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Spanish inheritance tax can swallow-up a huge percentage of any inheritance, and so it is worth planning ahead as carefully as possible to avoid the lion’s share of any legacy winding up in the Spanish government's coffers.
Of course, it may be that investments and purchases have already been made and therefore there remains little to be planned for.
In any case, we will look at all the options open to an individual who wishes to minimise the inheritance tax they must pay in Spain.
Ever since the Spanish government devolved responsibility for inheritance taxes to the regional governments, huge steps have been taken to reducing and in many cases eradicating the payment of inheritance taxes.
1. Deductions at state level
Even if unable to take advantage of the more generous deductions available at a regional level, there do exist certain exemptions based on the governing legislation at state level.
In addition to the personal exemptions up to a maximum of €47,858.59 for close family members, there are also exemptions for inheritance of the habitual family residence.
2. Inheriting the family home
This will specifically benefit those who have moved to Spain to live permanently and can therefore call their Spanish property their permanent residence or vivienda habitual – as per Article 20(c) Law 29/1987.
The concept of a vivienda habitual is as defined by the Law relating to income tax in Spain (Ley de Impuesto sobre la Renta de las Personas Físicas). Following this, anyone who spends more than 183 days a year in Spain is technically resident for tax purposes. It is also very important to obtain a certificate of Empadronamiento which means to register as being a local resident with the town hall.
It is a simple process and may be used as evidence of being a resident and using the home as your vivienda habitual. The amount of time that needs to have been spent by the deceased living in the property before it may be called a vivienda habitual is described in the income tax laws as three years, though it also states that death of the individual during that period is an exception so it can only be said for sure that the longer the period of time the better.
The exemption amounts to €122,606.47 per beneficiary and is restricted to spouses, children, and parents of the deceased and only to extended family members who have lived with the deceased for a minimum of two years prior to the date of death. This exemption has a ceiling of 95% of the value of the property.
One proviso is that the beneficiaries may not immediately sell the property and must maintain ownership for several years.
3. Tax residency in spain
Inheritance tax in Spain states that if you are resident in Spain for tax purposes (more than 183 days a year) then you are legally obliged to make a tax return once a year (even if it is a zero return).
Known as the 'Declaración de la renta', this also helps to prove residence and if the address used on the tax return is that of the property in question it goes towards evidence that it is your vivienda habitual.
Care should be taken here as if you are determined to be resident in Spain for tax purposes then in theory your worldwide wealth is taxable in Spain.
4. Debts, loans and charges
In order to reach the 'net' estate that is to be divided among beneficiaries, it is necessary to first deduct from the estate any existing debts or loans belonging to the deceased. There are limits, however, and typically a 'loan' or debt to any beneficiary is not deductible.
The only exception to this is where the deceased owed monies to the Spanish Social Security system and in this case any person, including a beneficiary, who pays off such debts, may be able to deduct them from the estate before it is distributed to other beneficiaries. In order for a debt to be deducted from the estate of the deceased it should be ratified by a public document, i.e. an informal debt will not constitute a deductible debt for the purposes of Article 13.
As a result, it is possible to reduce the value of a property by any mortgage that exists. This can radically reduce the value of any inheritance tax payable. Article 12 'charges' on properties may also be deducted, but these are unlikely to be present in most typical scenarios.
5. Other expenses
Medical expenses incurred as a result of the final illness and those expenses relating to the funeral of the deceased may be deducted from the estate before considering inheritance taxes.
Where the body of the deceased is returned to another country for burial, these can be substantial. In any case, all funeral and health care receipts must be retained. The expenses relating to the management of the inheritance such as legal and notary fees are not generally deductible unless they relate to litigation on behalf of the beneficiaries as a group.
6. Regional deductions
As previously stated, regional governments have greatly reduced or eradicated inheritance taxes for close family members, up to varying maximum amounts. The scope of the exemptions is determined by the region in which you are resident.
This can be a disputed matter, and legislation exists to determine which region's laws are to be applied where there is a conflict. In many cases, the location of a property determines the regional law to be applied where it is the subject of an inheritance.
A thorough examination of the deductions and exemptions available at the regional level is available in: Spanish Inheritance Law By Region
7. Other considerations
Care should be taken by any couples that are not married. This could mean that the surviving partner may fail to benefit from tax advantages ordinarily available only to spouses.
This can be rectified in a number of regions by registering as a 'pareja de hecho' in the relevant local registry, and which henceforth permits the partner to benefit from typical spousal tax advantages. They will of course be subject to all the standard legal exclusions that a spouse would typically face, such as residency etc.
8. Estate planning
The term relates to organising an individual's assets in such a way that their distribution can be carried out in the most financially advantageous manner possible. Of course, it depends upon a number of factors:
- The make-up of the estate – is it made up of property, businesses, chattels or most likely a mixture of all three
- The way the estate is to be distributed
- To whom the owner wishes to distribute the assets.
It is impossible of course to cover the whole array of possibilities that exist, and so this can only be managed on an individual basis with an expert in the field. It is however worthwhile making general suggestions regarding methods that can be used to minimise taxation liability.
The most important considerations to make and the greatest financial benefits that may be obtained when carrying out Estate Planning relate to the most important asset held by most people – property.
Life Interest or 'Usufruct'
Rather than leaving their half of a property to the surviving spouse or registered civil partner, an individual may bequeath a life interest only.
It is taxed at 70% of the value less 1% per year that the beneficiary is over the age of 20 - e.g. if the surviving spouse or civil partner is 60 years old – the life interest is valued at 70% – 40% (60 - 20 = 40) = 30% of the half of the property owned by the deceased which is a 70% reduction in the taxable base. In fact, where there are children, then it may be interesting to convert from outright ownership to life interest only.
In this way ownership would be in the names of the children from the outset and any inheritance tax would be negligible as upon death the life interest would be extinguished. The owners (in this case the children) would be prohibited from dealing with the property without the express consent of the life interest holders.
9. Buying property with a mortgage
By purchasing with a mortgage (the maximum is normally 70% in Spain) then a deduction may be made of any outstanding mortgage before inheritance tax is considered. While more difficult to obtain later in life, this is something that may be done at any time to reduce the inheritance tax, as it reduces the absolute value of the assets being inherited.
10. Setting-up a company
A possible solution to avoid a hefty inheritance tax bill would be to place the property in the ownership of a UK limited company, which would see the shares in the company pass as per inheritance rules or any valid will without being affected by Spanish inheritance tax.
Negative aspects to this option would include the hefty set-up costs as well as annual costs involved in carrying-out the mandatory statutory annual reporting related to running a company. Also, there might be issues if trying to sell the property in the future while still under company ownership.
On the positive side, if you are facing a situation where you are unable to take advantage of the other tax reducing methods already mentioned, this option can be carried-out almost at any time up until the inheritance becomes operative and avoid paying up to 40% of the value of your assets in Spain.
Also, it is possible to mitigate the problem regarding future resale of the property by returning the property to private ownership and then selling-on.