In Spain it is a standard practice to apply the law of a person’s nationality to any wills made with regard to their Spanish assets. However, this does not mean that inheritance tax is also determined in this way. Spanish inheritance tax must be paid in Spain if the estate of the deceased include any Spanish assets. It is therefore important to understand how these laws operate as they can have a serious economic impact on a family's wealth. This can be important where for example a beneficiary wishes to sell an asset. In order to do so, the beneficiary will need to demonstrate proof of payment of due taxes before being able to pass good title.
How Is Spanish Inheritance Tax Applied?
Inheritance tax is payable on all bequests of assets including:
- Property
- Vehicles
- Cash
- shares
- bonds
- any cash paid out by the maturity of a life insurance policy
The amount payable is the net amount after deductible costs and charges. Admissible costs and charges would include:
- Social Security Debts
- Tax Debts
- Outstanding Mortgage Debt
- Health Care Expenses
- Funeral Costs
Not included would be debts owed to any of the beneficiaries even though they chose to turn down the bequest.
Factors That Determine Spanish Inheritance Tax
The first major difference between Spanish inheritance tax and elsewhere is that in Spain the tax payable is determined with reference to the heir or beneficiary rather than merely considering the size of the estate itself. Whereas in the UK inheritance tax is only payable where the threshold (currently £325,000) is exceeded and there is no need to consider any other factor if the estate is valued below this, the same is not true in Spain. In Spain it is necessary to consider the following factors before the inheritance tax liability might be determined:
- Tax Exemptions
- Tax Rates
- The Wealth of the Beneficiary
- The proximity of the relation of the beneficiary to the deceased
- Funeral Costs
It should be pointed out that, at a state level, no exemption exists for spouses as is the case in other countries. A couple would often be considered to own half of a property each. Upon the death of one of the spouses the surviving spouse is considered to have inherited the other half (if this is provided for in the will).
Tax Exemptions At State Level
Inheritance tax has been effectively delegated by the central government to the autonomous communities in Spain which has allowed the regional governments to set the exemptions that can be claimed by beneficiaries. Previously, many of the Spanish regions enacted legislation which required residency in the region before beneficiaries might benefit from the exemptions. This situation has now changed, finally allowing foreign EU citizens to benefit from the same generous deductions previously only available to local residents. Visit the relevant section under Spanish Inheritance Tax by Region for an overview of the regional tax exemptions available . However, non-EU citizens must continue to avail of the less generous 'state level' tax deductions. Below is an overview:
Group Definitions
For the purposes of determining the proximity of a relationship to the deceased, the legislation dealing with Gift and Inheritance Tax in Spain (Ley 29/1987) considers there to be four categories or groups:
- Group I – Children, including adopted children, under the age of 21
- Group II – All other children, spouses and parents
- Group III – close relatives such as brothers and sisters, grandparents, aunts and uncles
- Group IV – more distant relatives
Example A 16 year old child who inherits from her parents falls into Group I and so may claim an exemption of €15,956.87 + (€3,990.72 * 5) = €19,953.60 to give a total exemption of €35,910.47.
Other Deductions
A number of other exemptions exist at the state level. These include:
Disabilities
In addition to the above exemptions, should any beneficiary be disabled, further exemptions ranging between €47,858.59 and €150,253.03 are available.
Life Insurance Policies
If the deceased took out a life insurance policy in favour of a beneficiary there is an exemption up to the value of €9,159.49 where the beneficiary is a spouse, child or parent.
The Family Home
An exemption also exists for tax payable on the permanent or habitual residence. This exemption applies equally to spouses, children and parents of the deceased at a rate of 95% of the value of their inherited portion of the property up to a maximum value of €122,606.47 each. An important proviso exists in that the property may not be sold for a period of 10 years after the inheritance. Other relatives further removed, may also benefit from this exemption but must have been living with the deceased in the property for a period of at least two years prior to the date of death.
Regional Deductions: Spanish Inheritance taxes by region
The Spanish regional governments' inheritance tax deductions tend to me more generous than the state level deductions. For example there are often almost 100% deductions available to spouses and children, relating to the primary family home and businesses. For an overview of the regional tax exemptions available view the relevant section under Spanish Inheritance Law by Region. After this Spanish Inheritance Tax overview it is obvious that planning a clever strategy about assets and estate inheritance is necessary for you and your family interests. Do not fall short on advise, do use the expertise of English speaking local Inheritance expert lawyers.
