposal now as an option. Here is how the numbers stack up:

    1. Catastral value €540k
    2. Current actual market value (estimated): €400k
    3. Cost to resolve planning issue (estimated): €30k
    4. Acquisition cost in 1983 (purchase of land, plus building costs): €50k

    The current market value estimate was based on a quick sale, but before the planning issue came to light. So this would probably have to be reduced to €370k to take that into account.

    Spanish CGT would be calculated as 35% of the €490k gain – which will come to over €170,000. At least this is likely to eclipse any CGT payable in the UK.

    So disposal would mean my Mother taking just €200k for the asset, which if she then gave to me, would be further taxed as a life-time gift in the UK should she die before she reaches 93 years of age.

    The other aspect is that by disposing of the asset, I am losing the ability to take an income for it before I retire, and losing that as a retirement option for myself.

    On the other hand, if I inherit the property as a resident of an EU country, then I will have only a few thousand Euro of IHT to pay in Spain, and I get to keep the asset, which I can then continue to benefit from.

    This is why I am looking at ways in which I can maintain my EU residency after Brexit. Even if this is impossible, the IHT bill as heavy as it is, will be about €50k less than the CGT bill my Mum would have to pay on a sale.

  • #198445
    Profile photo of freddo
    freddo
    Participant

    Why not transfer the property into a Company and have the shares transferred to you

  • #198446
    Profile photo of RayLewis
    RayLewis
    Participant

    Would such a transfer not be subject to Spanish CGT and property transfer tax?

    Ray

  • #198868
    Profile photo of mariadecastro
    mariadecastro
    Participant

    Recent European Court Decission made a good advance on equaling all EU residents in Spain regarding Inheritance Tax as they were being taxed under National rules and therefore not being bebefitted from regional reductions on taxable amounts.

    After Brexit, UK nationals will lose this benefit

  • #198891
    Profile photo of Chris Nation
    Chris Nation
    Participant

    My understanding is that those over 65/pensioners are exempt from CGT on sale of home, presumably if registered as a resident.

     

    The EU ruling on equality of treatment of non-Spanish EU citizens would apply to this, I guess.

    Any of this correct?

  • #198892
    Profile photo of Chris Nation
    Chris Nation
    Participant

    I think that any questions that include the words “after Brexit” are pretty much not worth asking.

  • #200132

    Hello Ray,

    I have been following the series of Posts on this Form for your comments. I own a UK & Spain Tax Consultancy since 1994 understanding both Countries so I will qualify some details written so you have 100% correct information.

    As your Mother is a Tax Resident of the UK and owns the Spain property then when she passes away you will only have 6 months to Probate in Spain and pay the Spanish Inheritance Taxes. Her Spanish Will is registered in Madrid and you will be unable to sell the Spanish property to pay the Spain Inheritance Tax as Spain demand the Inheritance Tax paid before it will be registered in your name on her passing.

    When you pay the Spanish Inheritance Tax as a non Resident of Spain you can elect at which rate to pay the Spanish Inheritance Tax. You can pay as the non Resident Madrid central rate where Children only receive €15,957 allowance, or you can elect to use the allowance of the Region of the Balearic Islands. So you can pay at the lesser out of the 2 Tax calculations.

    If your Italian Wife is the next Beneficiary after your passing on this asset then whether she is UK, Italian or Maltese then Spanish Inheritance Tax to her on second passing is the same as above.

    If your Mother was to Gift the Spain property to you then Gift Tax and Spanish Inheritance Tax is now the same. The Spain Tax Office implemented this many years ago so Beneficiaries could not get around the Spain Inheritance Tax.

    Please note if your Mother was to sell or dispose of the Spain property with a profit then Spain CGT to a non Resident is not 35%, but if calculated correctly only 19% CGT for a non Resident of Spain.

    Freddo suggests a good idea , why not transfer the property into a Company and have the shares transferred to you.

    If you were to invest the Spain property into a UK Limited Company then there would be no 10% Property Transfer Tax. Also no Spain CGT as it will be placed into the UK Company at the value it is in the property deeds and not the €540,000 you think it is work today.

    Once it is placed into the UK Company using the correct Spain legislation then the UK Company can be passed onto you whilst your Mother is still alive with no Tax implication in Spain.

    I hope this helps?

    • #200739
      Profile photo of colin byrne
      colin byrne
      Participant

      Hi Mark,

      I am uk resident with a property in Spain. I was interested to read your reply regarding IHT after Brexit.

      I would like to look into transferring . my property to a company, to reduce tax liabilities on my beneficials.

      Could I have your contact details please.

       

      Regards

       

      Colin Byrne

       

    • #200816

      Hello Colin,

      Thank you for your request and I have just sent you a Private Message with my contact details you requested yesterday.

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