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How to reduce inheritance tax in Spain


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How to reduce inheritance tax in Spain

  1. 1. What you need to know about Inheritance In SpainHow to Reduce Inheritance Tax
  2. 2. Legal Note - It should be remembered that the application of Spanish law varies considerably according to region and the circumstancesof each individual and so this report can be treated as a general guide only and not as a substitute for qualified legal advice regardingany particular situation. Responsibility for acting on foot of this guide alone is entirely personal and no liability can be accepted bymyAdvocate Spain. To get advice on your specific situation from expert legal practitioners in Spain please see the end of the guide. How to reduce Inheritance Taxes in SpainInheritance taxes in Spain can swallow-up a potentially huge percentage of any inheritance and so it isworth planning ahead as carefully as possible to avoid the lions share of any legacy winding up in theSpanish governments coffers.Of course it may be that the stage has already been reached where investments and purchases havealready been made and there remains little to be planned for. In any case we will look at all of theoptions 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 regionalgovernments, huge steps have been taken to reducing and in many cases eradicating the payment ofinheritance taxes. However, the exemptions granted apply only to those who are resident in the region –often requiring residency for a majority of a period of five years. If residency in any specific region isnot established then the State rules apply. Deductions at State LevelEven if unable to take advantage of the more generous deductions available at a regional level there doexist certain exemptions based on the governing legislation at state level. In addition to the personalexemptions up to a maximum of €47,858.59 for close family members there are also exemptions forinheritance of the habitual family residence. Inheriting the Family HomeThis will specifically benefit those who have moved to Spain to live permanently and can therefore calltheir Spanish property their permanent residence or vivienda habitual – as per Article 20(c) Law29/1987. The concept vivienda habitual is as defined by the Law relating to income tax in Spain (Leyde Impuesto sobre la Renta de las Personas Fisicas). Following this, anyone who spends more than 183 1
  3. 3. 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 alocal resident with the town hall. It is a simple process and may be used as evidence of being a residentand using the home as your vivienda habitual. The amount of time that needs to have been spent bythe deceased living in the property before it may be called a vivienda habitual is described in theincome tax laws as three years though it also states that death of the individual during that period is anexception so it can only be said for sure that the longer the period of time the better.If you are resident in Spain for tax purposes (more than 183 days a year) then you are legally obliged tomake tax return once a year (even if it be a zero return). Known as the Declaración de la renta, thisalso helps to prove residence and if the address used on the tax return is that of the property in questionit 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 intheory your worldwide wealth is taxable in Spain.The exemption amounts to €122,606.47 per beneficiary and is restricted to spouses, children, parents ofthe deceased and only to extended family members who have lived with the deceased for a minimum oftwo 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 maintainownership for several years. Debts, Loans & ChargesIn order to reach the net estate that is to be divided among beneficiaries, it is necessary to first deductfrom the estate any existing debts or loans belonging to the deceased. There are limits however andtypically 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 systemand in this case any person, including a beneficiary, who pays off such debts may be able to deductthem 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 publicdocument 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 canradically reduce the value of any inheritance tax payable. 2
  4. 4. Article 12 charges on properties may also be deducted but these are unlikely to be present in mosttypical scenarios. Other ExpensesAll personal expenses incurred with relation to to the final illness and funeral of the deceased may bededucted from the estate before considering inheritance taxes. Where the body of the deceased isreturned to another country for burial these can be substantial. In any case, all funeral and health carereceipts must be retained.The expenses relating to the management of the inheritance such as legal and notary fees are notgenerally deductible unless they relate to litigation on behalf of the beneficiaries as a group. Regional DeductionsAs previously stated, regional governments have greatly reduced or eradicated inheritance taxes forclose family members up to varying maximum amounts. The extent of the exemptions are determinedby the region in which you are resident. This can be a disputed matter and legislation exists todetermine which regions laws are to be applied where there is a conflict. In many cases, the location ofa property determines the regional law to be applied where it is the subject of an inheritance.Examples of the exemptions and reductions available at a regional level can be seen in the reportInheritance Tax in Spain. Other ConsiderationsCare should be taken where a couple are unmarried. This could mean that the surviving partner mayfail to benefit from tax advantages ordinarily available only to spouses. This can be rectified in anumber of regions by registering as a pareja de hecho in the relevant local registry and whichhenceforth permits the partner to benefit from typical spousal tax advantages. They will of course besubject to all of the standard legal exclusions that a spouse would typically face such as residency etc. 3
  5. 5. Estate PlanningThe term relates to organising an estate in such a way that its distribution can be carried out in the mostfinancially 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 bemanaged on an individual basis with an expert in the field. It is however worthwhile making generalsuggestions regarding methods that can be used to minimise taxation liability.Life Interest or UsufructRather than leaving their half of a property to the surviving spouse or registered civil partner, anindividual may bequest a life interest only. It is taxed at 70% of the value less 1% per year that thebeneficiary is over the age of 20 e.g. if the surviving spouse or civil partner is 60 years old – the lifeinterest is valued at 70 – (60 - 20 = 40) = 30% of the half of the property owned by the deceased whichis a 70% reduction in the taxable base.In fact, where there are children, then it may be interesting to convert from outright ownership to lifeinterest only. In this way ownership would be in the names of the children from the outset and anyinheritance 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 expressconsent of the life interest holders.Buying Property with a mortgageBy purchasing with a mortgage (the maximum is normally 70% in Spain) then a deduction may bemade of any outstanding mortgage before inheritance tax is considered. While more difficult to obtainlater in life this is something that may be done at any time to reduce the inheritance tax as it reduces theabsolute value of the assets being inherited.Setting-up a CompanyThis is a method that found favour at one time but isnt really to be recommended. The tax benefits aredisputable as the company could be considered to be a vehicle for evasion of taxes. Also, there are 4
  6. 6. yearly running costs that over the years would mount up and when considered against any purportedtax savings would probably be negligible. Furthermore, when seeking to sell the property problemsmight well arise as you would in fact be selling shares in a company that will carry the sameadministrative headache for the new owners and would not be very appealing. _____________________For information on contacting legal experts in the field of inheritance tax law in Spain please go to: 5