Like many mainland European countries, Spanish inheritance tax, along with general tax legislation, comes under the banner of Napoleonic law. Succession and gift tax, Impuesto sobre Sucesiones y Donaciones (ISD), apply to beneficiaries of gifts and inheritances for Spanish tax residents. ‘Forced heirship’ rules determine how an estate must be divided and what rate of tax applies to beneficiaries. There are four categories of beneficiary, ranging from direct descendants such as children and adopted children to in-laws, step-children and ascendants.
Napoleon’s reason for creating new succession laws was mainly political as he sought to break up land ownership amongst aristocrats into smaller packages, thus reducing power bases. This was all done in the name of equality and simplification. Before these changes were enacted, succession legislation was complicated and open to abuse. The net effect was that aristocratic families hardly paid any tax and were able to retain their considerable interests in land ownership. Napoleon realised that by breaking up estates and charging tax on the proceeds after the death of the owner, many beneficiaries would either choose to sell up or be forced to, as a result of not having sufficient liquid wealth to cover tax bills. The state then accepted ownership of land in lieu of tax liabilities; this meant that the balance of state and privately-owned land gradually changed. To this day, more land is state-owned in countries that practiced forced heirship laws of succession; Spain is no exception.
Spanish inheritance tax and Double Tax Treaties
Back to the present. Despite Napoleon’s attempts at simplifying succession laws, it is still very complex, particularly for expats who might own assets in different countries and (maybe without knowing) are still considered domiciled in their home country. Thankfully, within the EU and many other countries in the world, Double Tax Treaties (DTT’s) exist which ensure that no-one pays tax twice on the same asset. A simple example would be a British expat, tax resident in Spain, but domiciled in the UK due to not having lived outside of the UK for long enough, or perhaps retaining financial interests in the UK. Property can present specific issues for benificiaries as it is an immovable asset; there is thus no doubt as to where it is situated. Being domiciled in the UK means tax is payable on worldwide income and capital, which conflicts with Spanish legislation that insists tax is paid on assets based in Spain if the owner is tax resident there. This is where DTTs come into play; although the deceased’s heirs won’t pay tax twice, the process is not straight-forward.
The Spanish and UK tax authorities do not discriminate in terms of which assets are owned when they send the tax bills. For cash and readily realisable savings and investments, this usually presents few problems. Non-liquid investments (including many esoteric UCIS funds) and property can therefore create problems for descendants similar to those faced by aristocratic families of 18th century France. Having to sell a house, apartment or land in the UK to pay a Spanish inheritance tax or UK tax bill can present challenges. The market may have recently corrected, making it a bad time to sell, or it may not be possible to sell at all due to oversupply or recessionary times. To further complicate matters, a mortgage lender might also push for the sale of a house in order to recover their loan. The tax authorities still want their money though; they do not usually allow more than 6 months for the beneficiaries or estate to pay.
Things to consider in terms of Spanish inheritance tax
- The first step is to value your worth. List all assets, liabilities, investments and savings
- Make a will, or perhaps even two, depending on where your assets are located
- Ensure your Executors know who wrote your will(s)
- Update your financial records regularly
- Use gifting laws to your advantage
- Speak to your financial adviser about Spanish inheritance tax and legal tax avoidance strategies
- Wrap your strategy in solid professional advice from a properly qualified tax specialist
Lastly, it is interesting to note that the DTT between Spain and the UK does not specify rules regarding Spanish inheritance tax and succession laws, other than confirming tax won’t be paid twice. This is due to this subject being complicated; for every rule there will be exceptions. No two people have the same situation regarding tax liability. With the correct advice you will be able to create your own personal tax strategy which should reflect your overall financial position and family circumstances.