Spanish Inheritance Tax: Advantages of Making a Will in Spain
Raymundo Larraín Nesbitt - Lawbird Legal Services
3rd of September 2009
In this article I’m going to focus mainly on why it is almost essential, for non-residents owning property in Spain, to make a will in Spain in lieu of drawing up a national one to dispose of their Spanish estate.Additionally, I’ll introduce the article shedding some light onto Spain’s Inheritance Taxation system so as to cast aside some increasingly widespread misconceptions.
Spanish Inheritance Tax Overview
The topic of Inheritance in Spain is a fairly complex and technical one, allowing for multiple articles on the matter. Besides a general legal framework which is applied nationwide (Law 29/87 and Ordinance 1629/1991), each of the 17 existing autonomous regions that make Spain are additionally empowered to rule on some aspects enacting their own laws i.e. on applying their own tax allowances.
There’s an ongoing trend to abolish Spanish inheritance tax (much like there was for Wealth tax which was abolished last year) fostered by Spain’s conservative party. These trends are always very popular amongst voters. Many regional communities have jumped onto the band wagon and are now applying reductions on IHT to such an extent which in practice translates to almost suppressing it, i.e. Madrid, Basque Country, Navarre, Valencia, Balearic and Canary Islands.
Other regional communities, in despite of not having suppressed IHT yet, apply their own tax allowances in addition to those set by the Government in the above laws. As an example, such would be the case of Inheritance Tax in Andalucía in which beneficiaries, resulting from a death occurred after the 7th of June 2008, may benefit from the following regional tax allowances:
- Reduction of 99.99% in the IHT taxable base on inheriting the family home (deaths occurred since the 1st January 2003). This requires the beneficiaries being resident in Spain.
- Reduction of 99% in the IHT taxable base on those inheriting a business providing certain conditions are met.
- No IHT paid on theeEstate itself on compliance with certain requirements (i.e. inheritance taxable base < €175,000, heirs are next of kin or spouse, heirs pre-existing wealth < €402,678.11).
- No IHT paid by physically handicapped (disability above 33%) with a taxable base < €250,000.
Is the Dread on Spanish IHT Justified? Not so
Spanish inheritance tax has been grossly overblown over the last years by a minority with a vested interest in peddling doubtful financial products or else complex holding structures to non-residents at large who, in most cases, are in no real need of them. These “creative” solutions often involve high setting up fees as well as high annual costs that can altogether negate the sought tax mitigation. Besides, you run the risk that if you decide to sell the property later on in life, for whatever reason (i.e. health issues), some purchasers’ lawyers may turn down deals when the property is locked up within a string of holding companies because of the associated legal risks. Naturally these companies can always be wound up, at a prohibitive expense, to sell on the underlying property although it may take some time. And last, albeit not least, is the point on who’s really in control of such corporate structures.
Worthwhile mentioning is the Spanish Tax Office’s clamp down on such structures as of late, eager to offset the shortfall in property tax revenue. The bottom line is that these solutions may prove unsuitable for most people, requiring a careful case-by-case approach.
Spanish IHT most onerous cases are related to the transfer of large estates or assets bequeathed to distant relatives or non-family members such as friends (Group IV). It is in both of these cases, which are a minority really, in which the IHT liability can be high, too high, reaching even 81,6%, which is tantamount to expropriation in my opinion. Hence the need of tailored tax planning which may indeed justify setting up corporate structures, for tax mitigation purposes, on such cases.
The key to successfully mitigate Spain’s IHT is to plan ahead prior to the purchase of a property in Spain.
The Average Estate is not Taxed on Being Inherited by Offspring
Spanish Inheritance tax is a progressive tax which follows a sliding scale; the larger the estate bequeathed, the more tax heirs pay. The truth is that the average Spanish inheritance tax paid by non-resident heirs is not as high as claimed and it’s often nil on applying both national and regional tax allowances as well as offsetting associated expenses incurred.
Taking for example Andalucía, 97% of inheritances from parents to children went untaxed in 2008 (source: Andalucian Parliament query 8-08/POP-000270 from the 9th October 2008) and 90% of inheritances filed were below the €125,000 benchmark (source: El País daily newspaper). The reason is that children below 21 years of age , regardless if they are resident in Spain or not, qualify for an additional personal tax allowance that, in most cases, leaves the tax bill at nil. They are explained below.
So quotes such as “most Spanish estates will be hit with a 40-50% tax charge” or “your inheritors will be hit with a 40% plus inheritance tax bill” or “a forced sale of your Spanish property may be necessary (to pay IHT)” are grossly misleading if not downright false.
Example of Inheritance Taxation in Spain
Let’s take the case of a non-resident couple owning a property in joint names with a market value equal to €500,000. So when one of them passes on, the heirs only inherit the 50% share (€250,000). In most cases, heirs belong to either Group I or Group II (next of kin in first degree and spouse), so each inheritor (resident and non-resident alike) is entitled to a national personal allowance of almost €16,000 to which regional tax allowances are added on top (dependant on many cases in taking up Spanish residency). Heirs can additionally offset funeral expenses (typically circa 6,000€) and medical expenses incurred by the deceased albeit borne by the heirs, up to a limit, against the inheritance tax. All this brings the tax bill to a manageable level for the vast majority of families on inheriting in Spain.
Taking the above example for an average property worth €500,000 held under joint names by two married non-residents in which one of them passes away leaving the property to his appointed heirs (all non-resident). They have two children. We will consider these two children to have no pre-existing wealth of their own in Spain, other than the share of the property they are inheriting. We will also consider the property to be mortgage-free (which is frankly unrealistic). On this example I will only consider national tax allowances, leaving aside regional tax allowances to keep it simple, so this property could be located anywhere within Spain. I will consider three inheritance scenarios:
- Scenario 1: The deceased bequeaths his 50% share (€250,000) on the property to their two underage children, aged 13 and 18. The taxable base of each heir would amount to €125,000. In this case as both children are underage further national tax allowances are applicable as they belong to Group I. Besides a tax allowance of almost €16,000, descendants and adopted children under 21 have a further deduction of €3,991 for every year below 21 up to a maximum of €47,858.59 per child. In this example, after applying deductible expenses and personal tax allowances, the 13 year old would pay nil and the 18 year old would be liable for an IHT bill of only 1,419€.
- Scenario 2: The deceased bequeaths his 50% share (€250,000) on the property to their two children. Both are above 21 years old. In this case the tax base would amount to €125,000 each. They would both have a personal allowance of almost €16,000. They would both be liable, after applying deductible expenses and personal tax allowance, for €13,391.50 each. If this property were to be located say in Andalucía they would both pay nil as their taxable base is below €175,000€.
- Scenario 3: The deceased leaves his 50% share (€250,000) on the property to the surviving spouse, leaving the children as alternative heirs. In this case the heir has pre-existing net wealth sited in Spain valued at €250K (the pre-owned 50% on the property). The taxable base would be €250,000. The spouse would belong to Group II and would have a national personal allowance of almost 16,000€. In this case a multiplicand is applied to the taxable base as the heir has pre-existing net wealth of their own in Spain. The multiplicand applied would be 1 (thus leaving the taxable base unchanged) as the heir belongs to Group II (spouse) and the pre-existing wealth is below €402K. The resulting IHT liability would be €37,600. If this property had a typical non-resident mortgage on it for say 60% LTV the resulting inheritance tax bill would be approximately €9,000.
Depending on where the property is located in Spain, regional tax allowances may also be applicable which will again bring down further the IHT. Funeral and medical expenses can also be offset against the IHT tax base. If this property had a mortgage on it, as in most cases, IHT would only be payable on the un-mortgaged portion of the property thus reducing considerably the taxable base. As we can verify in the above options, I’ve only taken into account national tax allowances (leaving aside regional ones) and have considered the property to be mortgage-free, very unrealistically. Additionally a dwelling valued at €500K is well above the average for a foreign-owned property.
On reviewing the three inheritance scenarios, in the first case the IHT to be paid by both children would be nil or close. In the second case the tax base would be 13,391€ (if there was a mortgage against the property it would be nil). The third case is the most sensitive as the heir is liable for a considerable tax bill of 37,600€ (which amounts to 7,5% of the property’s value). It is in this last case in which a qualified expert, such as a lawyer or tax advisor, can add value bringing down significantly the taxable base by means of planning ahead fiscally to mitigate IHT exposure.
It is recommendable to take on a whole life insurance policy naming each spouse as cross beneficiary on planning ahead for this event. This will ensure that any IHT liability can be paid off comfortably from the life insurance. There’s a 100% tax allowance on life insurance with a maximum limit of 9,195.49€ (Groups I and II).
It is important to note that in Spain, unlike the UK, there is no exemption from inheritance tax between husband and wife.
Isn’t a Will Drawn up in the U.K. or in Ireland Valid?
A UK or Irish will are perfectly valid to bequeath assets located in Spain. Having said this, many practical problems stem from this that could easily be overcome by means of having made a Spanish will.
Then why is it that it’s “Essential” to Draw Up a Spanish Will?
Fairly often people just don’t realise they are adding unnecessary stress and expenses to their loved ones at a time of bereavement by not having drawn up a Spanish will. For all those owning property in Spain it is highly advisable you make a Spanish will which will be complementary to the will you’ve already made in your own home country. However I would just like to clarify that making a Spanish will doesn’t avoid you being liable for Spanish IHT in any way. Drawing up a Spanish will, to dispose exclusively of your Spanish estate, has a number of advantages for your beneficiaries, all having to do with saving them time, money and hassle. This recommendation can also be found on the UK's Foreign Office Department website for Spain.
Advantages of Making a Spanish Will
The most obvious advantages are the following:
- A Spanish will is exclusive to your assets located in Spain. It doesn’t preclude any will you may draw up in your home country whether before or after. This means that the Spanish will won’t overrule your national will and affects only your Spanish Estate providing your national will holds no provisions on the Spanish assets.
- Drawing up a Spanish will saves taxes to your heirs. There’s a deadline of 6 months as from the time of the testator’s demise to file and pay Spanish Inheritance Tax. You can request a deferral within the first five months of the death, but heirs may still have to pay the penalty and/or delay interests depending on how late they actually pay. You can also request to fraction the IHT paying in instalments up to five years. After the six months deadline has elapsed your beneficiaries will incur in penalties for late payment typically ranging from 5%, 10% and 15% if paid in the next 3, 6 and 12 months as from the said deadline. If payment is made after 12 months from the deadline a surcharge of 20% is applied besides the accrued delay interests. Bear in mind that deposit monies will be frozen upon death.
A Spanish will has the advantage that it can be executed almost immediately whereas a UK or Irish one will no doubt exceed the deadline attracting the penalties from the Spanish Tax Office for late payment. The reason is that a Grant of Probate must be followed in your home country which takes a long time and besides is fairly expensive. It is usual that foreign wills take in excess of a year or more to be executed in Spain which translates into higher expenses borne by your beneficiaries due to the surcharge for late payment explained above.
- Drawing up a Spanish will saves both money and hassle. On making only a national will your beneficiaries will have to translate all documents (death certificate, will) into Spanish by a sworn translator, notarise them and affix to each of them the Apostille seal of the Hague Convention of 5th October 1961. They will also have to obtain a Grant of Probate which requires as well to be translated into Spanish and apostilled. Additionally a Certificado de Ley (certificate of legal compliance) may be necessary explaining the inheritance procedure in a foreign country. All this greatly increases the expenses for your beneficiaries besides delaying significantly the whole transfer of estate procedure. Whereas if you had made a Spanish will the above would be unnecessary.
- Spanish wills are stored safely at no extra charge. On you making a Spanish will you will be given only a “copia simple” (simple copy) or “copia autorizada”. The original is stored by the Notary in his files for record. The Notary will send off to Madrid the details of this will to a registry known as “Registro General de Actos de Última Voluntad” (Central Registry of Last Wills) for safekeeping. Your beneficiaries can always request an authorised copy (“copia autorizada”) of the testator’s last will from the Notary who witnessed it. You can always know before which Notary it was made (if you happen not to know it) by means of requesting a “Certificado de Últimas Voluntades” from the aforementioned Central Registry of Last Wills. It’s just an A4 sized sheet of paper from the Ministry of Justice with the seal of the said registry which specifies which Spanish Notary witnessed the last will and the date on which it was made. The latest will always overrule any prior will unless specified otherwise.
Should you lose your copy, the notary office burn down or you simply don’t know before which Spanish Notary the will was made, don’t panic, it doesn’t matter really. All Spanish will’s details are stored safely in the said registry free of charge. One can always request a copy and they will let you know before which Notary it was witnessed if you believe you are a beneficiary. You will have to provide an original death certificate (translated into Spanish with the Apostille seal affixed if the death occurred abroad) and the original “Certificado de Últimas Voluntades” (Certificate of Last Will). The Spanish death certificate is obtained from the civil registry in the municipality in which the death took place.
Be wary of opportunistic companies that charge you an annual fee to store “safely” your Spanish will. As read above, this is unnecessary and they are just taking advantage of you.
- Spanish wills drawn up before a Notary public (Open wills) add security. Making a will is a personal act. It cannot be granted by means of a proxy. Normally these wills are set out in double column (Spanish and your native language) so you fully understand what you are signing. They are drafted by your appointed lawyer. If your command of Spanish is low it will be compulsory you draw up the will assisted by a translator (which can be an acquaintance with a good grasp of Spanish or typically your own lawyer) who will also sign it. The Notary will read out aloud the will in Spanish to make sure you fully understand and agree with its content. All this adds to the security on you granting a will in Spain.
- The content of a Spanish will is governed by your own national laws. This means that you are not constrained by Spain’s forced heirship rules. Additionally, If you are of British or Irish citizenship you have free testamentary disposition in Spain meaning you can make a will exactly the same as you would in the U.K. or in Ireland albeit with all the additional advantages I’ve highlighted above for your loved ones.
Once heirs have all three (original death certificate, will certificate and a notarised copy of the testator’s last will) they may now obtain a Deed of Declaration of Acceptance of Inheritance (“Escritura de Aceptación de Herencia”) before a Spanish Notary. With this deed they are now able to file, pay and lodge the death duties.
Once IHT is paid and lodged, not before that, will the property be registered under the beneficiaries name at the land registry where the property is located. Once registered, the property can be disposed of freely. Heirs cannot mortgage or sell the property to pay IHT as it still doesn’t belong to them.
It is important to plan ahead to mitigate Spanish Inheritance Tax, especially on large estates. A specialised lawyer can greatly reduce or even eliminate completely exposure to this tax. IHT rules vary widely from one region to another. There’s an ongoing trend to abolish IHT in Spain.
Ideally foreigners should make two wills; one in their home country ruling on their national assets and a second Spanish will drawn up in Spain which will rule only on their Spanish estate. A Spanish lawyer can assist you both making and executing one.
In this world nothing can be said to be certain, except death and taxes.
Benjamin Franklin 1789
Further articles on the matter:
- Free Testamentary Disposition for UK Citizens: Only if You Own Property in the UK - 22nd October 2008
- Spanish Inheritance Tax Abolished? I’m Afraid Not! 19th September 2008
- Ways on How to Avoid Inheritance Tax on Spanish Property - 22nd June 2005
- Applicable Inheritance Law to Estate Located in Spain - 16th April 2004
- Spanish Inheritance Tax: How much is it? - 1st February 2000
Related legal services offered by Lawbird:
- Drawing Up of a Spanish Will
- Estate Transfer to Heirs
- Spanish Company Formation
- Off-the-Shelf Company
Lawbird Spanish Lawyers is a law firm with broad experience in Litigation, Corporate and Spanish Property Law.
The article Spanish Inheritance Tax: Advantages of Making a Will in Spain was originally published on belegal.com.