Spanish inheritance tax

The Spanish Inheritance and Gift Tax (Ley 29/1987)

is the responsibility of the Spanish regional governments (Comunidades Autónomas).

According to this law, who is resident in Spain (183 days rule) is liable for this Tax for all the assets inherited, regardless of where they are located.

  1. Coordination between Spanish and UK taxation Law

The Spanish tax liability is also independent of whether the same acquisition is subject to Inheritance and Gift Tax in another country at the same time.
For example, if a Spain resident taxpayer inherits a real estate in England, the acquisition is subject to the Spanish but also to the UK Inheritance Tax. One could end up paying taxes in both countries.

The scope of the UK tax liability depends on whether the heir or the deceased (one of the two parties is sufficient!) was resident at the time of death. If the person is UK-domiciled, the result is that the world assets inherited are subject to unlimited tax liability in the UK. As UK residents are considered all natural persons who are domiciled in the UK or are habitually resident. Fortunately HMRC grants a credit against UK Inheritance Tax on the Spanish property in order to offset any paid Spanish taxes on it.

If someone decides to move away from the UK, it is possible to adopt what’s called a ‘domicile of choice’. Only UK immovable assets would be taxable. It’s the limited tax liability. But the flip side for this choice is that UK exemptions, like spouse exemption, would be limited to £55.000.

As European Community Law, Member States are not required to coordinate their respective legislation with each other. For a Spanish resident the compensation and neutralisation is therefore a matter of the Spanish tax law.

The double taxation agreement between Spain and the UK does not affect the Inheritance and Gift Tax. The UK inheritance tax rules allow for UK domestic assets no impairment of the UK tax substrate by foreign tax credit (unlike the case of foreign assets). As told before, for Spanish residents the avoidance of double taxation is a matter of Spain.

The Inheritance Tax in Spain allows the deduction of the lesser of 2 amounts:

  1. a) The amount of the foreign tax paid on foreign assets, which are included for the calculation of the Spanish Inheritance Tax,
    b) the amount of tax that results when the effective average tax rate of the Spanish Inheritance Tax is applied on the foreign assets.

In order the foreign tax to be deducted, it must be an Inheritance Tax fully comparable to the Spanish tax.

This ‘highest-rate’ rule ensures that attributable to the Spanish domestic assets, Spanish tax base cannot be diminished by an excessive foreign tax credit.

In conclusion, the tax competition between countries for certain assets means that for the foreign assets in each case a heir will pay the highest of Spanish or British tax rate.

  1. TAX CALCULATION

Value of the added assets
(undeclared funds, which up to one year belonged to the ancestor before his death or that has been acquired by him three years ago)
+ Value of household goods
(3% of the assets)
– warrants and pawns
(and certain easements)
– Deductible liabilities
(such as loans and mortgages)
= Gross Tax base
– Discounts, allowances and exemptions
(Degree of relationship, disability, permanent residence property, company or business, life insurance)
= Net taxable base
x % tax rate according to the tax rate chart (see below under 1)
(progressive tax scale, starting at 7.65% for the first taxable € 8,000, to a maximum of 34% for amounts over € 800,000)
= tax amount
x coefficient multipliers
(due to the degree of relationship and the pre-existing assets of the heir, it varies from 1.0 to 2.4)
= Corrected tax amount

-Deductions and final allowances
(Deductions of internationally taxed assets and e.g. deductions of the Spanish autonomous regions)
= Amount to be paid

 

  • Tax Rate Chart

 

Taxable BaseTill € Tax€ Remaining TaxBase till € Rate in %
0,00 8.000 7,65
8.000 612,00 8.000 8,50
8.000 1.292 8.000 9,35
24.000 2.040 8.000 10,20
32.000 2.856 8.000 11,05
40.000 3.340 8.000 11,90
48.000 4.692 8.000 12,75
56.000 5.712 8.000 13,60
64.000 6.800 8.000 14,45
72.000 7.956 8.000 15,30
80.000 9.180 40.000 18,70
120.000 15.640 40.000 18,70
160.000 23.120 80.000 21,25
240.000 40.120 160.000 25,50
400.000 80.920 400.000 29,75
800.000 199.920 Excess 34
  1. NOTES ON THE ALLOWANCES AND EXEMPTIONS

The allowances on the degree of relationship that will be used in the Autonomous Region of the Balearic Islands, are as follows:
For descendants, spouses, and ancestors the allowance is 25,000 Euros.
For descendants under 21 years, the deduction increases to € 6,250 for each year of age till 21, but only up to 50,000 Euros.

For other Spanish regions, please ask us for information.

Another significant reduction is the allowance of 95% of a personal individual or professional business. Shares in companies can also benefit from this exemption only if the income generated by this activity was more than 50% of the total income of the deceased and this activity was usually exercised by him or her on a regular and personal manner.
For the property of permanent domicile (therefore only applicable for residents) an exemption of 100% will be applied with a limit of € 180.000 for each person. This allowance will not be deducted from the 3% household calculation. Condition is that the heir spouses, ancestors or descendants have lived together with the deceased before his death for at least two years and that the property is retained by the heirs for at least 5 further years. For life insurance the amount exempt is a lump sum of 12.000 Euros.

The heirs who are resident in the Balearic Islands and belong to the Group II of the tax tariff (successors older than 21 years, spouses and ancestors) can apply a general exemption of 99% on the tax base. Thus the effective tax rate in the Balearic Islands is only 1%. For other regions in Spain, please ask us.

  1. CLARIFICATIONS TO THE JUDGMENT OF THE EUROPEAN COURT AND ITS CONSEQUENCES

On September 3rd 2014, the European Court of Justice (ECJ) has failed a judgment sentencing that the Spanish Inheritance Tax taxed differently European non-resident citizens and residents for inheritances and gifts. This is against the free movement of capital Act (Art. 63 paragraph. 1 TFEU).
These differences existed:
– Between Spain residents and Spain non-residents heirs or gift recipients
– Between Spain residents and non-resident testators
– Between inheritance and gifts of assets within and outside of the Spanish territory.
In March 2012 the European Commission sued Spain. It had repeatedly called the Spanish government since 2010 to amend the Inheritance and Gift Tax Law. This call was given no attention by the Spanish government. Finally the Commission presented the lawsuit that led to that judgment filed against Spain.
Spanish law is contrary to Community law because, although there is a national Inheritance and Gift Tax Law, the autonomous regions have incorporated normative responsibilities in this Tax. Many autonomous regions have made use of these freedom and some of them have reduced the Inheritance and Gift Tax to a minimum by incorporating exemptions and allowances.
For example, the Inheritance Tax is reduced in the Balearic Islands and Madrid to 1%. But the 99% exemption was only applied when the heirs and the deceased were both residents in that region at time of death.
For non-resident heirs, or even when the deceased was non-resident in these communities, the special rules of the Autonomous Communities did not apply. They were subject to National Law (Central State) and could therefore not rely on the tax benefits of the Communities. It was a clear discrimination. The same discrimination took place at inheritances or gifts of properties located abroad.
As the Court points out, there is a discrimination impairment of the Inheritance and Gift Tax as a result of this unfavourable treatment by the Spanish government in the case of non-resident heirs and testators and outside Spain properties.

As a result of the Court’s decision on September 3rd, the Spanish Kingdom was obliged to adapt its legislation to the Community principles.

On the basis of that judgment, the Spanish government ruled the 3rd final provision of Law 26/2014 by 28th of November 2014. It was ruled that if a Spanish asset is acquired by inheritance by a non-resident person in Spain, but resident in a EU or EEA country, the regulations of the Region-Autonomous Communities are fully applicable. Therefore, if a real estate property is located in Mallorca, the allowance of 99% is fully applicable. If the property is in Andalucía, the special rules of this Region are applicable.

For a UK resident who inherits a Mallorca property, at the end UK inheritance tax would apply since de facto Spanish-Balearic tax could not be offset against, as this is only 1%. It would be different if the Spanish central government would decide to establish a minimum Inheritance and Gift Tax rate for all Spanish regions, converging in a tax rate of, lets say, about 15%. However, this is not to be expected in the medium term.

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