If you are a resident of Spain it is important to understand that there will be liabilities due to the Spanish government in the event of a death. Whether it’s you that is inheriting part of an estate or it’s your estate being distributed the taxman is going to want his share.
Many British nationals don’t realise that depending on the asset and its location there may also be a claim from the UK taxman. Just because you are a non UK resident it does not eliminate the requirement to settle taxes in both the UK and Spain. Spanish succession tax will be due either when the assets being inherited are located in Spain, such as a property, even if the recipient of the asset lives outside of Spain OR if the assets are based outside of Spain but the recipient lives in Spain.
For example: if you leave your Spanish property to your children who are now UK residents they will be liable to pay succession tax to the Spanish government. On the flip side if you receive an inheritance from the UK and you are a Spanish resident then again you have to pay tax in Spain.
As mentioned above, if you are a British national and are resident in Spain you could be liable to UK inheritance tax as well as Spanish succession tax. In the UK they require all worldwide assets to be declared, as you will be considered “UK domiciled” by the government. It is almost impossible to be considered as anything other than UK domiciled, even if you haven’t lived in the UK for some time.
There is no double tax treaty signed between the UK and Spain when it comes to inheritance, however if tax has been paid in the UK the amount is usually deductible against the Spanish liability.
To complicate matters further, Spain have a standard set of “State Rules” which lay down the rates and allowances for succession tax as well as individual “Autonomous rules” which means things are different from one community to another. Detailed below are these state rules:
The tax rates differ depending on the value of the amount inherited. These range from 7.65% on the first €7,933, up to 34% on €797,555 and over.
Beneficiaries are graded into four different groups and the more remote the beneficiary’s relationship is to the deceased the lower the tax allowance and the higher the tax rates. These four groups are:
- Natural and adopted children under 21
- Natural and adopted children aged 21 and over, grandchildren, parents, grandparents, spouses
- in-laws and their ascendants/descendants, stepchildren, cousins, nieces, nephews, uncles, aunts
- all others including unmarried partners
Allowances are available between husband and wife or direct line ascendants/descendants, but this is set at just short of €16.000. If an inheritor is also a direct line descendant under the age of 21, there is an additional allowance of €3,990 for each year they are under 21. The total of this additional allowance is restricted to €47,858 per child or grandchild.
For more distant relatives (e.g. cousins) the exemption is set at €7,933. There is no exemption for beneficiaries who are not related.
A main home in Spain may be virtually exempt from Spanish succession tax provided the beneficiaries are either your spouse, parents or children and they continue to own the property for ten years from the date of death.
The exemption can also apply where the beneficiary is a more distant relative over the age of 65 and they have lived with you for at least two years before death. If these conditions are met, the value of the house can be reduced by 95% in calculating the tax base liable, subject to a maximum reduction in value per inheritor of €122,606. It is important to note that this is only applies principal private residence and is owned by a Spanish resident.
Some examples of where the Autonomous rules differ from the state rules:
In Valenciana, spouses and children receive an allowance of €100,000 each. They can also benefit from a 75% reduction in the amount of succession tax payable.
In Murcia, the taxable inheritance for children under 21 is reduced by 99%, while older children and spouses get a 50% reduction.
In Andalucía, spouses and children can benefit from a 100% exemption for inheritances up to €175,000, provided they are not worth more than €402,268.
Cataluña offers a 99% allowance for spouses. Other Group I and II relatives receive a relief depending on the amount of their inheritance. Personal reductions are €100,000 for spouses and children (more for those under 21), €50,000 for other descendants, €30,000 for ascendants and €8,000 for other relatives. The 95% main home relief is up to a property value of €500,000, with the amount pro-rated among the beneficiaries (minimum €180,000 limit each). The property need only be kept five years rather than the 10 year state rule.
To summarise the key points of succession tax:
- Tax is paid by each recipient, rather than by the estate
- Spouses are not exempt
- Allowances under the state rules are very low – just €15,957 for spouses, descendants over 21 and ascendants, €7,993 for other close relatives and nil for everyone else
- Under state rules, tax is applied at progressive rates from 7.65% (for assets under €7,993) to 34% (for assets over €797,555). However, multipliers depending on the relationship between the two can increase this rate
- If you leave assets to your spouse, who then passes them on to your children when he/she dies, succession tax will be due again on the second death
- Succession tax also applies to pension funds
- Tax is paid at the time of the inheritance, even if the funds are not accessed at the time. There is a six-month period to pay the tax after the death, although it is possible to apply for an extension in certain cases
- Succession tax is governed by both state and local autonomous community rules; each community has the right to amend the state rules
- Whether the state or the local autonomous community rules apply for each case, depends on where the beneficiary and the donor are resident and where the assets inherited/gifted are located
- If you are UK domiciled you need to consider both the UK inheritance tax rules as well as the Spanish succession tax rules
Whilst the Spectrum IFA Group are not tax advisers, we can help to put you in touch with the right people. It is important to understand the various succession tax rules and how they apply to your situation, as well as how they affect any UK liability. You need specialist advice to understand the intricacies of the two tax regimes, and how to lower both tax liabilities and potentially save your heirs a considerable amount of tax. You can often combine your estate planning with your personal tax planning.
*Sources: Advoco, LegalforSpain, Globalpropertyguide, GovUK, AILO