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 7th 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.