Spanish Inheritance Tax and Habitual Residence

By John Hayward
This article is published on: 3rd October 2013

The Valencian Community, amongst other autonomous regions in Spain, allows huge reductions on inheritance tax. Conversely, Spanish Inheritance Tax (aka Succession Tax – ISD) can be a nightmare if you don´t qualify for these reductions. To qualify, the deceased AND the beneficiary need to be habitually resident in the Valencian Community. Habitually resident is defined as spending the majority of the 5 years prior to death in the Valencian Community.

In the UK, inheritance tax is chargeable on the deceased’s estate when it is worth more than £325,000 (£650,000 if unused allowances are included). In Spain, it is the beneficiary who is taxed. The rate of tax will be determined by the relationship, where the parties are resident, and what existing wealth the beneficiary has.

The ISD is a little more complicated. Up until 7^th August 2013, residents of the Valencian Community benefited from a 99% reduction on the tax bill. Therefore, very little was due. Now spouses, descendants and ascendants will have their personal allowances, on receipt of benefits, increased from €40,000 to €100,000. However, the reduction is being lowered to 75%.

Example. Property owned in joint names and deemed to be owned 50/50. Spouse dies leaving their 50% to the surviving spouse. There is no inter-spouse exemption in Spain. Property valued at €400,000. €200,000 (50%) inherited. Under the old system, the tax bill would have been based on €200,000 less €40,000 allowance. This would result in a tax bill of €23,141 which would then be reduced by 99%, leaving a tax bill of €231. Now you need to deduct the allowance of €100,000 which leaves a tax bill of €12,415. Reduce this by 75% and the debt will be €3,103. Under ISD rules, this needs to be paid within 6 months of the death.

As mentioned, these allowances and reductions are only applicable to habitual tax residents and those who are in Group 1 or 2. Those who do not qualify, such as some unmarried couples, or those who are non-resident, would expect an allowance of around €16,000 (€15,956.87 to be precise) with no further reductions. There are a number of other factors but these are the basics.

Tax is payable on gifts as well as inheritances and the rules are very similar to inheritance tax albeit with some restrictions on how much can be gifted to benefit from the reductions.

To see how much tax you could potentially pay, or leave for someone, please go to the Spanish Inheritance Tax Rates.

If you would like to see the Valencia Government’s publication on this, please visit their website.

Property and inheritance tax increases in the Valencian Community

By John Hayward
This article is published on: 11th August 2013

As of 7^th August 2013, the Valencian government has increased Stamp Duty (ITP – Impuesto de transmisiones patrimoniales) and Inheritance Tax (ISD – Impuesto sobre sucesiones y donaciones). The ITP is more obvious an increase as it will increase from 8% to 10%.

The ISD is a little more complicated. Up until this point, residents of the Valencian Community benefited from a 99% reduction on whatever the tax bill was. Therefore, very little was due. Now spouses, descendants and ascendants will have their personal allowances on receipt of benefits increased from €40,000 to €100,000. However, the reduction is being lowered to 75%.

Example. Property owned in joint names and deemed to be owned 50/50. Spouse dies leaving 50% to the surviving spouse. There is no inter-spouse exemption in Spain. Property valued at €400,000. €200,000 (50%) inherited. Deduct allowance of €100,000 which, based on current rates, leaves a tax bill of €12,415. Reduce this by 75% and the tax due will be €3,103*. This needs to be paid within 6 months of the death. Under the old system, the tax bill would have been based on €200,000 less €40,000 allowance. This would result in a tax bill of €23,141 which, although higher than the figure above, would then be reduced by 99%, leaving a tax bill of €231*. (* Subject to personal circumstances and specific assets)

As one can see, many tax residents on the Costa Blanca can look forward to sizeable tax increases. A concern is that bank accounts can be frozen on death which could mean the money to pay this tax might not be available within the 6 months stipulated. Simply becoming non-resident, which has been seen as a solution to the recent asset declaration ‘problem’, wouldn’t work here as the inheritance tax due for non-residents is even worse.

A solution could be to have money in a low risk insurance bond, recognised by Spain for tax purposes but not based in Spain and, importantly, not frozen on the death of a policyholder. Apart from being far more tax efficient than a bank account, it could provide the money at a time when there is plenty of other expense, as well as at a time when there is the human aspect of grief.

(Detailed Valencian and Castilian versions of the law can be found on the Valencian government’s website. Click here to view them.)

Insight into tax efficient savings in Spain

By Spectrum IFA
This article is published on: 21st June 2013

It is that time of year again when attention turns to tax in Spain. The time of year when we add our worldwide

This year it is particularly important. Firstly, the Renta Declaration has to correspond with our Form 720 (Modelo 720). Secondly, the G8 are addressing the issue of tax which includes implementing more automatic exchange of information between countries.income to the “declaración de la renta”.

Despite this “crackdown”, in many countries there are tax efficient ways of saving. In the UK this includes ISAs and in France the Assurance Vie (Life Assurance) as examples. Tax efficient Saving in Spain is also available in a simple and effective manner using a unit linked insurance. With tax only paid on withdrawals, the fact your investment grows free of tax can make a big difference.

The rate of return of 6.9% is used as an example only and has been used as it is the average return on a diversified portfolio in the last 10 years.^*

Tax is payable in the following manner

100,000€ invested

grows to

150,000€

which is 100,000€ capital and 50,000€ gain

On a withdrawal of, say, 30,000€

 Treated as 20,000€ Capital and 10,000€ gain (ie in same proportions as above).

 10,000€ taxed at 21%

equals 2,100€

2,100€ on a withdrawal of 30,000€ is an effective tax rate of 7%